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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2015
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of LKQ Corporation and its subsidiaries. All intercompany transactions and accounts have been eliminated. Use of Estimates In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The majority of our revenue is derived from the sale of vehicle parts. Revenue is recognized when the products are shipped to, delivered to or picked up by customers and title has transferred, subject to an allowance for estimated returns, discounts and allowances that we estimate based upon historical information. We recorded a reserve for estimated returns, discounts and allowances of approximately $32.8 million and $31.3 million at December 31, 2015 and 2014, respectively. We present taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on our Consolidated Statements of Income and are shown as a current liability on our Consolidated Balance Sheets until remitted. We recognize revenue from the sale of scrap, cores and other metals when title has transferred, which typically occurs upon delivery to the customer. Revenue also includes amounts billed to customers for shipping and handling. Distribution expenses in the accompanying Consolidated Statements of Income are the costs incurred to prepare and deliver products to customers. Receivables and Allowance for Doubtful Accounts In the normal course of business, we extend credit to customers after a review of each customer's credit history. We recorded a reserve for uncollectible accounts of approximately $24.6 million and $19.4 million at December 31, 2015 and 2014, respectively. The reserve is based upon the aging of the accounts receivable, our assessment of the collectability of specific customer accounts and historical experience. Receivables are written off once collection efforts have been exhausted. Recoveries of receivables previously written off are recorded when received. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and equivalents and accounts receivable. We control our exposure to credit risk associated with these instruments by (i) placing our cash and equivalents with several major financial institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because our customer base is composed of a large number of geographically diverse customers. Inventory We classify our inventory into the following categories: aftermarket and refurbished products, and salvage and remanufactured products. An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. Cost is established based on the average price we pay for parts, and includes expenses incurred for freight and overhead costs. For items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished inventory cost is based on the average price we pay for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing. The cost of our refurbished inventory also includes expenses incurred for freight, labor and other overhead. A salvage product is a recycled vehicle part suitable for sale as a replacement part. Cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based on a part's days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured inventory cost is based upon the price paid for cores, and also includes expenses incurred for freight, direct manufacturing costs and overhead. For all inventory, carrying value is recorded at the lower of cost or market and is reduced to reflect current anticipated demand. If actual demand differs from our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made. Inventory consists of the following (in thousands):
| December 31,
| 2015 |  | 2014
Aftermarket and refurbished products | $ | 1,146,162 |  |  | $ | 1,022,549 |
Salvage and remanufactured products | 410,390 |  |  | 411,298 |
| $ | 1,556,552 |  |  | $ | 1,433,847 |
Our acquisitions completed during 2015 and adjustments to preliminary valuations of inventory for certain of our 2014 acquisitions contributed $73.4 million to our aftermarket and refurbished products inventory and $6.3 million to our salvage and remanufactured products inventory during 2015. See Note 8, "Business Combinations" for further information on our acquisitions. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. As property and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assured renewal periods, if shorter. Our estimated useful lives are as follows:
Land improvements | 10-20 years
Buildings and improvements | 20-40 years
Furniture, fixtures and equipment | 3-20 years
Computer equipment and software | 3-10 years
Vehicles and trailers | 3-10 years
Property and equipment consists of the following (in thousands):
| December 31,
| 2015 |  | 2014
Land and improvements | $ | 118,420 |  |  | $ | 112,582 |
Buildings and improvements | 183,480 |  |  | 173,366 |
Furniture, fixtures and equipment | 379,645 |  |  | 337,125 |
Computer equipment and software | 130,363 |  |  | 125,888 |
Vehicles and trailers | 101,201 |  |  | 87,944 |
Leasehold improvements | 140,732 |  |  | 129,309 |
| 1,053,841 |  |  | 966,214 |
Less—Accumulated depreciation | (437,946 | ) |  | (374,291 | )
Construction in progress | 80,672 |  |  | 38,064 |
| $ | 696,567 |  |  | $ | 629,987 |
We record depreciation expense within Depreciation and Amortization on our Consolidated Statements of Income. Additionally, included in Cost of Goods Sold on the Consolidated Statements of Income is depreciation expense associated with our refurbishing, remanufacturing, and furnace operations and our distribution centers. Total depreciation expense for the years ended December 31, 2015, 2014 and 2013 was $94.4 million, $90.9 million, and $72.7 million, respectively. Intangible Assets Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer relationships, software and other technology related assets, and covenants not to compete. Goodwill is tested for impairment at least annually, and we performed annual impairment tests during the fourth quarters of 2015, 2014 and 2013. The results of all of these tests indicated that goodwill was not impaired. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. We performed an interim impairment test in the third quarter for our Self Service reporting unit based on the impact of declining scrap steel and other metals prices on operating margin in addition to our annual test performed in the fourth quarter. The impairment test indicated the fair value of the Self Service reporting unit, determined using both market and income approaches, exceeded the reporting unit’s carrying value by approximately 11% and no impairment adjustment was required. The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
| North America |  | Europe |  | Specialty |  | Total
Balance as of January 1, 2013 | $ | 1,339,831 |  |  | $ | 350,453 |  |  | $ | — |  |  | $ | 1,690,284 |
Business acquisitions and adjustments to previously recorded goodwill | 27,035 |  |  | 208,412 |  |  | — |  |  | 235,447 |
Exchange rate effects | (7,929 | ) |  | 19,642 |  |  | — |  |  | 11,713 |
Balance as of December 31, 2013 | $ | 1,358,937 |  |  | $ | 578,507 |  |  | $ | — |  |  | $ | 1,937,444 |
Business acquisitions and adjustments to previously recorded goodwill | 43,752 |  |  | 91,916 |  |  | 280,035 |  |  | 415,703 |
Exchange rate effects | (10,657 | ) |  | (53,604 | ) |  | 9 |  |  | (64,252 | )
Balance as of December 31, 2014 | $ | 1,392,032 |  |  | $ | 616,819 |  |  | $ | 280,044 |  |  | $ | 2,288,895 |
Business acquisitions and adjustments to previously recorded goodwill | 72,355 |  |  | 21,217 |  |  | (1,397 | ) |  | 92,175 |
Exchange rate effects | (18,537 | ) |  | (43,554 | ) |  | 267 |  |  | (61,824 | )
Balance as of December 31, 2015 | $ | 1,445,850 |  |  | $ | 594,482 |  |  | $ | 278,914 |  |  | $ | 2,319,246 |
In 2015 and 2014, we finalized the valuation of certain intangible assets acquired related to our 2014 and 2013 acquisitions, respectively. As these adjustments did not have a material impact on our financial position or results of operations, we recorded these adjustments to goodwill and amortization expense in 2015 and 2014. The components of other intangibles are as follows (in thousands):
| December 31, 2015 |  | December 31, 2014
| Gross Carrying Amount |  | Accumulated Amortization |  | Net |  | Gross Carrying Amount |  | Accumulated Amortization |  | Net
Trade names and trademarks | $ | 172,219 |  |  | $ | (43,458 | ) |  | $ | 128,761 |  |  | $ | 173,340 |  |  | $ | (35,538 | ) |  | $ | 137,802 |
Customer and supplier relationships | 95,508 |  |  | (41,007 | ) |  | 54,501 |  |  | 92,972 |  |  | (26,751 | ) |  | 66,221 |
Software and other technology related assets | 44,500 |  |  | (17,844 | ) |  | 26,656 |  |  | 44,640 |  |  | (10,387 | ) |  | 34,253 |
Covenants not to compete | 10,774 |  |  | (5,575 | ) |  | 5,199 |  |  | 11,074 |  |  | (3,825 | ) |  | 7,249 |
| $ | 323,001 |  |  | $ | (107,884 | ) |  | $ | 215,117 |  |  | $ | 322,026 |  |  | $ | (76,501 | ) |  | $ | 245,525 |
During 2015, we recorded $3.6 million of trade names, $4.6 million of customer and supplier relationships, $1.2 million of software and other technology related assets and $0.6 million of covenants not to compete resulting from our 2015 acquisitions and adjustments to certain preliminary intangible asset valuations from our 2014 acquisitions. During 2014, we recorded $35.5 million of trade names, $65.1 million of customer and supplier relationships, $26.7 million of software and other technology related assets and $1.9 million of covenants not to compete resulting from our 2014 acquisitions and adjustments to certain preliminary intangible asset valuations from our 2013 acquisitions. The trade names, customer relationships, and software and other technology related assets recorded in 2014 included $22.0 million, $30.5 million, and $25.5 million, respectively, related to our acquisition of Keystone Specialty as discussed in Note 8, "Business Combinations." Other intangible assets resulting from our acquisition of Keystone Specialty were not material. We also recognized trade names and customer relationships of $10.1 million and $17.6 million, respectively, related to our 2014 acquisition of a supplier of replacement parts, supplies and accessories for recreational vehicles in our Specialty segment and customer relationships of $12.0 million related to our 2014 acquisition of an automotive core business. Trade names and trademarks are amortized over a useful life ranging from 4 to 30 years on a straight-line basis. Customer and supplier relationships are amortized over the expected period to be benefited (4 to 20 years) on an accelerated basis. Software and other technology related assets are amortized on a straight-line basis over the expected period to be benefited (three to six years). Covenants not to compete are amortized over the lives of the respective agreements, which range from one to five years, on a straight-line basis. The weighted average amortization period for our intangible assets acquired during 2015 is 11 years. Amortization expense for intangibles was $33.8 million, $34.5 million and $13.8 million during the years ended December 31, 2015, 2014 and 2013, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2020 is $29.8 million, $27.3 million, $22.9 million, $18.3 million and $12.5 million, respectively. Impairment of Long-Lived Assets Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no material adjustments to the carrying value of long-lived assets during the years ended December 31, 2015, 2014 or 2013. Warranty Reserve Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity. The changes in the warranty reserve are as follows (in thousands):
Balance as of January 1, 2014 | $ | 12,447 |
Warranty expense | 30,370 |
Warranty claims | (27,936 | )
Balance as of December 31, 2014 | $ | 14,881 |
Warranty expense | 33,727 |
Warranty claims | (31,245 | )
Balance as of December 31, 2015 | $ | 17,363 |
Self-Insurance Reserves We self-insure a portion of employee medical benefits under the terms of our employee health insurance program. We purchase certain stop-loss insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability, directors and officers liability, workers' compensation, and property coverage, under deductible insurance programs. The insurance premium costs are expensed over the contract periods. A reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon our estimate of ultimate cost, which is calculated using analysis of historical data. We monitor new claims and claim development as well as trends related to the claims incurred but not reported in order to assess the adequacy of our insurance reserves. Total self-insurance reserves were $78.4 million and $76.0 million, of which $37.8 million and $36.4 million was classified as current as of December 31, 2015 and 2014, respectively. The remaining balances of self-insurance reserves are classified as Other Noncurrent Liabilities, which reflects management's estimates of when claims will be paid. The reserves presented on the Consolidated Balance Sheets are net of claims deposits of $0.6 million at both December 31, 2015 and 2014, respectively. In addition to these claims deposits, we had outstanding letters of credit of $64.9 million and $59.2 million at December 31, 2015 and 2014, to guarantee self-insurance claims payments. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our insurance reserves and corresponding expenses could be affected if future claims experience differs significantly from historical trends and assumptions. Income Taxes Current income taxes are provided on income reported for financial reporting purposes, adjusted for transactions that do not enter into the computation of income taxes payable in the same year. Deferred income taxes have been provided to show the effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or that future deductibility is uncertain. We recognize the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include interest and penalties associated with income tax obligations in income tax expense. U.S. federal income taxes are not provided on our interest in undistributed earnings of foreign subsidiaries when it is management's intent that such earnings will remain invested in those subsidiaries or other foreign subsidiaries. Taxes will be provided on these earnings in the period in which a decision is made to repatriate the earnings. Investment in Unconsolidated Subsidiary As of December 31, 2015, the carrying value of our investments in unconsolidated subsidiaries was $10.9 million; of this amount, $8.2 million relates to our investment in ACM Parts which was included within Other Current Assets on the Consolidated Balance Sheet as the investment was classified as held for sale as of year-end. In August 2013, we entered into an agreement with Suncorp Group, a leading general insurance group in Australia and New Zealand, to develop ACM Parts, an alternative vehicle replacement parts business in those countries. We held a 49% interest in the entity and contributed our experience to help establish automotive parts recycling operations and to facilitate the procurement of aftermarket parts; Suncorp Group held a 51% equity interest and supplied salvage vehicles to the venture as well as assisting in establishing relationships with repair shops as customers. We accounted for our interest in this subsidiary using the equity method of accounting, as our investment gave us the ability to exercise significant influence, but not control, over the investee. We divested our interest in ACM Parts in February 2016. Our equity in the net earnings of the investees for the years ended December 31, 2015 and 2014 was not material. Rental Expense We recognize rental expense on a straight-line basis over the respective lease terms, including reasonably assured renewal periods, for all of our operating leases. Foreign Currency Translation For most of our foreign operations, the local currency is the functional currency. Assets and liabilities are translated into U.S. dollars at the period-ending exchange rate. Statements of Income amounts are translated to U.S. dollars using monthly average exchange rates during the period. Translation gains and losses are reported as a component of Accumulated Other Comprehensive Income (Loss) in stockholders' equity. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which was amended in July 2015. This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance, and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities adopting the standard have the option of using either a full retrospective or modified retrospective approach in the application of this guidance. ASU 2014-09 will be effective for the Company during the first quarter of our fiscal year 2018. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. We are still evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures. In April 2015, the FASB issued Accounting Standards Update 2015-03, "Interest-Imputation of Interest" ("ASU 2015-03"). This update simplifies the presentation of debt issuance costs on the financial statements by requiring companies to deduct debt issuance costs from the carrying value of their corresponding liability on the balance sheet, rather than presenting debt issuance costs as deferred charges. ASU 2015-03 required that the Company adopt the ASU during the first quarter of our fiscal year 2016; however, early adoption was permitted. Entities must retrospectively apply this guidance within the balance sheet for all periods presented in order to reflect the period-specific effects of this new guidance. We elected to early adopt this guidance during the fourth quarter of 2015. We have disclosed the amounts reclassified for December 31, 2014 in Note 4, "Long-term Obligations" as well as in the table below. In July 2015, the FASB issued Accounting Standards Update 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"), which requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 will be effective for the Company during the first quarter of our fiscal year 2017 and must be applied on a prospective basis. Early adoption is permitted. We do not anticipate the adoption of this guidance will have a material impact on our financial position, results of operations, or cash flows. In September 2015, the FASB issued Accounting Standards Update 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"), which requires an acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are identified as opposed to recognition as if the accounting adjustment had been completed as of the acquisition date. The ASU also requires disclosure regarding amounts that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date. ASU 2015-16 will be effective for the Company during the first quarter of our fiscal year 2016 and must be applied on a prospective basis. Early adoption is permitted for financial statements that have not been issued. We do not anticipate that the adoption of this guidance will have a material impact on our financial position, results of operations, or cash flows. In November 2015 the FASB issued Accounting Standards Update 2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"), which requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU 2015-17 requires adoption by the Company during the first quarter of our fiscal year 2017 and can be applied prospectively and retrospectively. Early adoption is permitted for financial statements that have not been issued, and we elected to adopt this standard on a retrospective basis for the fourth quarter of 2015. The reclassification adjustments made to our December 31, 2014 balances to conform with our presentation as of December 31, 2015 for the adoption of ASU 2015-03 and ASU 2015-17 have been presented below (in thousands):
| December 31, 2014
| Deferred Income Taxes(1) |  | Other Assets |  | Other Current Liabilities |  | Current Portion of Long-Term Obligations |  | Long-Term Obligations, Excluding Current Portion |  | Deferred Income Taxes
As reported | $ | 81,744 |  |  | $ | 91,668 |  |  | $ | 36,815 |  |  | $ | 63,515 |  |  | $ | 1,801,047 |  |  | $ | 181,662 |
Adjustment - adoption of ASU 2015-03 | — |  |  | (18,414 | ) |  | — |  |  | (1,577 | ) |  | (16,837 | ) |  | — |
Adjustment - adoption of ASU 2015-17 | (81,744 | ) |  | 2,405 |  |  | (4,615 | ) |  | — |  |  | — |  |  | (74,724 | )
As adjusted | $ | — |  |  | $ | 75,659 |  |  | $ | 32,200 |  |  | $ | 61,938 |  |  | $ | 1,784,210 |  |  | $ | 106,938 |
(1)As of December 31, 2014, the current portion of deferred tax assets was included as a separate line item within the Consolidated Balance Sheets. With the adoption of ASU 2015-17 in the fourth quarter of 2015, we no longer present the current portion of deferred taxes; all deferred taxes are presented as non-current.

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