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Business Combinations | 9 Months Ended
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Sep. 30, 2017
Business Combinations [Abstract] |
Business Combinations | Business Combinations During the nine months ended September 30, 2017, we completed 21 acquisitions including 4 wholesale businesses in North America, 14 wholesale businesses in Europe and 3 Specialty vehicle aftermarket businesses. Total acquisition date fair value of the consideration for these acquisitions was $280 million, composed of $250 million of cash paid (net of cash acquired), $6 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $19 million), $4 million of other purchase price obligations (non-interest bearing), $19 million of notes payable and $1 million settlement of pre-existing balances. We typically fund our acquisitions using borrowings under our credit facilities or other financing arrangements. During the nine months ended September 30, 2017, we recorded $185 million of goodwill related to these acquisitions, of which we expect $20 million to be deductible for income tax purposes. In the period between the acquisition dates and September 30, 2017, these acquisitions generated revenue of $106 million and an operating loss of $2 million. On March 18, 2016, LKQ acquired Rhiag-Inter Auto Parts Italia S.p.A. ("Rhiag"), a distributor of aftermarket spare parts for passenger cars and commercial vehicles in Italy, Czech Republic, Slovakia, Switzerland, Hungary, Romania, Ukraine, Bulgaria, Poland and Spain. This acquisition expanded LKQ's geographic presence in continental Europe, and we believe the acquisition will generate potential purchasing synergies. Total acquisition date fair value of the consideration for our Rhiag acquisition was €534 million ($602 million), composed of €534 million ($601 million) of cash paid (net of cash acquired) and €1 million ($1 million) of intercompany balances considered to be effectively settled as part of the transaction. In addition, we assumed €489 million ($551 million) of existing Rhiag debt as of the acquisition date. We recorded $591 million ($585 million in 2016 and $5 million in the three months ended March 31, 2017) of goodwill related to our acquisition of Rhiag, which we do not expect to be deductible for income tax purposes. Related to the funding of the purchase price of the Rhiag acquisition, LKQ entered into foreign currency forward contracts in March 2016 to acquire a total of €588 million. The rates locked in under the foreign currency forwards were favorable to the spot rate on the settlement date, and as a result, these derivative contracts generated a gain of $18 million during the year ended December 31, 2016. The gain on the foreign currency forwards was recorded in Gains on foreign exchange contracts - acquisition related on our Unaudited Condensed Consolidated Statement of Income for the year ended December 31, 2016. On April 21, 2016, LKQ acquired Pittsburgh Glass Works LLC (“PGW”). At acquisition, PGW’s business comprised aftermarket automotive replacement glass distribution services and automotive glass manufacturing. The acquisition expanded our addressable market in North America. Additionally, we believe the acquisition will create potential distribution synergies with our existing network. Total acquisition date fair value of the consideration for our PGW acquisition was $662 million, consisting of cash paid (net of cash acquired). We recorded $208 million ($205 million in 2016 and $3 million in the six months ended June 30, 2017) of goodwill related to our acquisition of PGW, of which we expect $104 million to be deductible for income tax purposes. On October 4, 2016, we acquired substantially all of the business assets of Andrew Page Limited ("Andrew Page"), a distributor of aftermarket automotive parts in the U.K., out of receivership. The acquisition is subject to regulatory approval by the Competition and Markets Authority ("CMA") in the U.K. On September 14, 2017, the CMA issued its provisional findings that the acquisition was approved except that we may be required to divest up to 10 locations. The CMA's review is ongoing and we have been informed the deadline for the final decision is on or about November 6, 2017. Total acquisition date fair value of the consideration for this acquisition was £16 million ($20 million). In connection with the acquisition, we recorded a gain on bargain purchase of $11 million ($8 million recorded in the fourth quarter of 2016 and $3 million recorded in the nine months ended September 30, 2017), which is recorded on a separate line in our consolidated statement of income. We believe that we were able to acquire the net assets of Andrew Page for less than fair value as a result of (i) Andrew Page's financial difficulties that put the company into receivership prior to our acquisition and (ii) a motivated seller that desired to complete the sale in an expedient manner to ensure continuity of the business. In addition to our acquisitions of Rhiag, PGW and Andrew Page, we acquired seven wholesale businesses in Europe and five wholesale businesses in North America during the year ended December 31, 2016. Total acquisition date fair value of the consideration for these acquisitions was $76 million, composed of $68 million of cash paid (net of cash acquired), $4 million of notes payable and $4 million of other purchase price obligations (non-interest bearing). During the year ended December 31, 2016, we recorded $52 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2015 acquisitions. We expect that substantially all of the goodwill recorded for these acquisitions will not be deductible for income tax purposes. Our acquisitions are accounted for under the purchase method of accounting and are included in our unaudited condensed consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair market values at the dates of acquisition. The purchase price allocations for the acquisitions made during the nine months ended September 30, 2017 and the last three months of the year ended December 31, 2016 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the final estimation of the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations. From the date of our preliminary allocation for Rhiag in the first quarter of 2016 through March 31, 2017, we recorded adjustments based on our valuation procedures for our acquisition of Rhiag that resulted in the allocation of $149 million of goodwill to acquired assets, primarily intangible assets and property and equipment; this amount includes a $5 million increase to goodwill recorded in 2017, primarily attributable to a decline in the value allocated to property and equipment. Additionally, from the date of our preliminary allocation for PGW in the second quarter of 2016 through June 30, 2017, we recorded adjustments based on our valuation procedures that resulted in a $24 million increase to goodwill recorded for our PGW acquisition, of which $3 million was recorded in 2017. These adjustments were primarily attributable to a decline in the value allocated to property and equipment, partially offset by an increase in the value allocated to deferred taxes. Finally, from the date of our preliminary allocations for our acquisitions completed in the first half of 2017 through September 30, 2017, we recorded adjustments based on our valuation procedures that resulted in a decrease to goodwill of $11 million. This decrease to goodwill was primarily a result of an increase in the value allocated to intangible assets and a decrease in our estimate of the acquisition date fair value of the contingent payment liability to the former owners. The income statement effect of these measurement period adjustments for our Rhiag and PGW acquisitions as well as our acquisitions completed in the first half of 2017 that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition dates was immaterial. The balance sheet impact and income statement effect of other measurement-period adjustments recorded for acquisitions completed in prior periods were immaterial. The preliminary purchase price allocations for the acquisitions completed during the nine months ended September 30, 2017 and the year ended December 31, 2016 are as follows (in thousands):
| Nine Months Ended |  | Year Ended
| September 30, 2017 |  | December 31, 2016
| All Acquisitions (1) |  | Rhiag |  | PGW (2) |  | Other Acquisitions |  | Total
Receivables | $ | 53,509 |  |  | $ | 230,670 |  |  | $ | 136,523 |  |  | $ | 13,216 |  |  | $ | 380,409 |
Receivable reserves | (5,696 | ) |  | (28,242 | ) |  | (7,135 | ) |  | (794 | ) |  | (36,171 | )
Inventories (3) | 121,484 |  |  | 239,529 |  |  | 169,159 |  |  | 62,223 |  |  | 470,911 |
Prepaid expenses and other current assets | (1,147 | ) |  | 10,793 |  |  | 42,573 |  |  | 4,445 |  |  | 57,811 |
Property and equipment | 5,511 |  |  | 56,774 |  |  | 225,645 |  |  | 17,140 |  |  | 299,559 |
Goodwill | 192,688 |  |  | 585,415 |  |  | 205,058 |  |  | 52,336 |  |  | 842,809 |
Other intangibles | 31,149 |  |  | 429,360 |  |  | 37,954 |  |  | 2,537 |  |  | 469,851 |
Other assets (4) | 2,188 |  |  | 2,092 |  |  | 57,671 |  |  | (133 | ) |  | 59,630 |
Deferred income taxes | (1,676 | ) |  | (110,791 | ) |  | 17,506 |  |  | (1,000 | ) |  | (94,285 | )
Current liabilities assumed | (83,223 | ) |  | (239,665 | ) |  | (168,332 | ) |  | (42,290 | ) |  | (450,287 | )
Debt assumed | (29,900 | ) |  | (550,843 | ) |  | (4,027 | ) |  | (2,378 | ) |  | (557,248 | )
Other noncurrent liabilities assumed | (1,563 | ) |  | (23,085 | ) |  | (50,847 | ) |  | (103 | ) |  | (74,035 | )
Contingent consideration liabilities | (6,234 | ) |  | — |  |  | — |  |  | — |  |  | — |
Other purchase price obligations | (3,777 | ) |  | — |  |  | — |  |  | (6,698 | ) |  | (6,698 | )
Notes issued | (18,899 | ) |  | — |  |  | — |  |  | (4,087 | ) |  | (4,087 | )
Settlement of pre-existing balances | (620 | ) |  | (591 | ) |  | — |  |  | (32 | ) |  | (623 | )
Gains on bargain purchases (5) | (3,990 | ) |  | — |  |  | — |  |  | (8,207 | ) |  | (8,207 | )
Settlement of other purchase price obligations (non-interest bearing) | 2,863 |  |  | — |  |  | — |  |  | — |  |  | — |
Cash used in acquisitions, net of cash acquired | $ | 252,667 |  |  | $ | 601,416 |  |  | $ | 661,748 |  |  | $ | 86,175 |  |  | $ | 1,349,339 |
(1) | Includes $6 million and $3 million of adjustments to reduce property and equipment and other current assets for Rhiag and PGW, respectively.
(2) | Includes both continuing and discontinued operations of PGW. See Note 3, "Discontinued Operations" for further information on our discontinued operations.
(3) | The PGW inventory balance includes the impact of a $10 million step-up adjustment to report the inventory at its fair value.
(4) | The balance for PGW includes $24 million of investments in unconsolidated subsidiaries which relate to the discontinued portion of our PGW operations.
(5) | The amount recorded during the nine months ended September 30, 2017 includes a $3 million increase to the gain on bargain purchase recorded for our Andrew Page acquisition as a result of changes to our estimate of the fair value of the net assets acquired. The remainder of the gain on bargain purchase recorded during the nine months ended September 30, 2017 is an immaterial amount related to another acquisition in Europe completed in the second quarter of 2017, as the fair value of the net assets acquired exceeded the purchase price.
The fair value of our intangible assets is based on a number of inputs including projections of future cash flows, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. The fair value of our property and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value are not observable in the market, and therefore, these inputs are considered to be Level 3 inputs. Other noncurrent liabilities recorded for our acquisitions of Rhiag and PGW includes a liability for certain pension and other post-retirement obligations we assumed with the acquisitions. A portion of PGW's liability for pension and post-retirement obligations relates to the glass manufacturing operations business, which was classified as discontinued operations, and was recorded within Liabilities of discontinued operations on our consolidated balance sheet as of December 31, 2016; these amounts were included in the net assets disposed of as part of the sale of the business, which occurred in the first quarter of 2017. Due to the immateriality of our pension plans for our continuing operations, we have not provided the detailed disclosures otherwise prescribed by the accounting guidance on pensions and other post-retirement obligations. The primary objectives of our acquisitions made during the nine months ended September 30, 2017 and the year ended December 31, 2016 were to create economic value for our stockholders by enhancing our position as a leading source for alternative collision and mechanical repair products and to expand into other product lines and businesses that may benefit from our operating strengths. Certain 2017 acquisitions were completed to enable us to align our distribution model in the Benelux region. Our 2016 acquisition of Rhiag enabled us to expand our market presence in continental Europe. We believe that our Rhiag acquisition will allow for synergies within our European operations, most notably in procurement, and these projected synergies contributed to the goodwill recorded on the Rhiag acquisition. The aftermarket automotive glass distribution business of PGW ("PGW autoglass"), which is included within continuing operations, enabled us to enter into new product lines and increase the size of our addressable market. In addition, we believe that the acquisition of PGW autoglass will allow for distribution synergies with our existing network in North America, which contributed to the goodwill recorded on the acquisition. When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provide a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill. The following pro forma summary presents the effect of the businesses acquired during the nine months ended September 30, 2017 as though the businesses had been acquired as of January 1, 2016, and the businesses acquired during the year ended December 31, 2016 as though they had been acquired as of January 1, 2015. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Revenue, as reported | $ | 2,465,800 |  |  | $ | 2,207,343 |  |  | $ | 7,267,054 |  |  | $ | 6,433,625 |
Revenue of purchased businesses for the period prior to acquisition: |  |  |  |  |  |  |
Rhiag | — |  |  | — |  |  | — |  |  | 213,376 |
PGW (1) | — |  |  | — |  |  | — |  |  | 102,540 |
Other acquisitions | 18,664 |  |  | 177,210 |  |  | 195,550 |  |  | 572,076 |
Pro forma revenue | $ | 2,484,464 |  |  | $ | 2,384,553 |  |  | $ | 7,462,604 |  |  | $ | 7,321,617 |
Income from continuing operations, as reported | $ | 122,381 |  |  | $ | 109,844 |  |  | $ | 414,104 |  |  | $ | 359,825 |
Income (loss) from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments: |  |  |  |  |  |  |
Rhiag | — |  |  | 59 |  |  | — |  |  | (84 | )
PGW (1),(2) | — |  |  | — |  |  | — |  |  | 7,574 |
Other acquisitions | 734 |  |  | 2,727 |  |  | 6,481 |  |  | 9,198 |
Acquisition related expenses, net of tax (3) | 2,184 |  |  | 328 |  |  | 4,801 |  |  | 10,483 |
Pro forma income from continuing operations | $ | 125,299 |  |  | $ | 112,958 |  |  | $ | 425,386 |  |  | $ | 386,996 |
Earnings per share from continuing operations, basic—as reported | $ | 0.40 |  |  | $ | 0.36 |  |  | $ | 1.34 |  |  | $ | 1.17 |
Effect of purchased businesses for the period prior to acquisition: |  |  |  |  |  |  |
Rhiag | — |  |  | 0.00 |  |  | — |  |  | (0.00) |
PGW (1),(2) | — |  |  | — |  |  | — |  |  | 0.02 |
Other acquisitions | 0.00 |  |  | 0.01 |  |  | 0.02 |  |  | 0.03 |
Acquisition related expenses, net of tax (3) | 0.01 |  |  | 0.00 |  |  | 0.02 |  |  | 0.03 |
Pro forma earnings per share from continuing operations, basic (4) | $ | 0.41 |  |  | $ | 0.37 |  |  | $ | 1.38 |  |  | $ | 1.26 |
Earnings per share from continuing operations, diluted—as reported | $ | 0.39 |  |  | $ | 0.35 |  |  | $ | 1.33 |  |  | $ | 1.16 |
Effect of purchased businesses for the period prior to acquisition: |  |  |  |  |  |  |
Rhiag | — |  |  | 0.00 |  |  | — |  |  | (0.00) |
PGW (1),(2) | — |  |  | — |  |  | — |  |  | 0.02 |
Other acquisitions | 0.00 |  |  | 0.01 |  |  | 0.02 |  |  | 0.03 |
Acquisition related expenses, net of tax (3) | 0.01 |  |  | 0.00 |  |  | 0.02 |  |  | 0.03 |
Pro forma earnings per share from continuing operations, diluted (4) | $ | 0.40 |  |  | $ | 0.36 |  |  | $ | 1.37 |  |  | $ | 1.25 |
(1) | PGW reflects the results for the continuing aftermarket automotive glass distribution business only.
(2) | Excludes $5 million of corporate costs from January 1, 2016 through April 21, 2016 that we do not expect to incur going forward as a result of the sale of the glass manufacturing business.
(3) | Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(4) | The sum of the individual earnings per share amounts may not equal the total due to rounding.
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses, net of tax. Refer to Note 5, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1497-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1490-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1392-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1486-128463 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4845-128472 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1524-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4922-128472 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4934-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4926-128472 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=73530397&loc=SL65897772-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1383-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 + Details
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