Financial Statement Information (Policies)

9 Months Ended

Sep. 30, 2017

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 $42 million and $38 million at September 30, 2017 and December 31, 2016, respectively. We present taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue on our Unaudited Condensed Consolidated Statements of Income and are shown as a current liability on our Unaudited Condensed Consolidated Balance Sheets until remitted. We recognize revenue from the sale of scrap metal, other metals, and cores when title has transferred, which typically occurs upon delivery to the customer.

Allowance for Doubtful Accounts

We have a reserve for uncollectible accounts which was approximately $56 million and $46 million at September 30, 2017 and December 31, 2016, respectively.

Inventory

Inventories

Inventories consists of the following (in thousands):



	September 30,		December 31,
	2017		2016
Aftermarket and refurbished products	$	1,769,539	$	1,540,257
Salvage and remanufactured products	466,837		394,980
Total inventories	$	2,236,376	$	1,935,237

Our acquisitions completed during 2017 contributed $85 million of the increase in our aftermarket and refurbished products inventory and $36 million of the increase in our salvage and remanufactured products inventory. See Note 2, "Business Combinations" for further information on our acquisitions.

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 and supplier relationships, software and other technology related assets, and covenants not to compete.

The changes in the carrying amount of goodwill by reportable segment during the nine months ended September 30, 2017 are as follows (in thousands):



	North America ⁽¹⁾		Europe		Specialty ⁽¹⁾			Total
Balance as of January 1, 2017	$	1,661,800	$	1,099,976	$	292,993		$	3,054,769
Business acquisitions and adjustments to previously recorded goodwill	31,964		154,926		5,798			192,688
Exchange rate effects	8,858		136,487		(439		)	144,906
Balance as of September 30, 2017	$	1,702,622	$	1,391,389	$	298,352		$	3,392,363


(1)	In the first quarter of 2017, we realigned a portion of our North America operations under our Specialty segment. Prior year amounts have been recast to reflect the shift in reporting structure.

The components of other intangibles acquired during the nine months ended September 30, 2017, are as follows (in thousands):



	Gross Amount
	All 2017 Acquisitions
Trade names and trademarks	$	15,189
Customer and supplier relationships	10,550
Software and other technology related assets	4,796
Covenants not to compete	614
	$	31,149

The components of other intangibles are as follows (in thousands):



	September 30, 2017							December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Trade names and trademarks	$	328,914	$	(69,824	)	$	259,090	$	286,008	$	(51,104	)	$	234,904
Customer and supplier relationships	441,182		(148,499		)	292,683		395,284		(92,079		)	303,205
Software and other technology related assets	101,646		(54,688		)	46,958		77,329		(35,648		)	41,681
Covenants not to compete	12,838		(9,145		)	3,693		11,726		(7,285		)	4,441
	$	884,580	$	(282,156	)	$	602,424	$	770,347	$	(186,116	)	$	584,231

Our estimated useful lives for our finite lived intangible assets are as follows:



	Method of Amortization	Useful Life
Trade names and trademarks	Straight-line	4-30 years
Customer and supplier relationships	Accelerated	4-20 years
Software and other technology related assets	Straight-line	3-8 years
Covenants not to compete	Straight-line	1-5 years

Amortization expense for intangibles was $26 million and $74 million during the three and nine months ended September 30, 2017, respectively, and $25 million and $58 million during the three and nine months ended September 30, 2016, respectively. Estimated amortization expense for each of the five years through the period ending December 31, 2021 is $26 million (for the remaining three months of 2017), $89 million, $74 million, $59 million and $49 million, respectively

Property and Equipment

Included in Cost of Goods Sold on the Unaudited Condensed Consolidated Statements of Income is depreciation expense associated with our refurbishing, remanufacturing, and furnace operations, and our distribution centers. Total depreciation expense was $34 million and $93 million during the three and nine months ended September 30, 2017, respectively, and $30 million and $84 million

Investments in Unconsolidated Subsidiaries

Our investment in unconsolidated subsidiaries was $199 million and $183 million as of September 30, 2017 and December 31, 2016, respectively. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen") from AxMeko AB, an affiliate of Axel Johnson AB, for an aggregate purchase price of $181 million. Headquartered in Stockholm, Sweden, Mekonomen is the leading independent car parts and service chain in the Nordic region of Europe, offering a range of products including spare parts and accessories for cars, and workshop services for consumers and businesses. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of September 30, 2017, the book value of our investment in Mekonomen exceeded our share of the book value of Mekonomen's net assets by $123 million; this difference is primarily related to goodwill and the fair value of other intangible assets. We are reporting our equity in the net earnings of Mekonomen on a one quarter lag, and therefore we recorded no equity in earnings for this investment in 2016. For the three and nine months ended September 30, 2017, we recorded equity in earnings totaling $3 million and $5 million, respectively, related to our investment in Mekonomen, which represents our share of the results from the investment date through June 30, 2017, including adjustments to convert the results to US GAAP and to recognize the impact of our purchase accounting adjustments. In May 2017, we received a cash dividend of $7 million (SEK 67 million) related to our investment in Mekonomen. The level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at September 30, 2017 was $216 million compared to a carrying value of $193 million.

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. Our warranty reserve is recorded within Other accrued expenses and Other Noncurrent Liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The changes in the warranty reserve are as follows (in thousands):



Balance as of January 1, 2017	$	19,634
Warranty expense	28,262
Warranty claims	(26,835		)
Balance as of September 30, 2017	$	21,061

- Definition

Disclosure of accounting policy for the equity method of accounting for investments in common stock or other interests including unconsolidated subsidiaries, corporate joint ventures, noncontrolling interests in real estate ventures, limited partnerships, and limited liability companies. The accounting policy may include information such as: (1) initially recording an investment in the stock of an investee at cost; (2) adjusting the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of acquisition; and (3) adjustments to reflect the investor's share of changes in the investee's capital (dividends). This disclosure may also include a detailed description of the policy for determining the amount of equity method losses recognized after an investment has been reduced to zero as a result of previous losses, reasons for not using the equity method when the investor company owns 20 percent or more of the voting stock of the investee's company (including identification of the significant investee), reasons for using the equity method when the ownership percentage is less than 20 percent, and discussion of recognition of equity method losses when an investor's total investment in an investee includes, in addition to an investment in common stock, other investments such as preferred stock and loans to the investee. An entity also may describe how such investments are assessed for impairment.

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- Definition

Disclosure of accounting policy for trade and other accounts receivable, and finance, loan and lease receivables, including those classified as held for investment and held for sale. This disclosure may include (1) the basis at which such receivables are carried in the entity's statements of financial position (2) how the level of the valuation allowance for receivables is determined (3) when impairments, charge-offs or recoveries are recognized for such receivables (4) the treatment of origination fees and costs, including the amortization method for net deferred fees or costs (5) the treatment of any premiums or discounts or unearned income (6) the entity's income recognition policies for such receivables, including those that are impaired, past due or placed on nonaccrual status and (7) the treatment of foreclosures or repossessions (8) the nature and amount of any guarantees to repurchase receivables.

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