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Business Combinations (Notes)
 3 Months Ended
Mar. 31, 2018
Business Combinations [Abstract]  
Business Combinations
Business Combinations
During the three months ended March 31, 2018, we completed one acquisition of a wholesale business in North America. This acquisition was not material to our results of operations or financial position as of and for the three months ended March 31, 2018.
During the year ended December 31, 2017, we completed 26 acquisitions including 6 wholesale businesses in North America, 16 wholesale businesses in Europe and 4 Specialty businesses. Our acquisitions in Europe included the acquisition of four aftermarket parts distribution businesses in Belgium in July 2017. Our acquisitions in Specialty included the acquisition of the aftermarket business of Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories, in November 2017.
Total acquisition date fair value of the consideration for our 2017 acquisitions was $542 million, composed of $510 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), $5 million of other purchase price obligations (non-interest bearing) and $20 million of notes payable. We typically fund our acquisitions using borrowings under our credit facilities or other financing arrangements. During the year ended December 31, 2017, we recorded $307 million of goodwill related to these acquisitions, of which we expect $21 million to be deductible for income tax purposes.
On December 10, 2017, we entered into an agreement to acquire Stahlgruber GmbH ("Stahlgruber"), a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Czech Republic, Italy, Slovenia, and Croatia with further sales to Switzerland. This acquisition will expand LKQ's geographic presence in continental Europe and serve as an additional strategic hub for our European operations. In addition, we believe this acquisition will allow for continued improvement in procurement, logistics and infrastructure optimization. The enterprise value for the pending Stahlgruber acquisition is €1.5 billion, which will be financed with the proceeds from €1.0 billion of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. On May 3, 2018, the European Commission cleared the proposed acquisition for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of the Czech Republic wholesale business has been referred to the Czech competition authority for review. We anticipate that the closing of the transaction with respect to Stahlgruber's operations outside of the Czech Republic will occur during the second quarter of 2018. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability.
Our acquisitions are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair values at the dates of acquisition. The purchase price allocations for the acquisitions made during the three months ended March 31, 2018 and the last nine months of the year ended December 31, 2017 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. During the first quarter of 2018, the measurement period adjustments recorded for acquisitions completed in prior periods were not material.
The purchase price allocations for the acquisitions completed during the year ended December 31, 2017 are as follows (in thousands):
 
Year Ended
 
December, 31, 2017
 
All
Acquisitions (1)
Receivables
$
73,782

Receivable reserves
(7,032
)
Inventories (2)
150,342

Prepaid expenses and other current assets
(295
)
Property, plant and equipment
41,039

Goodwill
314,817

Other intangibles
181,216

Other assets
3,257

Deferred income taxes
(65,087
)
Current liabilities assumed
(111,484
)
Debt assumed
(33,586
)
Other noncurrent liabilities assumed
(1,917
)
Contingent consideration liabilities
(6,234
)
Other purchase price obligations
(5,074
)
Notes issued
(20,187
)
Settlement of pre-existing balances
242

Gains on bargain purchases (3)
(3,870
)
Settlement of other purchase price obligations (non-interest bearing)
3,159

Cash used in acquisitions, net of cash acquired
$
513,088

(1)
The amounts recorded during the year ended December 31, 2017 include $6 million and $3 million of adjustments to reduce property, plant and equipment and other assets for Rhiag-Inter Auto Parts Italia S.p.A. (“Rhiag”) and Pittsburgh Glass Works LLC (“PGW”), respectively.
(2)
The amount for our 2017 acquisitions includes a $4 million step-up adjustment related to our Warn acquisition.
(3)
The amount recorded during the year ended December 31, 2017 includes a $2 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 year ended December 31, 2017 is an immaterial amount related to another acquisition in Europe completed in the second quarter of 2017.
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, plant 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 use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 12, "Fair Value Measurements" for further information regarding the tiers in the fair value hierarchy.
The primary objectives of our acquisitions made during 2017 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.
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 three months ended March 31, 2018 as though the businesses had been acquired as of January 1, 2017, and the businesses acquired during the year ended December 31, 2017 as though they had been acquired as of January 1, 2016. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenue, as reported
$
2,720,764

 
$
2,342,843

Revenue of purchased businesses for the period prior to acquisition:
 
 
 
All acquisitions
26

 
139,216

Pro forma revenue
$
2,720,790

 
$
2,482,059

 
 
 
 
Income from continuing operations, as reported
$
152,763

 
$
140,809

Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
 
 
 
All acquisitions
0

 
7,470

Acquisition related expenses, net of tax (1)
623

 
1,243

Pro forma income from continuing operations
$
153,386

 
$
149,522

 
 
 
 
Earnings per share from continuing operations, basic - as reported
$
0.49

 
$
0.46

Effect of purchased businesses for the period prior to acquisition:
 
 
 
All acquisitions
0.00

 
0.02

Acquisition related expenses, net of tax (1)
0.00

 
0.00

Pro forma earnings per share from continuing operations, basic (2) 
$
0.50

 
$
0.49

 
 
 
 
Earnings per share from continuing operations, diluted - as reported
$
0.49

 
$
0.45

Effect of purchased businesses for the period prior to acquisition:
 
 
 
All acquisitions
0.00

 
0.02

Acquisition related expenses, net of tax (1)
0.00

 
0.00

Pro forma earnings per share from continuing operations, diluted (2) 
$
0.49

 
$
0.48


(1)
Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(2)
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, plant 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 6, "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.