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Business Combinations (Notes) | 12 Months Ended
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Dec. 31, 2019
Business Combinations [Abstract] |
Business Combinations | Business Combinations During the year ended December 31, 2019, we completed seven acquisitions, including three wholesale businesses and one self service business in North America, and three wholesale businesses in Europe. These acquisitions were not material to our results of operations or financial position as of and for the year ended December 31, 2019. Total acquisition date fair value of the consideration for our acquisitions for the year ended December 31, 2019 was $63 million, composed of $29 million of cash paid (net of cash acquired), $7 million for the estimated value of contingent payments to former owners (with maximum payments totaling $8 million), $2 million of other purchase price obligations (non-interest bearing), $21 million of notes payable, and $5 million of pre-existing balances considered to be effectively settled as a result of the acquisitions. In addition, we assumed $8 million of existing debt as of the acquisition dates. On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. Total acquisition date fair value of the consideration for our Stahlgruber acquisition was €1.2 billion ($1.4 billion), composed of €1.0 billion ($1.1 billion) of cash paid (net of cash acquired), and €215 million ($251 million) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from €1.0 billion ($1.2 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. We recorded $915 million ($908 million in 2018 and $7 million of adjustments in the six months ended June 30, 2019) of goodwill related to our acquisition of Stahlgruber, of which we expected $300 million to be deductible for income tax purposes. In the period between the acquisition date and December 31, 2018, Stahlgruber, which is reported in our Europe reportable segment, generated third party revenue of $1.1 billion and operating income of $52 million. On May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of Stahlgruber’s Czech Republic wholesale business was referred to the Czech Republic competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic wholesale business subject to the requirement that we divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was never integrated into our Europe segment; see Note 3, "Discontinued Operations" for further information. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability. There was no additional consideration beyond the previously remitted amounts for the Stahlgruber transaction required to complete the acquisition of the Czech Republic wholesale business. In addition to our acquisition of Stahlgruber, during the year ended December 31, 2018, we completed acquisitions of four wholesale businesses in North America and nine wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $99 million, composed of $85 million of cash paid (net of cash and restricted cash acquired), $11 million of notes payable, and $3 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $5 million). During the year ended December 31, 2018, we recorded $68 million of goodwill related to these acquisitions, of which we expected $4 million to be deductible for income tax purposes. In the period between the acquisition dates and December 31 2018, these acquisitions generated third party revenue of $46 million and operating income of $3 million. 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 Specialty acquisitions included the acquisition of the aftermarket business of 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. During the year ended December 31, 2017, we recorded $307 million of goodwill related to these acquisitions, of which we expected $21 million to be deductible for income tax purposes. In the period between the acquisition dates and December 31, 2017, these acquisitions generated revenue of $227 million and an operating loss of $2 million. On October 4, 2016, we acquired substantially all of the business assets of Andrew Page, a distributor of aftermarket automotive parts in the U.K., out of receivership. The acquisition was subject to regulatory approval by the CMA in the U.K. The CMA concluded its review on October 31, 2017 and required us to divest less than 10% of the acquired locations. 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 $10 million ($8 million recorded in 2016 and $2 million recorded in 2017), which is presented in Interest income and other income, net in our Consolidated Statements 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. 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 year ended December 31, 2019 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 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 year ended December 31, 2019, the measurement period adjustments recorded for acquisitions completed in prior periods were not material. The income statement effect of these measurement period adjustments that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition dates was immaterial. The purchase price allocations for the acquisitions completed during the year ended December 31, 2018 are as follows (in thousands):
| Year Ended
| December 31, 2018
| Stahlgruber |  | Other Acquisitions (1) |  | Total
Receivables | $ | 144,826 |  |  | $ | 19,171 |  |  | $ | 163,997 |
Receivable reserves | (2,818 | ) |  | (918 | ) |  | (3,736 | )
Inventories | 380,238 |  |  | 14,021 |  |  | 394,259 |
Prepaid expenses and other current assets | 10,970 |  |  | 1,851 |  |  | 12,821 |
Property, plant and equipment | 271,292 |  |  | 5,711 |  |  | 277,003 |
Goodwill | 908,253 |  |  | 64,637 |  |  | 972,890 |
Other intangibles | 285,255 |  |  | 35,159 |  |  | 320,414 |
Other noncurrent assets | 16,625 |  |  | 37 |  |  | 16,662 |
Deferred income taxes | (78,130 | ) |  | (5,285 | ) |  | (83,415 | )
Current liabilities assumed | (346,788 | ) |  | (20,116 | ) |  | (366,904 | )
Debt assumed | (79,925 | ) |  | (4,875 | ) |  | (84,800 | )
Other noncurrent liabilities assumed (2) | (80,824 | ) |  | (10,306 | ) |  | (91,130 | )
Noncontrolling interest | (44,110 | ) |  | — |  |  | (44,110 | )
Contingent consideration liabilities | — |  |  | (3,107 | ) |  | (3,107 | )
Other purchase price obligations | (6,084 | ) |  | 3,623 |  |  | (2,461 | )
Stock issued | (251,334 | ) |  | — |  |  | (251,334 | )
Notes issued | — |  |  | (11,347 | ) |  | (11,347 | )
Gains on bargain purchases (3) | — |  |  | (2,418 | ) |  | (2,418 | )
Settlement of other purchase price obligations (non-interest bearing) | — |  |  | 1,711 |  |  | 1,711 |
Cash used in acquisitions, net of cash and restricted cash acquired | $ | 1,127,446 |  |  | $ | 87,549 |  |  | $ | 1,214,995 |
(1) | The amounts recorded during the year ended December 31, 2018 include a $5 million adjustment to increase other intangibles related to our Warn acquisition and $4 million of adjustments to reduce other purchase price obligations related to other 2017 acquisitions.
(2) | The amount recorded for our acquisition of Stahlgruber includes a $79 million liability for certain pension obligations.
(3) | The amounts recorded during the year ended December 31, 2018 are due to the gains on bargain purchases related to (i) an acquisition in Europe completed in the second quarter of 2017 as a result of changes in the acquisition date fair value of the consideration, and (ii) three acquisitions in Europe completed during 2018.
The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, discount rates, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. 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 acquisition of Stahlgruber expanded LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, the acquisition of Stahlgruber should allow for continued improvement in procurement, logistics and infrastructure optimization. The primary objectives of our other acquisitions made during the years ended December 31, 2019 and 2018 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. When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provides 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 year ended December 31, 2019 as though the businesses had been acquired as of January 1, 2018, the businesses acquired during the year ended December 31, 2018 as though they 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. We have excluded the May 29, 2019 acquisition of the Czech Republic wholesale business as the business was never integrated into our Europe segment. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands):
| Year Ended December 31,
| 2019 |  | 2018 |  | 2017
Revenue, as reported | $ | 12,506,109 |  |  | $ | 11,876,674 |  |  | $ | 9,736,909 |
Revenue of purchased businesses for the period prior to acquisition: |  |  |  |  |
Stahlgruber | — |  |  | 815,405 |  |  | 1,756,893 |
Other acquisitions | 24,614 |  |  | 164,133 |  |  | 448,721 |
Pro forma revenue | $ | 12,530,723 |  |  | $ | 12,856,212 |  |  | $ | 11,942,523 |
Income from continuing operations, as reported (1) | $ | 543,415 |  |  | $ | 487,565 |  |  | $ | 536,974 |
Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments: |  |  |  |  |
Stahlgruber | 14,481 |  |  | 17,309 |  |  | 4,796 |
Other acquisitions | 3,664 |  |  | 6,591 |  |  | 16,667 |
Acquisition related expenses, net of tax (2) | 1,499 |  |  | 14,524 |  |  | 8,787 |
Pro forma income from continuing operations | 563,059 |  |  | 525,989 |  |  | 567,224 |
Less: Net income (loss) attributable to continuing noncontrolling interest, as reported | 2,800 |  |  | 3,050 |  |  | (3,516 | )
Less: Pro forma net income attributable to noncontrolling interest | — |  |  | 2,799 |  |  | 1,095 |
Pro forma income from continuing operations attributable to LKQ stockholders (3) | $ | 560,259 |  |  | $ | 520,140 |  |  | $ | 569,645 |
(1) | 2018 amounts include interest expense for the period from April 9, 2018 through December 31, 2018 recorded on the senior notes issued in connection with our acquisition of Stahlgruber.
(2) | Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
(3) | Excludes our acquisition of the Czech Republic wholesale business which is classified as discontinued operations.
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.

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