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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2019
Accounting Policies [Abstract] |
Property, Plant and Equipment, Policy [Policy Text Block] | Property, Plant and Equipment Property, plant 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, plant 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
Machinery and equipment | 3-20 years
Computer equipment and software | 3-10 years
Vehicles and trailers | 3-10 years
Furniture and fixtures | 5-7 years
Property, plant and equipment consists of the following (in thousands):
| December 31,
| 2019 |  | 2018
Land and improvements | $ | 194,437 |  |  | $ | 177,998 |
Buildings and improvements | 384,918 |  |  | 351,733 |
Machinery and equipment | 679,292 |  |  | 617,424 |
Computer equipment and software | 153,900 |  |  | 143,547 |
Vehicles and trailers | 156,334 |  |  | 150,824 |
Furniture and fixtures | 52,601 |  |  | 58,919 |
Leasehold improvements | 295,534 |  |  | 278,687 |
Finance lease assets | 71,724 |  |  | 61,310 |
| 1,988,740 |  |  | 1,840,442 |
Less—Accumulated depreciation | (807,680 | ) |  | (685,751 | )
Construction in progress | 53,340 |  |  | 65,471 |
Total property, plant and equipment, net | $ | 1,234,400 |  |  | $ | 1,220,162 |
We record depreciation expense associated with our refurbishing, remanufacturing, manufacturing and furnace operations as well as our distribution centers in Cost of goods sold in the Consolidated Statements of Income. We report depreciation expense resulting from restructuring programs in Restructuring and acquisition related expenses. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expense for the years ended December 31, 2019, 2018, and 2017 was $174 million, $157 million, and $129 million, respectively.
Inventory | Inventories We classify our inventory into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products. An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. For all of our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts; for our aftermarket automotive glass products inventory, cost is established using the first-in first-out method. Inventory cost for all of our aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; LKQ will apply new parts, products or materials to these parts in order to produce the finished product. Refurbished inventory cost is based upon the average price we pay for cores. The cost of our refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs. 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 the vehicle. 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 number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing, and also includes expenses incurred for freight in, direct manufacturing costs and other overhead costs. A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Cost is established using the first-in first-out method. For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made. Inventories consist of the following (in thousands):
| December 31,
| 2019 |  | 2018
Aftermarket and refurbished products | $ | 2,297,895 |  |  | $ | 2,309,458 |
Salvage and remanufactured products | 447,908 |  |  | 503,199 |
Manufactured products | 26,974 |  |  | 23,418 |
Total inventories | $ | 2,772,777 |  |  | $ | 2,836,075 |
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of December 31, 2019, manufactured products inventory was composed of $17 million of raw materials, $3 million of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $17 million of raw materials, $2 million of work in process, and $4 million of finished goods.
Receivable [Policy Text Block] | 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 $53 million and $57 million at December 31, 2019 and 2018, 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.
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 of America, 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 See Note 5, "Revenue Recognition" for our accounting policies related to revenue. Cost of Goods Sold Our cost of goods sold includes: the price we pay for inventory, net of vendor discounts, rebates or other incentives; inbound freight and other transportation costs to bring inventory into our facilities; and overhead costs related to purchasing, warehousing and transporting our products from our distribution warehouses to our selling locations. For our salvage, remanufactured, and refurbished products, our cost of goods sold also includes direct and indirect labor, equipment costs, depreciation, and other overhead to transform inventory into finished products suitable for sale. Cost of goods sold also includes expenses for our service-type warranties and for our assurance-type warranty programs. See Note 5, "Revenue Recognition" for additional information related to our warranty programs. Selling, General and Administrative Expenses Selling, general and administrative expenses include: personnel costs for employees in selling, general and administrative functions; costs to operate our branch locations, corporate offices and back office support centers; costs to transport our products from our facilities to our customers; and other selling, general and administrative expenses, such as professional fees, supplies, and advertising expenses. The costs included in selling, general and administrative expenses do not relate to inventory processing or conversion activities, and, as such, are classified below the gross margin line in our Consolidated Statements of Income. Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash. Restricted cash includes cash for which the Company's ability to withdraw funds at any time is contractually limited. As of both December 31, 2019 and 2018, we had $5 million of restricted cash that is recorded in Other noncurrent assets on the Consolidated Balance Sheets. 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 $53 million and $57 million at December 31, 2019 and 2018, 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 cash equivalents and accounts receivable. We control our exposure to credit risk associated with these instruments by (i) placing our cash and cash 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. Inventories We classify our inventory into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products. An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. For all of our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts; for our aftermarket automotive glass products inventory, cost is established using the first-in first-out method. Inventory cost for all of our aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; LKQ will apply new parts, products or materials to these parts in order to produce the finished product. Refurbished inventory cost is based upon the average price we pay for cores. The cost of our refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs. 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 the vehicle. 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 number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing, and also includes expenses incurred for freight in, direct manufacturing costs and other overhead costs. A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Cost is established using the first-in first-out method. For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made. Inventories consist of the following (in thousands):
| December 31,
| 2019 |  | 2018
Aftermarket and refurbished products | $ | 2,297,895 |  |  | $ | 2,309,458 |
Salvage and remanufactured products | 447,908 |  |  | 503,199 |
Manufactured products | 26,974 |  |  | 23,418 |
Total inventories | $ | 2,772,777 |  |  | $ | 2,836,075 |
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of December 31, 2019, manufactured products inventory was composed of $17 million of raw materials, $3 million of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $17 million of raw materials, $2 million of work in process, and $4 million of finished goods. Property, Plant and Equipment Property, plant 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, plant 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
Machinery and equipment | 3-20 years
Computer equipment and software | 3-10 years
Vehicles and trailers | 3-10 years
Furniture and fixtures | 5-7 years
Property, plant and equipment consists of the following (in thousands):
| December 31,
| 2019 |  | 2018
Land and improvements | $ | 194,437 |  |  | $ | 177,998 |
Buildings and improvements | 384,918 |  |  | 351,733 |
Machinery and equipment | 679,292 |  |  | 617,424 |
Computer equipment and software | 153,900 |  |  | 143,547 |
Vehicles and trailers | 156,334 |  |  | 150,824 |
Furniture and fixtures | 52,601 |  |  | 58,919 |
Leasehold improvements | 295,534 |  |  | 278,687 |
Finance lease assets | 71,724 |  |  | 61,310 |
| 1,988,740 |  |  | 1,840,442 |
Less—Accumulated depreciation | (807,680 | ) |  | (685,751 | )
Construction in progress | 53,340 |  |  | 65,471 |
Total property, plant and equipment, net | $ | 1,234,400 |  |  | $ | 1,220,162 |
We record depreciation expense associated with our refurbishing, remanufacturing, manufacturing and furnace operations as well as our distribution centers in Cost of goods sold in the Consolidated Statements of Income. We report depreciation expense resulting from restructuring programs in Restructuring and acquisition related expenses. All other depreciation expense is reported in Depreciation and amortization. Total depreciation expense for the years ended December 31, 2019, 2018, and 2017 was $174 million, $157 million, and $129 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 and supplier 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 2019, 2018 and 2017. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. The fair value estimates of our reporting units are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. Based on the annual goodwill impairment test in 2019, we determined no impairment existed as all of our reporting units had a fair value estimate which exceeded the carrying value by at least 25%. Based on our annual goodwill impairment test in 2018, we determined the carrying value of our Aviation reporting unit exceeded the fair value estimate by more than the carrying value, thus we recorded an impairment charge of $33 million, which represented the total carrying value of goodwill in our Aviation reporting unit (subsequently sold in the third quarter of 2019). The impairment charge was due to a decrease in the fair value estimate from the prior year fair value estimate, primarily driven by a significant deterioration in the outlook for the Aviation reporting unit due to competition, customer financial issues and changing market conditions for the airplane platforms that the business services, which lowered our projected gross margin and related future cash flows. We reported the impairment charge in Impairment of net assets held for sale and goodwill in the Consolidated Statements of Income for the year ended December 31, 2018. 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, 2018 | $ | 1,709,354 |  |  | $ | 1,414,898 |  |  | $ | 412,259 |  |  | $ | 3,536,511 |
Business acquisitions and adjustments to previously recorded goodwill | 6,805 |  |  | 970,923 |  |  | (4,838 | ) |  | 972,890 |
Impairment of goodwill | (33,244 | ) |  | — |  |  | — |  |  | (33,244 | )
Exchange rate effects | (9,383 | ) |  | (85,532 | ) |  | 216 |  |  | (94,699 | )
Balance as of December 31, 2018 | $ | 1,673,532 |  |  | $ | 2,300,289 |  |  | $ | 407,637 |  |  | $ | 4,381,458 |
Business acquisitions and adjustments to previously recorded goodwill | 38,913 |  |  | 15,099 |  |  | — |  |  | 54,012 |
Reclassified to net assets held for sale and discontinued operations | — |  |  | (4,721 | ) |  | — |  |  | (4,721 | )
Disposal of business | — |  |  | (1,919 | ) |  | — |  |  | (1,919 | )
Exchange rate effects | 5,599 |  |  | (27,847 | ) |  | (47 | ) |  | (22,295 | )
Balance as of December 31, 2019 | $ | 1,718,044 |  |  | $ | 2,280,901 |  |  | $ | 407,590 |  |  | $ | 4,406,535 |
Accumulated impairment losses as of December 31, 2019 | $ | (33,244 | ) |  | $ | — |  |  | $ | — |  |  | $ | (33,244 | )
The components of other intangibles, net are as follows (in thousands):
| December 31, 2019 |  | December 31, 2018
Intangible assets subject to amortization | $ | 769,038 |  |  | $ | 847,452 |
Indefinite-lived intangible assets |  |  |
Trademarks | 81,300 |  |  | 81,300 |
Total | $ | 850,338 |  |  | $ | 928,752 |
The components of intangible assets subject to amortization are as follows (in thousands):
| December 31, 2019 |  | December 31, 2018
| Gross Carrying Amount |  | Accumulated Amortization |  | Net |  | Gross Carrying Amount |  | Accumulated Amortization |  | Net
Trade names and trademarks | $ | 488,945 |  |  | $ | (119,957 | ) |  | $ | 368,988 |  |  | $ | 496,166 |  |  | $ | (94,451 | ) |  | $ | 401,715 |
Customer and supplier relationships | 580,052 |  |  | (321,650 | ) |  | 258,402 |  |  | 593,517 |  |  | (247,464 | ) |  | 346,053 |
Software and other technology related assets | 248,941 |  |  | (108,979 | ) |  | 139,962 |  |  | 176,118 |  |  | (79,283 | ) |  | 96,835 |
Covenants not to compete | 13,435 |  |  | (11,749 | ) |  | 1,686 |  |  | 13,344 |  |  | (10,495 | ) |  | 2,849 |
Total | $ | 1,331,373 |  |  | $ | (562,335 | ) |  | $ | 769,038 |  |  | $ | 1,279,145 |  |  | $ | (431,693 | ) |  | $ | 847,452 |
The components of intangible assets acquired as part of our acquisitions in 2018 are as follows (in thousands):
| Year Ended
| December 31, 2018
| Stahlgruber |  | Other Acquisitions (1) |  | Total
Trade names and trademarks | $ | 173,946 |  |  | $ | 8,870 |  |  | $ | 182,816 |
Customer and supplier relationships | 77,980 |  |  | 20,779 |  |  | 98,759 |
Software and other technology related assets | 33,329 |  |  | 376 |  |  | 33,705 |
Covenants not to compete | — |  |  | — |  |  | — |
Total | $ | 285,255 |  |  | $ | 30,025 |  |  | $ | 315,280 |
(1) The amounts recorded during the year ended December 31, 2018 exclude amounts related to our 2017 acquisitions, including a $5 million adjustment to increase other intangibles related to our 2017 acquisition of Warn. The weighted-average amortization periods for our intangible assets acquired during the years ended December 31, 2018 and 2017 are as follows (in years):
| Year Ended |  | Year Ended
| December 31, 2018 |  | December 31, 2017
| Stahlgruber |  | Other Acquisitions |  | Total |  | All Acquisitions
Trade names and trademarks | 18.0 |  |  | 10.0 |  |  | 17.6 |  |  | 11.2
Customer and supplier relationships | 3.0 |  |  | 7.9 |  |  | 4.0 |  |  | 18.6
Software and other technology related assets | 5.2 |  |  | 6.5 |  |  | 5.2 |  |  | 11.1
Covenants not to compete | — |  |  | — |  |  | — |  |  | 4.4
Total acquired finite-lived intangible assets | 12.4 |  |  | 8.5 |  |  | 12.0 |  |  | 16.5
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 |  | 3-20 years
Software and other technology related assets | Straight-line |  | 3-15 years
Covenants not to compete | Straight-line |  | 2-5 years
Amortization expense for intangibles was $140 million, $137 million, and $102 million during the years ended December 31, 2019, 2018, and 2017, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2024 is $120 million, $93 million, $80 million, $70 million and $64 million, respectively. Net Assets Held for Sale During the year ended December 31, 2019, we committed to plans to sell certain businesses in our North America and Europe segments. As a result, these businesses were classified as net assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value, resulting in impairment charges totaling $47 million for the year ended December 31, 2019 (presented in Impairment of net assets held for sale and goodwill in the Consolidated Statements of Income). In the third quarter of 2019, we completed the sales of two of these businesses, our aviation business in North America and a wholesale business in Bulgaria. The disposed businesses were immaterial, generating annualized revenue of approximately $55 million prior to the divestiture. Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 3, "Discontinued Operations," as of December 31, 2019, there were $19 million of assets held for sale, including $5 million of goodwill that was reclassified as held for sale related to our Europe segment, and $9 million of liabilities held for sale, which were recorded within Prepaid expenses and other current assets and Other current liabilities, respectively, on the Consolidated Balance Sheets. We expect the remaining assets held for sale to be disposed of during the next twelve months. The assets held for sale generated annualized revenue of $87 million during the year ended December 31, 2019. We are required to record net assets of our held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for our discounted cash flow analysis of the businesses were based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, the inputs to our estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in our analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of December 31, 2019. 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. Other than the impairment charges recorded upon the classification of certain businesses in our North America and Europe segments as held for sale discussed in the "Net Assets Held for Sale" section above, there were no material adjustments to the carrying value of long-lived assets during the years ended December 31, 2019, 2018 or 2017. Investments in Unconsolidated Subsidiaries Our investment in unconsolidated subsidiaries was $139 million and $179 million as of December 31, 2019 and December 31, 2018, respectively. Europe Segment Our investment in unconsolidated subsidiaries in Europe was $122 million and $163 million as of December 31, 2019 and December 31, 2018, respectively. We recorded equity in losses of $33 million and $65 million during the years ended December 31, 2019 and December 31, 2018, respectively, and equity in earnings of $6 million during the year ended December 31, 2017 related to our investments in unconsolidated subsidiaries in our Europe segment, mainly related to our investment in Mekonomen. On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen for an aggregate purchase price of $181 million. In October 2018, we acquired an additional $48 million of equity in Mekonomen at a discounted share price as part of its rights issue, increasing our equity interest to 26.6%. 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 December 31, 2019, our share of the book value of Mekonomen's net assets exceeded the book value of our investment in Mekonomen by $5 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We are recording our equity in the net earnings of Mekonomen on a one quarter lag. During the years ended December 31, 2019 and 2018, we recognized other-than-temporary impairment charges of $40 million and $71 million, respectively, which represented the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen was determined using the Mekonomen share prices as of the dates of our impairment tests. The impairment charges are recorded in Equity in (losses) earnings of unconsolidated subsidiaries in our Consolidated Statements of Income. In May 2018, we received a cash dividend of $8 million (SEK 67 million) related to our investment in Mekonomen. Mekonomen announced in February 2019 that the Mekonomen Board of Directors proposed no dividend payment in 2019. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at December 31, 2019 was $149 million (using the Mekonomen share price of SEK 93 as of December 31, 2019) compared to a carrying value of $111 million. In 2018, we participated in a rights issue with preferential rights for Mekonomen's existing shareholders, who were given the right to subscribe for four new Mekonomen shares per seven existing owned shares at a discounted share price. The rights issue represented a derivative instrument related to our right to acquire Mekonomen shares at a discount. We measured the derivative instrument at fair value, and we recorded a derivative loss of $5 million in Interest income and other income, net in the Consolidated Statements of Income in October 2018 upon the settlement of the derivative instrument. North America Segment Our investment in unconsolidated subsidiaries in the North America segment was $18 million and $16 million as of December 31, 2019 and December 31, 2018, respectively. The equity in earnings for the North America equity investments was $1 million for the year ended December 31, 2019 and an immaterial amount for the year ended December 31, 2018; we did not have any equity in earnings in the North America segment in 2017. 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. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record the warranty costs in Cost of goods sold in our Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our 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, 2018 | $ | 23,151 |
Warranty expense | 43,682 |
Warranty claims | (43,571 | )
Balance as of December 31, 2018 | 23,262 |
Warranty expense | 58,253 |
Warranty claims | (56,074 | )
Balance as of December 31, 2019 | $ | 25,441 |
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 $109 million and $105 million, of which $54 million and $52 million was classified as current, as of December 31, 2019 and 2018, respectively, and are classified as Other accrued expenses on the Consolidated Balance Sheets. The remaining balances of self-insurance reserves are classified as Other noncurrent liabilities, which reflects management's estimates of when claims will be paid. We had outstanding letters of credit of $69 million and $65 million at December 31, 2019 and 2018, respectively, 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. Litigation and Related Contingencies We have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows. Stockholders' Equity Treasury Stock On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to $500 million of our common stock from time to time through October 25, 2021. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases. On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $500 million of our common stock from time to time through October 25, 2022; this extended date also applies to the original repurchase program. With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases. During the year ended December 31, 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $292 million. During 2018, we repurchased 2.3 million shares of common stock for an aggregate price of $60 million. As of December 31, 2019, there was $648 million of remaining capacity under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method. Noncontrolling Interest In July 2019, we purchased substantially all of the noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition for a purchase price of $19 million, which included the issuance of $14 million of notes payable. This purchase resulted in a net decrease to Noncontrolling interest of $10 million and a decrease to Additional paid-in capital of $9 million in our consolidated financial statements as of December 31, 2019. In December 2019, we modified the shares of a noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition and issued new redeemable shares to the minority shareholder. The new redeemable shares contain (i) a put option for all noncontrolling interest shares at a fixed price of $24 million (€21 million) for the minority shareholder exercisable in the fourth quarter of 2023, (ii) a call option for all noncontrolling interest shares at a fixed price of $26 million (€23 million) for the Company exercisable beginning in the first quarter of 2026 through the end of the fourth quarter of 2027, and (iii) a guaranteed dividend to be paid quarterly to the minority shareholder through the fourth quarter of 2023. The new redeemable shares do not provide the minority shareholder with rights to participate in the profits and losses of the subsidiary prior to the exercise date of the put option. As the put option is outside the control of the Company, we recorded a $24 million Redeemable noncontrolling interest at the put option's redemption value outside of permanent equity on our Consolidated Balance Sheets. This transaction also resulted in a decrease to Additional paid-in capital of $18 million, a decrease to Noncontrolling interest of $12 million, and a $7 million dividend payable ($2 million recorded in Other current liabilities and $5 million in Other noncurrent liabilities) in our consolidated financial statements as of December 31, 2019. The redeemable noncontrolling interest and dividend payable represent noncash financing activities in our Consolidated Statements of Cash Flows. 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. Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested. 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. During 2017, new tax legislation was signed into law making significant changes to the Internal Revenue Code. See Note 15, "Income Taxes" for further information regarding the new tax law. 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 Adoption of New Lease Standard In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standards Codification Topic 842 ("ASC 842"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the Consolidated Balance Sheets and disclosing key information about leasing arrangements. The main difference between the prior standard and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the prior standard. We adopted the standard in the first quarter of 2019 using the modified retrospective approach and elected the transition package of practical expedients permitted within the new standard, which, among other things, allows us to carryforward the historical lease classification. For leases with a term of 12 months or less, we elected the short-term lease exemption, which allowed us to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. Additionally, we adopted the practical expedient to combine lease and non-lease components. As of January 1, 2019, we recorded both an operating lease asset and operating lease liability of $1.3 billion. The preexisting deferred rent liability balances from the historical straight-line treatment of operating leases was reclassified as a reduction of the lease asset upon adoption. The adoption of the standard did not materially affect our Consolidated Statements of Income or Statements of Cash Flows as operating lease payments will still be an operating cash outflow and capital lease payments will still be a financing cash outflow. The new standard did not have a material impact on our liquidity. The standard will have no impact on our debt covenant compliance under our current agreements as the covenant calculations are based on the prior lease accounting rules. Other Recently Adopted Accounting Pronouncements During the first quarter of 2019, we adopted ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which amends the hedge accounting recognition and presentation requirements in ASC 815 ("Derivatives and Hedging"). ASU 2017-12 significantly alters the hedge accounting model by making it easier for an entity to achieve and maintain hedge accounting and provides for accounting that better reflects an entity's risk management activities. We adopted the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the adoption date. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures but do not currently believe that it will have a material impact. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), and in November 2018 issued a subsequent amendment, ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. We do not anticipate the adoption of this accounting standard will have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements | Recent Accounting Pronouncements Adoption of New Lease Standard In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standards Codification Topic 842 ("ASC 842"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the Consolidated Balance Sheets and disclosing key information about leasing arrangements. The main difference between the prior standard and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the prior standard. We adopted the standard in the first quarter of 2019 using the modified retrospective approach and elected the transition package of practical expedients permitted within the new standard, which, among other things, allows us to carryforward the historical lease classification. For leases with a term of 12 months or less, we elected the short-term lease exemption, which allowed us to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases we may enter into in the future. Additionally, we adopted the practical expedient to combine lease and non-lease components. As of January 1, 2019, we recorded both an operating lease asset and operating lease liability of $1.3 billion. The preexisting deferred rent liability balances from the historical straight-line treatment of operating leases was reclassified as a reduction of the lease asset upon adoption. The adoption of the standard did not materially affect our Consolidated Statements of Income or Statements of Cash Flows as operating lease payments will still be an operating cash outflow and capital lease payments will still be a financing cash outflow. The new standard did not have a material impact on our liquidity. The standard will have no impact on our debt covenant compliance under our current agreements as the covenant calculations are based on the prior lease accounting rules. Other Recently Adopted Accounting Pronouncements During the first quarter of 2019, we adopted ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which amends the hedge accounting recognition and presentation requirements in ASC 815 ("Derivatives and Hedging"). ASU 2017-12 significantly alters the hedge accounting model by making it easier for an entity to achieve and maintain hedge accounting and provides for accounting that better reflects an entity's risk management activities. We adopted the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the adoption date. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement" ("ASU 2018-13"), which removes, modifies, and adds certain disclosure requirements in ASC 820. ASU 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in the process of evaluating the impact of this standard on our disclosures but do not currently believe that it will have a material impact. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), and in November 2018 issued a subsequent amendment, ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. We do not anticipate the adoption of this accounting standard will have a material impact on our consolidated financial statements.

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