Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________ 
FORM 10-Q
________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2016
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to
Commission File Number: 000-50404
________________________ 
LKQ CORPORATION
(Exact name of registrant as specified in its charter)
________________________ 
DELAWARE
 
36-4215970
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
500 WEST MADISON STREET,
SUITE 2800, CHICAGO, IL
 
60661
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (312) 621-1950
________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨   No x
At October 21, 2016, the registrant had issued and outstanding an aggregate of 307,510,598 shares of Common Stock.



 


PART I
FINANCIAL INFORMATION


Item 1.     Financial Statements

LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
 
September 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
271,851

 
$
87,397

Receivables, net
959,321

 
590,160

Inventories, net
1,912,568

 
1,556,552

Prepaid expenses and other current assets
151,801

 
106,603

Total Current Assets
3,295,541

 
2,340,712

Property, Plant and Equipment, net
1,023,707

 
696,567

Intangible Assets:
 
 
 
Goodwill
3,117,150

 
2,319,246

Other intangibles, net
619,246

 
215,117

Other Assets
148,308

 
76,195

Total Assets
$
8,203,952

 
$
5,647,837

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
682,719

 
$
415,588

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
106,544

 
86,527

Other accrued expenses
238,302

 
162,225

Other current liabilities
46,814

 
31,596

Current portion of long-term obligations
74,829

 
56,034

Total Current Liabilities
1,149,208

 
751,970

Long-Term Obligations, Excluding Current Portion
3,189,345

 
1,528,668

Deferred Income Taxes
226,682

 
127,239

Other Noncurrent Liabilities
211,440

 
125,278

Commitments and Contingencies

 

Stockholders’ Equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 307,487,198 and 305,574,384 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
3,074

 
3,055

Additional paid-in capital
1,110,841

 
1,090,713

Retained earnings
2,504,028

 
2,126,384

Accumulated other comprehensive loss
(190,666
)
 
(105,470
)
Total Stockholders’ Equity
3,427,277

 
3,114,682

Total Liabilities and Stockholders’ Equity
$
8,203,952

 
$
5,647,837

    

See notes to unaudited condensed consolidated financial statements
2





LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
(In thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
2,386,830

 
$
1,831,732

 
$
6,758,999

 
$
5,443,714

Cost of goods sold
1,503,418

 
1,118,953

 
4,193,203

 
3,307,512

Gross margin
883,412

 
712,779

 
2,565,796

 
2,136,202

Facility and warehouse expenses
183,048

 
143,918

 
519,323

 
412,954

Distribution expenses
172,566

 
158,768

 
509,240

 
450,521

Selling, general and administrative expenses
263,372

 
207,887

 
735,843

 
616,924

Restructuring and acquisition related expenses
8,412

 
4,578

 
32,303

 
12,729

Depreciation and amortization
53,016

 
30,883

 
137,233

 
90,118

Operating income
202,998

 
166,745

 
631,854

 
552,956

Other expense (income):
 
 
 
 
 
 
 
Interest expense, net
27,059

 
14,722

 
68,032

 
44,250

Loss on debt extinguishment

 

 
26,650

 

Gains on foreign exchange contracts - acquisition related

 

 
(18,342
)
 

Other income, net
(3,279
)
 
(2,928
)
 
(4,829
)
 
(912
)
Total other expense, net
23,780

 
11,794

 
71,511

 
43,338

Income before provision for income taxes
179,218

 
154,951

 
560,343

 
509,618

Provision for income taxes
56,797

 
52,475

 
182,751

 
177,255

Equity in earnings of unconsolidated subsidiaries
267

 
(1,130
)
 
52

 
(4,200
)
Net income
$
122,688

 
$
101,346

 
$
377,644

 
$
328,163

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.40

 
$
0.33

 
$
1.23

 
$
1.08

Diluted
$
0.40

 
$
0.33

 
$
1.22

 
$
1.07


Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
122,688

 
$
101,346

 
$
377,644

 
$
328,163

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
(12,317
)
 
(33,458
)
 
(85,434
)
 
(43,758
)
Net change in unrecognized gains/losses on derivative instruments, net of tax
3,059

 
612

 
(123
)
 
1,813

Net change in unrealized gains/losses on pension plans, net of tax
94

 
(25
)
 
361

 
82

Total other comprehensive income (loss)
(9,164
)
 
(32,871
)
 
(85,196
)
 
(41,863
)
Total comprehensive income
$
113,524

 
$
68,475

 
$
292,448

 
$
286,300


See notes to unaudited condensed consolidated financial statements
3





LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
377,644

 
$
328,163

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
150,370

 
94,688

Stock-based compensation expense
17,062

 
16,291

Loss on debt extinguishment
26,650

 

Gains on foreign exchange contracts - acquisition related
(18,342
)
 

Other
6,711

 
6,580

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Receivables, net
(46,376
)
 
(6,304
)
Inventories, net
27,070

 
22,345

Prepaid income taxes/income taxes payable
4,134

 
39,639

Accounts payable
(12,412
)
 
(11,139
)
Other operating assets and liabilities
(8,360
)
 
14,732

Net cash provided by operating activities
524,151

 
504,995

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(152,746
)
 
(99,573
)
Acquisitions, net of cash acquired
(1,301,127
)
 
(157,357
)
Proceeds from foreign exchange contracts
18,342

 

Other investing activities, net
10,841

 
3,174

Net cash used in investing activities
(1,424,690
)
 
(253,756
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
7,525

 
7,534

Taxes paid related to net share settlements of stock-based compensation awards
(4,440
)
 
(7,423
)
Debt issuance costs
(16,404
)
 

Proceeds from issuance of Euro notes
563,450

 

Borrowings under revolving credit facilities
1,961,702

 
282,421

Repayments under revolving credit facilities
(1,239,234
)
 
(433,840
)
Borrowings under term loans
338,478

 

Repayments under term loans
(9,461
)
 
(16,875
)
Borrowings under receivables securitization facility
100,480

 
3,858

Repayments under receivables securitization facility
(66,500
)
 
(8,958
)
Repayments of other debt, net
(2,362
)
 
(50,843
)
Repayment of Rhiag debt and related payments
(543,347
)
 

Payments of other obligations
(1,405
)
 
(2,491
)
Net cash provided by (used in) financing activities
1,088,482

 
(226,617
)
Effect of exchange rate changes on cash and equivalents
(3,489
)
 
(2,141
)
Net increase in cash and equivalents
184,454

 
22,481

Cash and equivalents, beginning of period
87,397

 
114,605

Cash and equivalents, end of period
$
271,851

 
$
137,086

Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
184,719

 
$
138,192

Interest
65,888

 
35,430

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Notes payable and other financing obligations, including notes issued and debt assumed in connection with business acquisitions
$
560,955

 
$
28,598

Noncash property, plant and equipment additions
1,617

 
4,841


See notes to unaudited condensed consolidated financial statements
4





LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
 
Common Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Stockholders’
Equity
 
Shares
Issued
 
Amount
 
BALANCE, January 1, 2016
305,574

 
$
3,055

 
$
1,090,713

 
$
2,126,384

 
$
(105,470
)
 
$
3,114,682

Net income

 

 

 
377,644

 

 
377,644

Other comprehensive income (loss)

 

 

 

 
(85,196
)
 
(85,196
)
Restricted stock units vested, net of shares withheld for employee tax
846

 
8

 
(4,448
)
 

 

 
(4,440
)
Stock-based compensation expense

 

 
17,062

 

 

 
17,062

Exercise of stock options
1,067

 
11

 
7,514

 

 

 
7,525

BALANCE, September 30, 2016
307,487

 
$
3,074

 
$
1,110,841

 
$
2,504,028

 
$
(190,666
)
 
$
3,427,277

     

See notes to unaudited condensed consolidated financial statements
5





LKQ CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1.
Interim Financial Statements
The unaudited financial statements presented in this report represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Operating results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our most recent Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 25, 2016.
As described in Note 2, "Business Combinations," on April 21, 2016, we completed our acquisition of Pittsburgh Glass Works LLC ("PGW"), a leading global distributor and manufacturer of automotive glass products. With our acquisition of PGW, we present an additional reportable segment, Glass. Our unaudited condensed consolidated financial statements reflect the impact of PGW from the date of acquisition through September 30, 2016.    
    
Note 2.
Business Combinations

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 €534.2 million ($602.0 million), composed of €533.6 million ($601.4 million) of cash (net of cash acquired) and €0.6 million ($0.6 million) of intercompany balances considered to be effectively settled as part of the transaction. In addition, we assumed €488.8 million ($550.8 million) of existing Rhiag debt as of the acquisition date.
To fund 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 $18.3 million during the three months ended March 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 nine months ended September 30, 2016.     
We recorded $581.8 million of goodwill related to our acquisition of Rhiag, which we do not expect to be deductible for income tax purposes. In the period between the acquisition date and September 30, 2016, Rhiag, which is reported in our Europe reportable segment, generated revenue of $586.4 million and operating income of $17.2 million, which included $10.9 million of acquisition related costs.
On April 21, 2016, LKQ acquired PGW. PGW’s business comprises wholesale and retail distribution services and automotive glass manufacturing. The acquisition expanded our addressable market in North America and globally. 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 $661.7 million, consisting of cash paid (net of cash acquired). We recorded $221.6 million of goodwill related to our acquisition of PGW, of which we expect $91.6 million to be deductible for income tax purposes. In the period between the acquisition date and September 30, 2016, PGW generated revenue of $468.5 million and operating income of $23.0 million, which included $2.1 million of acquisition related costs.
In addition to our acquisitions of Rhiag and PGW, we acquired five wholesale businesses in Europe and one wholesale business in North America during the nine months ended September 30, 2016. Total acquisition date fair value of the consideration for these acquisitions was $42.3 million, composed of $38.0 million of cash (net of cash acquired), $1.4 million

6



of notes payable, and $3.0 million of other purchase price obligations. During the nine months ended September 30, 2016, we recorded $30.1 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. In the period between the acquisition dates and September 30, 2016, these acquisitions generated revenue of $14.9 million and operating income of $1.1 million.
In October 2016, we acquired substantially all of the business assets of Andrew Page Limited out of receivership. Andrew Page Limited is a distributor of aftermarket automotive parts in the United Kingdom, and the acquisition is subject to customary regulatory approval from the Competition and Markets Authority in the U.K. The preliminary aggregate cash purchase price for this acquisition was approximately £16.5 million ($21.1 million). We are in the process of completing the purchase accounting for this acquisition, and as a result, we are unable to disclose the amounts recognized for each major class of assets acquired and liabilities assumed, or the pro forma effect of the acquisition on our results of operations.
During 2015, we completed 18 acquisitions, including 4 wholesale businesses in North America, 12 wholesale businesses in Europe, a self service retail operation, and a specialty vehicle aftermarket business. Our wholesale business acquisitions in North America included PartsChannel, Inc. ("Parts Channel"), an aftermarket collision parts distributor. The specialty aftermarket business acquired was The Coast Distribution System, Inc. ("Coast"), a supplier of replacement parts, supplies and accessories in North America for the recreational vehicle and outdoor recreation markets. Our European acquisitions included 11 aftermarket parts distribution businesses in the Netherlands, 9 of which were former customers of and distributors for our Netherlands subsidiary, Sator Beheer B.V. ("Sator") and were acquired with the objective of expanding our distribution network in the Netherlands. Our other acquisitions completed during 2015 enabled us to expand our geographic presence. Total acquisition date fair value of the consideration for these acquisitions was $187.9 million, composed of $161.3 million of cash (net of cash acquired), $4.3 million of notes payable, $21.2 million of other purchase price obligations, and $1.1 million of pre-existing balances between us and the acquired entities considered to be effectively settled as a result of the acquisitions. During the year ended December 31, 2015, we recorded $92.2 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2014 acquisitions. We expect $69.9 million of the $92.2 million of goodwill recorded to 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, 2016 and the last three months of 2015 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 September 30, 2016, we recorded adjustments based on our valuation procedures for our acquisition of Rhiag that resulted in the allocation of $158.0 million of goodwill to acquired assets, primarily intangible assets and property, plant and equipment. Additionally, from the date of our preliminary allocation for PGW as of June 30, 2016 through September 30, 2016, we recorded adjustments based on our valuation procedures that resulted in a $37.6 million increase to goodwill recorded for our PGW acquisition. This was primarily
attributable to a decline in the value allocated to property, plant and equipment, partially offset by an allocation of goodwill to
acquired assets, primarily intangible assets. The income statement effect of the Rhiag and PGW measurement period adjustments that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date was immaterial. The balance sheet impact and income statement effect of other measurement-period adjustments recorded for acquisitions completed in prior periods was immaterial.


7



The preliminary purchase price allocations for the acquisitions completed during the nine months ended September 30, 2016 and the year ended December 31, 2015 are as follows (in thousands):
 
Nine Months Ended
 
Year Ended
 
September 30, 2016
 
December 31, 2015
 
Rhiag
 
PGW
 
Other Acquisitions
 
Total
 
All Acquisitions
Receivables
$
230,670

 
$
136,523

 
$
9,924

 
$
377,117

 
$
29,628

Receivable reserves
(28,242
)
 
(6,146
)
 
(780
)
 
(35,168
)
 
(3,926
)
Inventories, net (1)
239,529

 
169,159

 
12,690

 
421,378

 
79,646

Prepaid expenses and other current assets
10,822

 
42,573

 
2,027

 
55,422

 
3,337

Property, plant and equipment
58,062

 
225,712

 
3,736

 
287,510

 
11,989

Goodwill
581,777

 
221,571

 
30,069

 
833,417

 
92,175

Other intangibles
429,460

 
35,054

 
30

 
464,544

 
9,926

Other assets
2,092

 
57,672

 
(288
)
 
59,476

 
5,166

Deferred income taxes
(109,833
)
 
2,024

 
(306
)
 
(108,115
)
 
4,102

Current liabilities assumed
(238,375
)
 
(167,520
)
 
(13,022
)
 
(418,917
)
 
(39,191
)
Debt assumed
(550,843
)
 
(4,027
)
 
(1,734
)
 
(556,604
)
 
(2,365
)
Other noncurrent liabilities assumed
(23,112
)
 
(50,847
)
 

 
(73,959
)
 
(2,651
)
Other purchase price obligations

 

 
(2,991
)
 
(2,991
)
 
(21,199
)
Notes issued

 

 
(1,360
)
 
(1,360
)
 
(4,296
)
Settlement of pre-existing balances
(591
)
 

 
(32
)
 
(623
)
 
(1,073
)
Cash used in acquisitions, net of cash acquired
$
601,416

 
$
661,748

 
$
37,963

 
$
1,301,127

 
$
161,268


(1) The PGW inventory balance includes the impact of a $9.8 million step-up adjustment to report the inventory at its fair value.
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. Due to the immateriality of these plans, 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, 2016 and the year ended December 31, 2015 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. 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. Our April 2016 acquisition of PGW enabled us to enter into new product lines and increase the size of our addressable market. In addition, we believe that our PGW acquisition 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.

8



The following pro forma summary presents the effect of the businesses acquired during the nine months ended September 30, 2016 as though the businesses had been acquired as of January 1, 2015 and the businesses acquired during the year ended December 31, 2015 as though they had been acquired as of January 1, 2014. 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,
 
2016
 
2015
 
2016
 
2015
Revenue, as reported
$
2,386,830

 
$
1,831,732

 
$
6,758,999

 
$
5,443,714

Revenue of purchased businesses for the period prior to acquisition:
 
 
 
 
 
 
 
Rhiag

 
256,479

 
213,376

 
738,364

PGW

 
281,004

 
328,000

 
818,389

Other acquisitions
5,551

 
48,061

 
44,763

 
269,402

Pro forma revenue
$
2,392,381

 
$
2,417,276

 
$
7,345,138

 
$
7,269,869

 
 
 
 
 
 
 
 
Net income, as reported
$
122,688

 
$
101,346

 
$
377,644

 
$
328,163

Net income of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments:
 
 
 
 
 
 
 
Rhiag

 
5,091

 
(447
)
 
9,670

PGW

 
8,466

 
13,573

 
11,121

Other acquisitions
239

 
(32
)
 
2,467

 
6,755

Acquisition related expenses, net of tax (2)
375

 
636

 
10,781

 
1,440

Pro forma net income
$
123,302

 
$
115,507

 
$
404,018

 
$
357,149

 
 
 
 
 
 
 
 
Earnings per share, basic—as reported
$
0.40

 
$
0.33

 
$
1.23

 
$
1.08

Effect of purchased businesses for the period prior to acquisition:
 
 
 
 
 
 
 
Rhiag

 
0.02

 
0.00

 
0.03

PGW

 
0.03

 
0.04

 
0.04

Other acquisitions
0.00

 
0.00

 
0.01

 
0.02

Acquisition related expenses, net of tax (2)
0.00

 
0.00

 
0.04

 
0.00

Pro forma earnings per share, basic (1) 
$
0.40

 
$
0.38

 
$
1.32

 
$
1.17

 
 
 
 
 
 
 
 
Earnings per share, diluted—as reported
$
0.40

 
$
0.33

 
$
1.22

 
$
1.07

Effect of purchased businesses for the period prior to acquisition:
 
 
 
 
 
 
 
Rhiag

 
0.02

 
0.00

 
0.03

PGW

 
0.03

 
0.04

 
0.04

Other acquisitions
0.00

 
0.00

 
0.01

 
0.02

Acquisition related expenses, net of tax (2)
0.00

 
0.00

 
0.03

 
0.00

Pro forma earnings per share, diluted (1) 
$
0.40

 
$
0.38

 
$
1.30

 
$
1.16


(1) The sum of the individual earnings per share amounts may not equal the total due to rounding.
(2) Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed.
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 4, "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.


9



Note 3.
Financial Statement Information
Revenue Recognition
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 $35.6 million and $32.8 million at September 30, 2016 and December 31, 2015, 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 $50.2 million and $24.6 million at September 30, 2016 and December 31, 2015, respectively. Our March 2016 acquisition of Rhiag and our April 2016 acquisition of PGW contributed $23.0 million and $4.8 million, respectively, to our reserve for uncollectible accounts. See Note 2, "Business Combinations" for further information on our acquisitions.
Inventories, net
Inventories, net consists of the following (in thousands):
 
September 30,
 
December 31,
 
2016
 
2015
Aftermarket and refurbished products
$
1,450,981

 
$
1,146,162

Salvage and remanufactured products
386,688

 
410,390

Glass manufacturing products (1)
74,899

 

Total inventories, net
$
1,912,568

 
$
1,556,552


(1) Includes all inventory types related to PGW's manufacturing and fabrication of original equipment manufacturer ("OEM") automotive glass parts. Aftermarket automotive glass products distributed by PGW are included within aftermarket and refurbished products above. The balance of glass manufacturing products as of September 30, 2016 is composed of $14.3 million of raw materials, $22.7 million of work in process, and $37.9 million of finished goods. Our U.S. glass manufacturing products inventory is stated at the lower of cost, using the first-in first-out method, or market.
Our acquisitions completed during 2016, including our March 2016 acquisition of Rhiag and our April 2016 acquisition of PGW, and adjustments to preliminary valuations of inventory for certain of our 2015 acquisitions as of the acquisition date, contributed $339.7 million to our aftermarket and refurbished products inventory, $3.9 million to our salvage and remanufactured products inventory, and $77.8 million to our glass manufacturing products inventory. See Note 2, "Business Combinations" for further information on our acquisitions.
Property, Plant and Equipment    
In Note 3, "Financial Statement Information" in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 filed with the SEC on August 2, 2016, we included certain disclosures related to our property, plant and equipment as of June 30, 2016 due to the material changes resulting from the acquisitions of Rhiag and PGW. There have been no material changes to the information contained in those disclosures as of September 30, 2016.
Included in Cost of Goods Sold on the Unaudited Condensed Consolidated Statements of Income is depreciation expense associated with our refurbishing, remanufacturing, glass manufacturing, and furnace operations as well as our distribution centers.
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.

10



The changes in the carrying amount of goodwill by reportable segment during the nine months ended September 30, 2016 are as follows (in thousands):
 
North America
 
Europe
 
Specialty
 
Glass
 
Total
Balance as of January 1, 2016
$
1,445,850

 
$
594,482

 
$
278,914

 
$

 
$
2,319,246

Business acquisitions and adjustments to previously recorded goodwill
2,304

 
605,877

 
3,665

 
221,571

 
833,417

Exchange rate effects
1,989

 
(36,608
)
 
(294
)
 
(600
)
 
(35,513
)
Balance as of September 30, 2016
$
1,450,143

 
$
1,163,751

 
$
282,285

 
$
220,971

 
$
3,117,150

During the nine months ended September 30, 2016, we recorded $581.8 million of goodwill related to our acquisition of Rhiag and $221.6 million related to our acquisition of PGW. See Note 2, "Business Combinations" for further information on our acquisitions.
The components of other intangibles are as follows (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trade names and trademarks
$
300,248

 
$
(52,995
)
 
$
247,253

 
$
172,219

 
$
(43,458
)
 
$
128,761

Customer and supplier relationships
412,711

 
(77,914
)
 
334,797

 
95,508

 
(41,007
)
 
54,501

Software and other technology related assets
59,349

 
(27,131
)
 
32,218

 
44,500

 
(17,844
)
 
26,656

Covenants not to compete
11,795

 
(6,817
)
 
4,978

 
10,774

 
(5,575
)
 
5,199

 
$
784,103

 
$
(164,857
)
 
$
619,246

 
$
323,001

 
$
(107,884
)
 
$
215,117

The components of other intangibles acquired during the nine months ended September 30, 2016 include the following (in thousands):    
 
Gross Amount
 
Rhiag
 
PGW
Trade names and trademarks
$
127,351

 
$
4,700

Customer and supplier relationships
291,893

 
27,700

Software and other technology related assets
10,216

 
1,054

Covenants not to compete

 
1,600

 
$
429,460

 
$
35,054

Amortization expense for intangible assets was $58.2 million and $25.0 million during the nine months ended September 30, 2016 and 2015, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2020 is $82.8 million, $90.8 million, $75.1 million, $60.4 million and $49.3 million, respectively.
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. The changes in the warranty reserve are as follows (in thousands):
Balance as of January 1, 2016
$
17,363

Warranty expense
23,789

Warranty claims
(21,917
)
Balance as of September 30, 2016
$
19,235


11



Investments in Unconsolidated Subsidiaries
In February 2016, we sold our investment in ACM Parts Pty Ltd ("ACM"). As part of the PGW acquisition, we obtained ownership interests in three joint ventures, including glass manufacturing operations in China and Mexico. Our investment in unconsolidated subsidiaries and our equity in the net earnings of the investees was not material as of and for the three and nine months ended September 30, 2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which was amended in July 2015. This update outlines a new comprehensive revenue recognition model that supersedes most current revenue recognition guidance, and requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities adopting the standard have the option of using either a full retrospective or modified retrospective approach in the application of this guidance. ASU 2014-09 will be effective for the Company during the first quarter of our fiscal year 2018. Early adoption is permitted for annual reporting periods beginning after December 15, 2016; however, we do not plan to early adopt. Based on our preliminary assessment, the new guidance will change the way we present sales returns, but we do not anticipate the adoption will have a material impact on our current revenue recognition policies or practices. We will continue to evaluate the potential effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures, which may identify other impacts.
In September 2015, the FASB issued Accounting Standards Update 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"), which requires an acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are identified as opposed to recognition as if the accounting had been completed as of the acquisition date. The ASU also requires disclosure regarding amounts that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date. ASU 2015-16 became effective for the Company during the first quarter of our fiscal year 2016 and is being applied on a prospective basis. The measurement-period adjustments for our acquisitions and the related impact on earnings of any amounts that would have been recorded in previous periods are disclosed in Note 2, "Business Combinations."     
In February 2016, the FASB issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between current GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard requires that entities apply the effects of these changes using a modified retrospective approach, which includes a number of optional practical expedients. While we are still in the process of quantifying the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures, we anticipate the adoption will materially affect our consolidated balance sheet and disclosures, as the majority of our operating leases will be recorded on the balance sheet under ASU 2016-02. We do not anticipate adoption of this accounting standard to have a material impact to our consolidated statements of income.    
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting" (“ASU 2016-09”), to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, the treatment of forfeitures, and calculation of earnings per share. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. During the three months ended September 30, 2016, the Company elected to early adopt ASU 2016-09 effective January 1, 2016. The provisions of the accounting standard related to the recognition of excess tax benefits in income tax expense were adopted prospectively, and resulted in the recognition of an $11.5 million income tax benefit and an increase of $0.04 to both basic and diluted earnings per share during the nine months ended September 30, 2016. The recognition of the income tax benefit during the nine months ended September 30, 2016 resulted in a corresponding increase of $11.5 million to retained earnings, with an equal offset to Additional Paid in Capital as of September 30, 2016 related to the recognition of excess tax benefits in 2016. While the full year-to-date impact is reported in the third quarter year-to-date results, the results for the three months ended September 30, 2016 reflect only the quarter-to-date impact of adopting this standard; quarterly information for the first and second quarters of 2016 will be recast in future filings when results for these periods are presented. Refer to the table below for the impact to quarterly net income, and basic and diluted earnings per share as a result of adopting this accounting standard. The presentation of excess tax benefits on share-based payments was adjusted retrospectively within the Unaudited Condensed Consolidated Statements of Cash Flows, resulting in an $11.7 million and $13.7 million increase in operating cash flows for the nine months ended September 30, 2016 and 2015, respectively, with a corresponding decrease to financing cash flows.

12



The impact to our quarterly financial statements as a result of adoption of ASU 2016-09 is presented below (in thousands, except per share amounts):

 
Three Months Ended
 
Nine Months Ended
 
March 31,
2016
 
June 30,
2016
 
September 30,
2016
 
September 30,
2016
Net Income
 
 
 
 
 
 
 
Prior to adoption of ASU 2016-09
$
107,732

 
$
140,737

 
$
117,704

 
$
366,173

Adjustment - adoption of ASU 2016-09
4,439

 
2,048

 
4,984

 
11,471

As adjusted
$
112,171

 
$
142,785

 
$
122,688

 
$
377,644

 
 
 
 
 
 
 
 
Basic Earnings per Share (1)
 
 
 
 
 
 
 
Prior to adoption of ASU 2016-09
$
0.35

 
$
0.46

 
$
0.38

 
$
1.19

Adjustment - adoption of ASU 2016-09
0.02

 
0.01

 
0.02

 
0.04

As adjusted
$
0.37

 
$
0.47

 
$
0.40

 
$
1.23

 
 
 
 
 
 
 
 
Diluted Earnings per Share (1)
 
 
 
 
 
 
 
Prior to adoption of ASU 2016-09
$
0.35

 
$
0.46

 
$
0.38

 
$
1.18

Adjustment - adoption of ASU 2016-09
0.01

 
0.00

 
0.02

 
0.04

As adjusted
$
0.36

 
$
0.46

 
$
0.40

 
$
1.22


(1) The sum of the individual earnings per share amounts may not equal the total due to rounding.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), to add and clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The ASU includes guidance on classification for the following items: debt prepayment or debt extinguishment costs, settlement of zero coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned or bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and other separately identifiable cash flows where application of the predominance principle is prescribed. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017; early adoption is permitted. The guidance requires retrospective application to all periods presented unless it is impracticable to do so. We are still evaluating the impact that ASU 2016-15 will have on our consolidated financial statements and related disclosures.

Note 4.
Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as legal, accounting, and advisory fees, totaled $2.7 million and $18.4 million for the three and nine months ended September 30, 2016, respectively. Of our 2016 expenses, $10.9 million related to our acquisition of Rhiag, $4.1 million related to our acquisition of PGW, and $3.4 million related to other completed and potential acquisitions. Acquisition related expenses incurred during the three and nine months ended September 30, 2015 totaled $1.2 million and $2.4 million, respectively. The expenses incurred in the three and nine months ended September 30, 2015 were primarily related to our acquisition of eleven aftermarket distribution businesses in the Netherlands and our acquisition of Coast.    
Acquisition Integration Plans
During the three and nine months ended September 30, 2016, we incurred $5.7 million and $13.9 million of restructuring expenses, respectively. Expenses incurred during the three and nine months ended September 30, 2016 were primarily a result of the integration of our acquisition of Parts Channel into our existing North America wholesale business, the integration of our Coast acquisition into our existing Specialty business, and restructuring activities within our Glass segment.

13


Expenses incurred were primarily related to facility closure and relocation costs for duplicate facilities, the merger of existing facilities into larger distribution centers, and the termination of employees.
During the three and nine months ended September 30, 2015, we incurred $3.4 million and $10.3 million of restructuring expenses, respectively. These expenses were primarily a result of the integration of our acquisition of Parts Channel into our existing North American wholesale business and our October 2014 acquisition of Stag Parkway Holding Company, a supplier of parts for recreational vehicles, into our Specialty business. Expenses incurred were primarily related to facility closure and relocation costs for duplicate facilities, and the termination of employees in connection with the consolidation of overlapping facilities with our existing business.
We expect to incur expenses related to the integration of certain of our other acquisitions into our existing operations during the fourth quarter of 2016 and extending into 2017. These integration activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with our existing business and moving expenses. Future expenses to complete these integration plans are expected to be less than $5.0 million; this amount excludes any potential future restructuring expense related to the integration of our acquisitions of Rhiag and PGW with our existing business.

Note 5.
Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us, we may grant qualified and nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares and performance units under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. We expect to issue new shares of common stock to cover past and future equity grants.
RSUs
RSUs vest over periods of up to five years, subject to a continued service condition. Currently outstanding RSUs contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case, both conditions must be met before any RSUs vest. For the RSUs containing a performance-based vesting condition, the Company must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.
During the nine months ended September 30, 2016, we granted 976,318 RSUs to employees. The fair value of RSUs that vested during the nine months ended September 30, 2016 was $29.2 million.
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the nine months ended September 30, 2016:
 
Number
Outstanding
 
Weighted
Average
Grant Date
Fair Value
 
Aggregate Intrinsic Value
   (in thousands) (1)
Unvested as of January 1, 2016
1,981,292

 
$
24.19

 
$
58,706

Granted
976,318

 
$
29.05

 
 
Vested
(996,607
)
 
$
22.30

 
 
Forfeited / Canceled
(74,196
)
 
$
27.18

 
 
Unvested as of September 30, 2016
1,886,807

 
$
27.58

 
$
66,906

Expected to vest after September 30, 2016
1,781,698

 
$
27.63

 
$
63,179

(1) The aggregate intrinsic value of unvested and expected to vest RSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all RSUs vested. This amount changes based on the market price of the Company’s common stock.
Stock Options
Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six or ten years from the date they are granted. No options were granted during the nine months ended September 30, 2016.

14



The following table summarizes activity related to our stock options under the Equity Incentive Plan for the nine months ended September 30, 2016:
 
Number
Outstanding
 
Weighted
Average Exercise Price
 
Weighted Average Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
   (in thousands) (1)
Balance as of January 1, 2016
3,765,952

 
$
8.63

 
2.9
 
$
79,317

Exercised
(1,066,756
)
 
$
7.05

 
 
 
 
Forfeited / Canceled
(17,400
)
 
$
23.66

 
 
 
 
Balance as of September 30, 2016
2,681,796

 
$
9.16

 
2.5
 
$
70,519

Exercisable as of September 30, 2016
2,600,860

 
$
8.44

 
2.5
 
$
70,264

Exercisable as of September 30, 2016 and expected to vest thereafter
2,673,702

 
$
9.09

 
2.5
 
$
70,493

(1) The aggregate intrinsic value of outstanding, exercisable and expected to vest options represents the total pretax intrinsic value (the difference between the fair value of the Company's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price) that would have been received by the option holders had all option holders exercised their options as of January 1, 2016 and September 30, 2016, respectively. This amount changes based on the market price of the Company’s common stock.
The following table summarizes the components of pre-tax stock-based compensation expense (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
RSUs
$
5,591

 
$
5,119

 
$
16,950

 
$
16,067

Stock options
46

 
58

 
112

 
224

Total stock-based compensation expense
$
5,637

 
$
5,177

 
$
17,062

 
$
16,291

As of September 30, 2016, unrecognized compensation expense related to unvested RSUs and stock options is $41.3 million and $0.1 million, respectively, and is expected to be recognized over weighted-average periods of 3.1 years and 0.3 years, respectively. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized.

Note 6.
Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
122,688

 
$
101,346

 
$
377,644

 
$
328,163

Denominator for basic earnings per share—Weighted-average shares outstanding
307,190

 
305,059

 
306,690

 
304,453

Effect of dilutive securities:
 
 
 
 
 
 
 
RSUs
681

 
603

 
686

 
678

Stock options
2,165

 
2,066

 
2,295

 
2,195

Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding
310,036

 
307,728

 
309,671

 
307,326

Earnings per share, basic
$
0.40

 
$
0.33

 
$
1.23

 
$
1.08

Earnings per share, diluted
$
0.40

 
$
0.33

 
$
1.22

 
$
1.07


15



Our earnings per share calculation for the three and nine months ended September 30, 2016 reflects the adoption of ASU 2016-09 as discussed in Note 3, "Financial Statement Information."
The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Antidilutive securities:
 
 
 
 
 
 
 
RSUs

 
272

 
76

 
306

Stock options

 
95

 
57

 
97


Note 7.
Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain on Pension Plan
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(170,007
)
 
$
(4,114
)
 
$
(7,381
)
 
$
(181,502
)
 
$
(37,373
)
 
$
(2,200
)
 
$
(9,644
)
 
$
(49,217
)
Pretax (loss)
 income
 
(12,317
)
 
3,390

 

 
(8,927
)
 
(33,458
)
 
(575
)
 

 
(34,033
)
Income tax effect
 

 
(1,087
)
 

 
(1,087
)
 

 
185

 

 
185

Reclassification of unrealized loss
 

 
1,124

 
125

 
1,249

 

 
1,542

 
(34
)
 
1,508

Reclassification of deferred income taxes
 

 
(368
)
 
(31
)
 
(399
)
 

 
(540
)
 
9

 
(531
)
Ending Balance
 
$
(182,324
)
 
$
(1,055
)
 
$
(7,287
)
 
$
(190,666
)
 
$
(70,831
)
 
$
(1,588
)
 
$
(9,669
)
 
$
(82,088
)

 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain
on Pension Plans
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Foreign
Currency
Translation
 
Unrealized (Loss) Gain
on Cash Flow Hedges
 
Unrealized (Loss) Gain on Pension Plan
 
Accumulated
Other
Comprehensive
(Loss) Income
Beginning balance
 
$
(96,890
)
 
$
(932
)
 
$
(7,648
)
 
$
(105,470
)
 
$
(27,073
)
 
$
(3,401
)
 
$
(9,751
)
 
$
(40,225
)
Pretax (loss)
 income
 
(85,434
)
 
(3,332
)
 

 
(88,766
)
 
(43,758
)
 
(1,814
)
 

 
(45,572
)
Income tax effect
 

 
1,241

 

 
1,241

 

 
624

 

 
624

Reclassification of unrealized loss
 

 
2,912

 
482

 
3,394

 

 
4,627

 
109

 
4,736

Reclassification of deferred income taxes
 

 
(944
)
 
(121
)
 
(1,065
)
 

 
(1,624
)
 
(27
)
 
(1,651
)
Ending Balance
 
$
(182,324
)
 
$
(1,055
)
 
$
(7,287
)
 
$
(190,666
)
 
$
(70,831
)
 
$
(1,588
)
 
$
(9,669
)
 
$
(82,088
)
Unrealized losses on our interest rate swap contracts totaling $1.1 million and $2.9 million were reclassified to interest expense in our Unaudited Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2016, respectively. During the three and nine months ended September 30, 2015, unrealized losses of $1.5 million and $4.6 million, respectively, related to our interest rate swaps were reclassified to interest expense. The deferred income taxes related to our cash flow hedges were reclassified from Accumulated Other Comprehensive Income to income tax expense.

16




Note 8.
Long-Term Obligations
Long-Term Obligations consist of the following (in thousands):
 
September 30,
 
December 31,
 
2016
 
2015
Senior secured credit agreement:
 
 
 
Term loans payable
$
748,870

 
$
410,625

Revolving credit facilities
1,202,042

 
480,481

Senior notes
600,000

 
600,000

Euro notes
561,750

 

Receivables securitization facility
96,980

 
63,000

Notes payable through October 2025 at weighted average interest rates of 2.2% and 2.2%, respectively
10,457

 
16,104

Other long-term debt at weighted average interest rates of 2.2% and 2.4%, respectively
69,825

 
29,485

Total debt
3,289,924

 
1,599,695

Less: long-term debt issuance costs
(23,268
)
 
(13,533
)
Less: current debt issuance cost
(2,482
)
 
(1,460
)
Total debt, net of issuance costs
3,264,174

 
1,584,702

Less: current maturities, net of debt issuance costs
(74,829
)
 
(56,034
)
Long term debt, net of debt issuance costs
$
3,189,345

 
$
1,528,668

Senior Secured Credit Agreement
On January 29, 2016, LKQ Corporation, LKQ Delaware LLP, and certain other subsidiaries (collectively, the "Borrowers") entered into the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Company’s Third Amended and Restated Credit Agreement by modifying certain terms to (1) extend the maturity date by approximately two years to January 29, 2021; (2) increase the total availability under the credit agreement from $2.3 billion to $3.2 billion (composed of $2.45 billion in the revolving credit facility's multicurrency component; and $750 million of term loans, which consist of a term loan of approximately $500 million and a €230 million term loan); (3) increase our ability to incur additional indebtedness; and (4) make other immaterial or clarifying modifications and amendments to the terms of the Third Amended and Restated Credit Agreement. The additional term loan borrowing was used to repay outstanding revolver borrowings and the amount outstanding under our receivables securitization facility, and to pay fees and expenses relating to the amendment and restatement. The remaining additional term loan borrowing was used to fund the Rhiag acquisition.
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on January 29, 2021. Amounts under the initial and additional term loan borrowings will be due and payable in quarterly installments equal to 0.625% of the original principal amount on each of June 30, September 30, and December 31, 2016, and quarterly installments thereafter equal to 1.25% of the original principal amount beginning on March 31, 2017, with the remaining balance due and payable on the maturity date of the Credit Agreement.
We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.
The Credit Agreement contains customary representations and warranties, and contains customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on our net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 9, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at September 30, 2016 and December 31, 2015 were 2.2% and 1.8%, respectively. We also pay a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.05% depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters

17



of credit at an applicable rate based on our net leverage ratio, as well as a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.
Of the total borrowings outstanding under the Credit Agreement, $33.2 million and $22.5 million were classified as current maturities at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, there were letters of credit outstanding in the aggregate amount of $70.9 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at September 30, 2016 was $1.2 billion.
Related to the execution of the Credit Agreement in January 2016, we incurred $6.1 million of fees, of which $5.0 million were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement. The remaining $1.1 million of fees, together with $1.8 million of capitalized debt issuance costs related to our Third Amended and Restated Credit Agreement, were expensed during the nine months ended September 30, 2016 as a loss on debt extinguishment.
Senior Notes
In April 2014, LKQ Corporation completed an offer to exchange $600 million aggregate principal amount of registered 4.75% Senior Notes due 2023 (the "Notes") for notes previously issued through a private placement. The Notes are governed by the Indenture dated as of May 9, 2013 among LKQ Corporation, certain of our subsidiaries (the "Guarantors") and U.S. Bank National Association, as trustee. The Notes are substantially identical to those previously issued through the private placement, except the Notes are registered under the Securities Act of 1933.
The Notes bear interest at a rate of 4.75% per year from the most recent payment date on which interest has been paid or provided for. Interest on the Notes is payable in arrears on May 15 and November 15 of each year. The first interest payment was made on November 15, 2013. The Notes are fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The Notes and the guarantees are, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and are subordinated to all of LKQ Corporation's and the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Notes are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Notes to the extent of the assets of those subsidiaries.
Repayment of Rhiag Acquired Debt and Debt Related Liabilities
On March 24, 2016, LKQ Netherlands B.V., a wholly-owned subsidiary of ours, borrowed €508 million under our multi-currency revolving credit facility to repay the Rhiag acquired debt and debt related liabilities. The borrowed funds were passed through an intercompany note to Rhiag and then were used to pay (i) $519.6 million (€465.0 million) for the principal of Rhiag senior note debt assumed with the acquisition, (ii) accrued interest of $8.0 million (€7.1 million) on the notes, (iii) the call premium of $23.8 million (€21.2 million) associated with early redemption of the notes and (iv) $4.9 million (€4.4 million) to terminate Rhiag’s outstanding interest rate swap related to the floating portion of the notes. The call premium is recorded as a loss on debt extinguishment in the Unaudited Condensed Consolidated Statements of Income.
Euro Notes
On April 14, 2016, LKQ Italia Bondco S.p.A. (the “Issuer”), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the “Euro Notes”) in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes are governed by the Indenture dated as of April 14, 2016 (the “Indenture”) among the Issuer, LKQ Corporation and certain of our subsidiaries (the “Euro Notes Subsidiaries”), the trustee, and the paying agent, transfer agent, and registrar.
The Euro Notes bear interest at a rate of 3.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Euro Notes is payable in arrears on April 1 and October 1 of each year, beginning on October 1, 2016. The Euro Notes are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes Subsidiaries (the "Euro Notes Guarantors").
The Euro Notes and the guarantees are, respectively, the Issuer’s and each Euro Notes Guarantor’s senior unsecured obligations and are subordinated to all of the Issuer's and the Euro Notes Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes to the extent of the assets of those subsidiaries. The Euro Notes have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange as well as the Global Exchange Market of the Irish Stock Exchange.

18



Related to the execution of the Euro Notes in April 2016, we incurred $10.3 million of fees which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the offering.
Receivables Securitization Facility
On September 29, 2014, we amended the terms of the receivables securitization facility with The Bank of Tokyo-Mitsubishi UFJ, LTD. ("BTMU") to: (i) extend the term of the facility to October 2, 2017; (ii) increase the maximum amount available to $97 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMU for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMU the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our Unaudited Condensed Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by BTMU, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly-owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the investors. As of September 30, 2016 and December 31, 2015, $129.6 million and $136.1 million, respectively, of net receivables were collateral for the investment under the receivables facility.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) the London InterBank Offered Rate ("LIBOR"), or (iii) base rates, and are payable monthly in arrears. Commercial paper rates will be the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. As of September 30, 2016, the interest rate under the receivables facility was based on commercial paper rates and was 1.6%. The outstanding balances of $97.0 million and $63.0 million as of September 30, 2016 and December 31, 2015, respectively, were classified as long-term on the Unaudited Condensed Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.

Note 9.
Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
At September 30, 2016, we had interest rate swap agreements in place to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement, with the objective of reducing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. The effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income (Loss) and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. Our interest rate swap contracts have maturity dates ranging from 2016 through 2021.
In the first quarter of 2016, we entered into interest rate swap contracts representing a total of $440 million of U.S. dollar-denominated debt. In the second quarter of 2016, we entered into interest rate swap contracts representing a total of $150 million of U.S. dollar-denominated debt. The new swaps entered into in 2016 have maturity dates ranging from January to June 2021, and convert floating to fixed interest rates.
From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of reducing the impact of changing exchange rates on these future cash flows, as well as reducing the impact of fluctuating exchange rates on our results of operations through the respective dates of settlement. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. The effective portion of the changes in fair value of the foreign currency forward contracts is recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to other income (expense) when the underlying transaction has an impact on earnings.

19



The following table summarizes the notional amounts and fair values of our interest rate swaps that are designated cash flow hedges as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
Notional Amount
 
Fair Value at September 30, 2016 (USD)
 
Fair Value at December 31, 2015 (USD)
 
 
September 30, 2016
 
December 31, 2015
 
Other Assets
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
 
Other Accrued Expenses
Interest rate swap agreements
 
 
 
 
 
 
 
 
USD denominated
 
$
760,000

 
$
170,000

 
$
431

 
$
152

 
$
2,414

 
$
858

GBP denominated
 
£
50,000

 
£
50,000

 

 
60

 

 
465

CAD denominated
 
C$

 
C$
25,000

 

 

 

 
24

Total cash flow hedges
 
$
431

 
$
212

 
$
2,414

 
$
1,347

 
While our derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis in our Unaudited Condensed Consolidated Balance Sheets. The impact of netting the fair values of these contracts would not have a material effect on our Unaudited Condensed Consolidated Balance Sheets at September 30, 2016 or December 31, 2015.
The activity related to our cash flow hedges is included in Note 7, "Accumulated Other Comprehensive Income (Loss)." Ineffectiveness related to our cash flow hedges was immaterial to our results of operations during the three and nine months ended September 30, 2016 and September 30, 2015. We do not expect future ineffectiveness related to our cash flow hedges to have a material effect on our results of operations.
As of September 30, 2016, we estimate that $1.4 million of derivative losses (net of tax) included in Accumulated Other Comprehensive Loss will be reclassified into our consolidated statements of income within the next 12 months.
Other Derivative Instruments
We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability related to inventory purchases and intercompany financing transactions denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted to fair value through our results of operations as of each balance sheet date, which could result in volatility in our earnings.

Note 10.
Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to value our financial assets and liabilities, and during the three and nine months ended September 30, 2016, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

20



The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of September 30, 2016 and December 31, 2015 (in thousands):
 
Balance as of September 30, 2016
 
Fair Value Measurements as of September 30, 2016
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
34,811

 
$

 
$
34,811

 
$

Interest rate swaps
431

 

 
431

 

Total Assets
$
35,242

 
$

 
$
35,242

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
3,168

 
$

 
$

 
$
3,168

Deferred compensation liabilities
36,289

 

 
36,289

 

Interest rate swaps
2,626

 

 
2,626

 

Total Liabilities
$
42,083

 
$

 
$
38,915

 
$
3,168

    
 
Balance as of December 31, 2015
 
Fair Value Measurements as of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
29,782

 
$

 
$
29,782

 
$

Total Assets
$
29,782

 
$

 
$
29,782

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
4,584

 
$

 
$

 
$
4,584

Deferred compensation liabilities
30,336

 

 
30,336

 

Interest rate swaps
1,347

 

 
1,347

 

Total Liabilities
$
36,267

 
$

 
$
31,683

 
$
4,584

The cash surrender value of life insurance is included in Other Assets on our Unaudited Condensed Consolidated Balance Sheets. The current portion of deferred compensation and contingent consideration liabilities is included in Other Current Liabilities, and the noncurrent portion is included in Other Noncurrent Liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swaps is presented in Note 9, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We value our derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates.
Our contingent consideration liabilities are related to our business acquisitions as further described in Note 2, "Business Combinations." Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market. These liabilities are not considered material.
Changes in the fair value of our contingent consideration obligations are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
3,134

 
$
5,191

 
$
4,584

 
$
7,295

Payments

 
(610
)
 
(1,667
)
 
(2,815
)
Increase in fair value included in earnings
57

 
89

 
176

 
365

Exchange rate effects
(23
)
 
(122
)
 
75

 
(297
)
Balance as of September 30
$
3,168

 
$
4,548

 
$
3,168

 
$
4,548


21



All the amounts included in earnings for the three and nine months ended September 30, 2016 were related to contingent consideration obligations outstanding as of September 30, 2016. Of the amounts included in earnings for the three and nine months ended September 30, 2015$0.1 million and $0.2 million of losses, respectively, were related to contingent consideration obligations outstanding as of September 30, 2016. Changes in the values of the liabilities are recorded in Other expense (income), net on our Unaudited Condensed Consolidated Statements of Income.
The changes in the fair value of contingent consideration obligations included in earnings during the respective periods in 2016 and 2015 reflect the quarterly reassessment of each obligation's fair value, including an analysis of the significant inputs used in the valuation, as well as the accretion of the present value discount.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of September 30, 2016 and December 31, 2015, the fair values of our credit agreement borrowings reasonably approximated the carrying values of $2.0 billion and $891.1 million, respectively. In addition, based on market conditions, the fair value of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $97.0 million and $63.0 million at September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, the fair value of the Notes was approximately $618.8 million and $567.3 million, respectively, compared to a carrying value of $600 million. As of September 30, 2016, the fair value of the Euro Notes was approximately $600.3 million compared to a carrying value of $561.8 million.
The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at September 30, 2016 to assume these obligations. The fair value of our Notes is classified as Level 1 within the fair value hierarchy since it is determined based upon observable market inputs including quoted market prices in an active market. The fair value of our Euro Notes is determined based upon observable market inputs including quoted market prices in a market that is not active, and therefore is classified as Level 2 within the fair value hierarchy.

Note 11.
Commitments and Contingencies
Operating Leases
We are obligated under noncancelable operating leases for corporate office space, warehouse and distribution facilities, trucks and certain equipment.
The future minimum lease commitments under these leases at September 30, 2016 are as follows (in thousands):
Three months ending December 31, 2016
$
51,473

Years ending December 31:
 
2017
188,098

2018
162,716

2019
132,020

2020
106,987

2021
80,143

Thereafter
477,455

Future Minimum Lease Payments
$
1,198,892

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.

Note 12.
Income Taxes
At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.

22



The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.    
Our effective income tax rate for the nine months ended September 30, 2016 was 32.6%, compared with 34.8% for the comparable prior year period. The lower effective income tax rate for the nine months ended September 30, 2016 reflects the $11.5 million discrete item for excess tax benefits from stock-based payments related to the adoption of ASU 2016-09 as described in Note 3, "Financial Statement Information." The adoption of this accounting standard could result in fluctuations to the effective tax rate from period to period depending on the amount of excess tax benefits or deficiencies recognized. The other discrete tax items for the nine months ended September 30, 2016 and 2015 were immaterial.
Our acquisitions completed during the first nine months of 2016, including our March 2016 acquisition of Rhiag and our April 2016 acquisition of PGW, contributed $29.7 million and $137.5 million of deferred tax assets and liabilities, respectively, relating to intangible assets; property, plant and equipment; and reserves, including pension and other post-retirement benefit obligations.

Note 13.
Segment and Geographic Information
We have five operating segments: Wholesale – North America; Europe; Specialty; Glass; and Self Service. Our Glass operating segment was formed with our April 21, 2016 acquisition of PGW, as discussed in Note 2, "Business Combinations." Our Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Our reportable segments are organized based on a combination of geographic areas served and type of product lines offered. The reportable segments are managed separately as each business serves different customers (i.e. geographic in the case of North America and Europe and product type in the case of Specialty and Glass) and is affected by different economic conditions. Therefore, we present four reportable segments: North America, Europe, Specialty and Glass.
The following tables present our financial performance by reportable segment for the periods indicated (in thousands):
 
North America
 
Europe
 
Specialty
 
Glass
 
Eliminations
 
Consolidated
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Third Party
$
1,046,579

 
$
770,219

 
$
311,621

 
$
258,411

 
$

 
$
2,386,830

Intersegment
86

 

 
969

 
114

 
(1,169
)
 

Total segment revenue
$
1,046,665

 
$
770,219

 
$
312,590

 
$
258,525

 
$
(1,169
)
 
$
2,386,830

Segment EBITDA
$
141,054

 
$
72,586

 
$
32,449

 
$
27,758

 
$

 
$
273,847

Depreciation and amortization (1)
17,551

 
27,792

 
5,628

 
8,517

 

 
59,488

Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Third Party
$
1,037,130

 
$
511,146

 
$
283,456

 
$

 
$

 
$
1,831,732

Intersegment
160

 

 
850

 

 
(1,010
)
 

Total segment revenue
$
1,037,290

 
$
511,146

 
$
284,306

 
$

 
$
(1,010
)
 
$
1,831,732

Segment EBITDA