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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 "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 consolidated condensed 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 have been condensed or omitted. These unaudited consolidated condensed financial statements reflect, in the opinion of management, all material adjustments (which include only normal 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, 2010 filed with the SEC on February 25, 2011.
As described in Note 3, "Discontinued Operations," during the fourth quarter of 2009, we agreed to sell two self service retail facilities in Dallas, Texas and we completed the sale in January 2010. These facilities qualified for treatment as discontinued operations. The financial results and assets and liabilities of these facilities are segregated from our continuing operations and presented as discontinued operations in the Unaudited Consolidated Condensed Balance Sheets and Unaudited Consolidated Condensed Statements of Income for all periods presented.
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Note 2. Financial Statement Information
Revenue Recognition
The majority of our revenue is derived from the sale of aftermarket, recycled, refurbished and remanufactured automotive replacement products. Revenue is recognized when the products are shipped 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 have recorded a reserve for estimated returns, discounts and allowances of approximately $18.2 million at both June 30, 2011 and December 31, 2010. We present taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue and are shown as a liability on our Unaudited Consolidated Condensed Balance Sheets until remitted. Revenue from the sale of separately-priced extended warranty contracts is reported as deferred revenue and recognized ratably over the term of the contracts or three years in the case of lifetime warranties.
Receivables
We have recorded a reserve for uncollectible accounts of approximately $5.9 million and $6.9 million at June 30, 2011 and December 31, 2010, respectively.
Inventory
Inventory consists of the following (in thousands):
| June 30, 2011 |
December 31, 2010 |
|||||||
|
Aftermarket and refurbished products |
$ | 313,230 | $ | 274,728 | ||||
|
Salvage and remanufactured products |
237,471 | 209,514 | ||||||
|
Core facilities inventory |
5,840 | 8,446 | ||||||
| $ | 556,541 | $ | 492,688 | |||||
Intangibles
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, covenants not to compete and customer relationships.
The change in the carrying amount of goodwill during the six months ended June 30, 2011 is as follows (in thousands):
|
Balance as of January 1, 2011 |
$ | 1,032,973 | ||
|
Business acquisitions and adjustments to previously recorded goodwill |
28,156 | |||
|
Exchange rate effects |
2,378 | |||
|
Balance as of June 30, 2011 |
$ | 1,063,507 | ||
During the six months ended June 30, 2011, we finalized the valuation of certain intangible assets acquired related to our 2010 acquisitions. As these adjustments did not have a material impact on our financial position or results of operations, we recorded these adjustments to goodwill in the six month period ended June 30, 2011.
The components of other intangibles are as follows (in thousands):
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
|
Trade names and trademarks |
$ | 76,484 | $ | (13,981 | ) | $ | 62,503 | $ | 75,661 | $ | (12,020 | ) | $ | 63,641 | ||||||||||
|
Covenants not to compete |
1,889 | (629 | ) | 1,260 | 2,688 | (1,382 | ) | 1,306 | ||||||||||||||||
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Customer relationships |
5,623 | (1,170 | ) | 4,453 | 4,355 | — | 4,355 | |||||||||||||||||
| $ | 83,996 | $ | (15,780 | ) | $ | 68,216 | $ | 82,704 | $ | (13,402 | ) | $ | 69,302 | |||||||||||
During the six months ended June 30, 2011, we recorded $0.8 million of trade names, $0.1 million of covenants not to compete and $1.3 million of customer relationships resulting from our 2011 acquisitions and adjustments to certain preliminary intangible asset valuations from our 2010 acquisitions. Trade names and trademarks are amortized over a useful life ranging from 10 to 20 years on a straight-line basis. Covenants not to compete are amortized over the lives of the respective agreements, which range from one to five years, on a straight-line basis. Customer relationships are amortized over the expected period to be benefitted (5 to 10 years) on either a straight-line or accelerated basis. Amortization expense for intangibles was approximately $3.4 million and $2.1 million during the six month periods ended June 30, 2011 and 2010, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2015 is $6.5 million, $5.8 million, $5.2 million, $4.6 million and $4.3 million, respectively.
Depreciation Expense
Included in cost of goods sold on the Unaudited Consolidated Condensed Statements of Income is depreciation expense associated with refurbishing, remanufacturing and smelting operations.
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 record the estimated warranty costs at the time of sale using historical warranty claims information to project future warranty claims activity. The changes in the warranty reserve during the six month period ended June 30, 2011 were as follows (in thousands):
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Balance as of January 1, 2011 |
$ | 2,063 | ||
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Warranty expense |
10,298 | |||
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Warranty claims |
(9,954 | ) | ||
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Business acquisitions |
3,228 | |||
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Balance as of June 30, 2011 |
$ | 5,635 | ||
For an additional fee, we also sell extended warranty contracts for certain mechanical products. The expense related to extended warranty claims is recognized when the claim is made.
Fair Value of Financial Instruments
Our debt is reflected on the balance sheet at cost. As discussed in Note 5, "Long-Term Obligations," we entered into a new senior secured credit agreement on March 25, 2011, the proceeds of which were used for full payment of amounts outstanding under our previous credit facility. Due to the short period between the execution of the new credit agreement and the end of the second quarter, the fair value of our outstanding debt approximated the carrying value of $574.6 million. We estimated the fair value of our credit facility borrowings by calculating the upfront cash payment a market participant would require to assume our obligations. The upfront cash payment, excluding any issuance costs, is the amount that a market participant would be able to lend at June 30, 2011 to an entity with a credit rating similar to ours and achieve sufficient cash inflows to cover the scheduled cash outflows under our credit facility.
The carrying amounts of our cash and equivalents, net trade receivables and accounts payable approximate fair value.
We apply the market and income approaches to value our financial assets and liabilities, which include the cash surrender value of life insurance, deferred compensation liabilities and interest rate swaps. Required fair value disclosures are included in Note 7, "Fair Value Measurements."
Segments
We are organized into three operating segments, composed of wholesale aftermarket and recycled products, self service retail products and recycled heavy-duty truck products. These segments are aggregated into one reportable segment because they possess similar economic characteristics and have common products and services, customers and methods of distribution.
The following table sets forth revenue by category (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2011 | 2010 | 2011 | 2010 | |||||||||||||
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Aftermarket, other new and refurbished products |
$ | 356,202 | $ | 290,271 | $ | 737,318 | $ | 602,644 | ||||||||
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Recycled, remanufactured and related products and services |
269,700 | 214,159 | 545,482 | 429,382 | ||||||||||||
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Other |
133,782 | 80,251 | 263,532 | 156,171 | ||||||||||||
| $ | 759,684 | $ | 584,681 | $ | 1,546,332 | $ | 1,188,197 | |||||||||
Revenue from other sources includes scrap sales, bulk sales to mechanical remanufacturers (including cores) and sales of aluminum ingots and sows from our smelting operations.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update ("ASU") No. 2011-05, "Presentation of Comprehensive Income," which eliminates the option to present the components of other comprehensive income in the statement of changes in stockholders' equity. Instead, entities will have the option to present the components of net income, the components of other comprehensive income and total comprehensive income in a single continuous statement or in two separate but consecutive statements. The guidance does not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and will be applied retrospectively. As this guidance only revises the presentation of comprehensive income, the adoption of this guidance will not affect our financial position, results of operations or cash flows.
In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This update provides clarification on existing fair value measurement requirements, amends existing guidance primarily related to fair value measurements for financial instruments, and requires enhanced disclosures on fair value measurements. The additional disclosures are specific to Level 3 fair value measurements, transfers between Level 1 and Level 2 of the fair value hierarchy, financial instruments not measured at fair value and use of an asset measured or disclosed at fair value differing from its highest and best use. This ASU is effective for interim and annual periods beginning after December 15, 2011, and will be applied prospectively. The adoption of this guidance is not expected to affect our financial position, results of operations or cash flows.
Effective January 1, 2011, we adopted FASB ASU 2010-29, "Disclosure of Supplementary Pro Forma Information for Business Combinations," which clarifies the disclosure requirements for pro forma financial information related to a material business combination or a series of immaterial business combinations that are material in the aggregate. The guidance clarifies that the pro forma disclosures are prepared assuming the business combination occurred at the start of the prior annual reporting period. Additionally, a narrative description of the nature and amount of material, non-recurring pro forma adjustments would be required. As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact our financial position, results of operations or cash flows.
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Note 3. Discontinued Operations
In the fourth quarter of 2009, we sold to Schnitzer Steel Industries, Inc. ("SSI") certain self service retail facilities and certain business assets related to additional self service facilities that were subsequently closed or converted to wholesale recycling operations. Related to this transaction, we agreed to sell to SSI two self service retail facilities in Dallas, Texas. These facilities were sold on January 15, 2010 for $12.0 million, resulting in a gain on the sale of approximately $1.7 million, net of tax, in our first quarter 2010 results. Goodwill totaling $6.7 million was included in the cost basis of net assets disposed when determining the gain on sale.
The self service facilities that we sold or closed are reported as discontinued operations for all periods presented. As of June 30, 2011 and December 31, 2010, we had accrued liabilities applicable to discontinued operations of $2.4 million and $2.7 million, respectively, included in the Unaudited Consolidated Condensed Balance Sheets. These liabilities were primarily composed of accrued restructuring expenses for the excess lease payments (net of estimated sublease income) and facility closure costs related to two of the closed self service facilities.
Results of operations for the discontinued operations are as follows (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenue |
$ | — | $ | — | $ | — | $ | 686 | ||||||||
|
Income before income tax provision |
— | — | — | 355 | ||||||||||||
|
Income tax provision |
— | — | — | 131 | ||||||||||||
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Income from discontinued operations, net of taxes, before gain on sale of discontinued operations |
— | — | — | 224 | ||||||||||||
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Gain on sale of discontinued operations, net of taxes of $1,015 |
— | — | — | 1,729 | ||||||||||||
|
Income from discontinued operations, net of taxes |
$ | — | $ | — | $ | — | $ | 1,953 | ||||||||
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Note 4. Equity Incentive Plans
We have two stock-based compensation plans, the LKQ Corporation 1998 Equity Incentive Plan (the "Equity Incentive Plan") and the Stock Option and Compensation Plan for Non-Employee Directors (the "Director Plan"). Under the Equity Incentive Plan, both qualified and nonqualified stock options, stock appreciation rights, restricted stock, performance shares and performance units may be granted. On January 13, 2011, the Compensation Committee amended the Equity Incentive Plan to allow the grant of Restricted Stock Units ("RSUs"). Under the Director Plan, shares of LKQ common stock may be issued to directors in lieu of cash compensation. We expect to issue new shares of common stock to cover future equity grants under these plans. In May 2011, we filed a registration statement on Form S-8 to register an additional 6.4 million shares of LKQ common stock, which may be issued in accordance with the Equity Incentive Plan.
We have granted stock options, restricted stock and RSUs under the Equity Incentive Plan. Stock options expire 10 years from the date they are granted. Most of the options granted under the Equity Incentive Plan vest over a period of five years. Most of the restricted stock and RSU awards granted to date vest over a period of five years, subject to a continued service condition. Until the shares of restricted stock vest, they may not be sold, pledged or otherwise transferred and are subject to forfeiture. Each RSU converts into one share of LKQ common stock on the applicable vesting date.
A summary of transactions in our stock-based compensation plans for the six months ended June 30, 2011 is as follows:
| Shares Available For Grant |
Stock Options | Restricted Stock | RSUs | |||||||||||||||||||||||||
| Number Outstanding |
Weighted Average Exercise Price |
Number Outstanding |
Weighted Average Grant Date Fair Value |
Number Outstanding |
Weighted Average Grant Date Fair Value |
|||||||||||||||||||||||
|
Balance, January 1, 2011 |
2,140,090 | 8,073,965 | $ | 12.27 | 154,000 | $ | 19.00 | — | $ | — | ||||||||||||||||||
|
Granted |
(816,674 | ) | — | — | — | — | 816,674 | 23.59 | ||||||||||||||||||||
|
Shares issued for director compensation |
(9,481 | ) | — | — | — | — | — | — | ||||||||||||||||||||
|
Exercised |
— | (694,744 | ) | 7.35 | — | — | — | — | ||||||||||||||||||||
|
Restricted stock or RSUs vested |
— | — | — | (43,000 | ) | 19.07 | — | — | ||||||||||||||||||||
|
Cancelled |
102,409 | (93,575 | ) | 16.80 | — | — | (8,834 | ) | 23.54 | |||||||||||||||||||
|
Additional shares registered |
6,400,000 | — | — | — | — | — | — | |||||||||||||||||||||
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Balance, June 30, 2011 |
7,816,344 | 7,285,646 | $ | 12.68 | 111,000 | $ | 18.97 | 807,840 | $ | 23.59 | ||||||||||||||||||
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During the six month period ended June 30, 2011, our Board of Directors granted 816,674 RSUs to employees and directors. The fair value of RSUs is based on the market price of LKQ stock on the date of issuance. When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of historical forfeitures. For valuing RSUs granted during the six month period ended June 30, 2011, forfeiture rates of 5% and 0% have been used for grants to employees and executive officers, respectively.
The total grant-date fair value of options that vested during the six months ended June 30, 2011 was approximately $4.7 million. There were 694,744 stock options exercised during the six months ended June 30, 2011 with an intrinsic value of $12.2 million. The fair value of restricted shares that vested during the six months ended June 30, 2011 was approximately $1.0 million.
The components of pre-tax stock-based compensation expense are as follows (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Stock options |
$ | 2,057 | $ | 2,288 | $ | 4,147 | $ | 4,514 | ||||||||
|
Restricted stock |
228 | 228 | 453 | 453 | ||||||||||||
|
RSUs |
891 | — | 1,769 | — | ||||||||||||
|
Stock issued to non-employee directors |
84 | 72 | 233 | 145 | ||||||||||||
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Total stock-based compensation expense |
$ | 3,260 | $ | 2,588 | $ | 6,602 | $ | 5,112 | ||||||||
The following table sets forth the total stock-based compensation expense included in the accompanying Unaudited Consolidated Condensed Statements of Income (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Cost of goods sold |
$ | 79 | $ | 73 | $ | 168 | $ | 143 | ||||||||
|
Facility and warehouse expenses |
623 | 540 | 1,234 | 1,067 | ||||||||||||
|
Selling, general and administrative expenses |
2,558 | 1,975 | 5,200 | 3,902 | ||||||||||||
| 3,260 | 2,588 | 6,602 | 5,112 | |||||||||||||
|
Income tax benefit |
(1,252 | ) | (1,017 | ) | (2,555 | ) | (2,009 | ) | ||||||||
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Total stock-based compensation expense, net of tax |
$ | 2,008 | $ | 1,571 | $ | 4,047 | $ | 3,103 | ||||||||
We have not capitalized any stock-based compensation costs during either of the six month periods ended June 30, 2011 or 2010.
At June 30, 2011, a total of 7,251,079 options with a weighted average exercise price of $12.65 and a weighted average remaining contractual life of 6.0 years were expected to vest. As of June 30, 2011, 111,000 shares of restricted stock with a weighted average remaining contractual life of 2.1 years were expected to vest. As of June 30, 2011, 790,939 RSUs with a weighted average remaining contractual life of 4.5 years were expected to vest. Unrecognized compensation expense related to stock options, restricted stock and RSUs at June 30, 2011 is expected to be recognized as follows (in thousands):
| Stock Options |
Restricted Stock |
RSUs | Total | |||||||||||||
|
Remainder of 2011 |
$ | 4,109 | $ | 460 | $ | 1,820 | $ | 6,389 | ||||||||
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2012 |
6,930 | 913 | 3,785 | 11,628 | ||||||||||||
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2013 |
4,743 | 208 | 3,785 | 8,736 | ||||||||||||
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2014 |
3,117 | 139 | 3,700 | 6,956 | ||||||||||||
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2015 |
78 | — | 3,652 | 3,730 | ||||||||||||
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2016 |
— | — | 149 | 149 | ||||||||||||
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Total unrecognized compensation expense |
$ | 18,977 | $ | 1,720 | $ | 16,891 | $ | 37,588 | ||||||||
The following table summarizes information about outstanding and exercisable stock options at June 30, 2011:
|
Range of Exercise Prices |
Outstanding | Exercisable | ||||||||||||||||||||||
| Shares | Weighted Average Remaining Contractual Life (Yrs) |
Weighted Average Exercise Price |
Shares | Weighted Average Remaining Contractual Life (Yrs) |
Weighted Average Exercise Price |
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$0.75 - $5.00 |
1,600,290 | 2.6 | $ | 3.75 | 1,600,290 | 2.6 | $ | 3.75 | ||||||||||||||||
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$5.01 - $10.00 |
618,820 | 4.5 | 9.31 | 618,820 | 4.5 | 9.31 | ||||||||||||||||||
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$10.01 - $15.00 |
2,254,118 | 6.8 | 11.33 | 1,190,198 | 6.4 | 11.04 | ||||||||||||||||||
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$15.01 - $20.00 |
2,786,918 | 7.7 | 19.56 | 996,392 | 7.1 | 19.33 | ||||||||||||||||||
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$20.01 + |
25,500 | 6.9 | 21.43 | 14,900 | 6.9 | 21.47 | ||||||||||||||||||
| 7,285,646 | 6.0 | $ | 12.68 | 4,420,600 | 4.9 | $ | 10.06 | |||||||||||||||||
The aggregate intrinsic value (market value of stock less option exercise price) of outstanding, expected to vest and exercisable stock options at June 30, 2011 was $97.7 million, $97.5 million and $70.8 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company's closing stock price of $26.09 on June 30, 2011. This amount changes based upon the fair market value of our common stock.
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Note 5. Long-Term Obligations
Long-Term Obligations consist of the following (in thousands):
| June 30, 2011 |
December 31, 2010 |
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Senior secured debt: |
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Term loans payable |
$ | 246,875 | $ | 590,099 | ||||
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Revolving credit facility |
327,728 | — | ||||||
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Notes payable to individuals through August 2019, interest at 2.0% to 8.0% |
11,758 | 10,855 | ||||||
| 586,361 | 600,954 | |||||||
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Less current maturities |
(15,520 | ) | (52,888 | ) | ||||
| $ | 570,841 | $ | 548,066 | |||||
We obtained a senior secured debt financing facility from Lehman Brothers Inc. and Deutsche Bank Securities, Inc. on October 12, 2007, which was amended on October 26, 2007, October 27, 2009 and November 19, 2010 (as amended, the "2007 Credit Agreement"). The 2007 Credit Agreement was scheduled to mature on October 12, 2013 and included a $610 million term loan, a $40 million Canadian currency term loan, an $85 million U.S. dollar revolving credit facility, and a $15 million dual currency revolving facility for drawings of either U.S. dollars or Canadian dollars. The 2007 Credit Agreement also provided for (i) the issuance of letters of credit of up to $35 million in U.S. dollars and up to $10 million in either U.S. or Canadian dollars, and (ii) the opportunity for us to add additional term loan facilities and/or increase the $100 million revolving credit facility's commitments, subject to certain requirements.
On March 25, 2011, we entered into a credit agreement (the "2011 Credit Agreement") with the several lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America N.A., as syndication agent, RBS Citizens, N.A. and Wells Fargo Bank, National Association, as co-documentation agents, and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBS Citizens, N.A. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners, to borrow up to $1 billion, consisting of (1) a five-year $750 million revolving credit facility (the "Revolving Credit Facility"), and (2) a five-year $250 million term loan facility (the "Term Loan Facility"). Under the Revolving Credit Facility, we may borrow up to the U.S. dollar equivalent of $300 million in Canadian Dollars, Pounds Sterling, euros, and other agreed-upon currencies. The 2011 Credit Agreement also provides for (a) the issuance of up to $75 million of letters of credit under the Revolving Credit Facility in agreed-upon currencies, (b) the issuance of up to $25 million of swing line loans under the Revolving Credit Facility, and (c) the opportunity to increase the amount of the Revolving Credit Facility or obtain incremental term loans up to $400 million. Outstanding letters of credit and swing line loans will be taken into account when determining availability under the Revolving Credit Facility. We used the initial proceeds from the 2011 Credit Agreement to pay off outstanding amounts of $591.1 million under the 2007 Credit Agreement.
The obligations under the 2011 Credit Agreement are unconditionally guaranteed by our direct and indirect domestic subsidiaries and certain foreign subsidiaries. Obligations under the 2011 Credit Agreement, including the related guarantees, are collateralized by a security interest and lien on a majority of the existing and future personal property of, and a security interest in 100% of our equity interest in, each of our existing and future direct and indirect domestic and foreign subsidiaries, provided that if a pledge of 100% of a foreign subsidiary's voting equity interests gives rise to an adverse tax consequence, such pledge shall be limited to 65% of the voting equity interest of the first tier foreign subsidiary. In the event that we obtain and maintain certain ratings from S&P (BBB- or better, with stable or better outlook) or Moody's (Baa3 or better, with stable or better outlook), and upon our request, the security interests in and liens on the collateral described above shall be released. In May 2011, S&P raised our corporate credit rating from BB to BB+ and confirmed a stable outlook. In April 2011, Moody's confirmed our credit rating at Ba2 with a stable outlook.
Amounts under the Revolving Credit Facility will be due and payable upon maturity of the 2011 Credit Agreement in March 2016. Amounts under the Term Loan Facility are due and payable in quarterly installments, with the annual payments equal to 5% of the original principal amount in the first and second years, 10% of the original principal amount in the third and fourth years, and 15% of the original principal amount in the fifth year. The remaining balance under the Term Loan Facility will be due and payable on the maturity date of the 2011 Credit Agreement. We are required to prepay the Term Loan Facility 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 2011 Credit Agreement.
The 2011 Credit Agreement contains customary representations and warranties, and contains customary covenants that provide limitations and conditions on our ability to, among other things (i) incur indebtedness, (ii) incur liens, (iii) enter into any merger, consolidation, amalgamation, or otherwise liquidate or dissolve the Company, (iv) dispose of certain property, (v) make dividend payments, repurchase our stock, or enter into derivative contracts indexed to the value of our common stock, (vi) make certain investments, including the acquisition of assets constituting a business or the stock of a business designated as a non-guarantor, (vii) make optional prepayments of subordinated debt, (viii) enter into sale-leaseback transactions, (ix) issue preferred stock, redeemable stock, convertible stock or other similar equity instruments, and (x) enter into hedge agreements for speculative purposes or otherwise not in the ordinary course of business. The 2011 Credit Agreement also contains financial and affirmative covenants under which we (i) may not exceed a maximum net leverage ratio of 3.00 to 1.00, except in connection with permitted acquisitions with aggregate consideration in excess of $200 million during any period of four consecutive fiscal quarters in which case the maximum net leverage ratio increases to 3.50 to 1.00 for the subsequent four fiscal quarters and (ii) are required to maintain a minimum interest coverage ratio of 3.00 to 1.00. We were in compliance with all restrictive covenants under the 2011 Credit Agreement and the 2007 Credit Agreement as of June 30, 2011 and December 31, 2010, respectively.
The 2011 Credit Agreement contains events of default that include (i) our failure to pay principal when due or interest, fees, or other amounts after grace periods, (ii) our material breach of any representation or warranty, (iii) covenant defaults, (iv) cross defaults to certain other indebtedness, (v) bankruptcy, (vi) certain ERISA events; (vii) material judgments; (viii) change of control, and (ix) failure of subordinated indebtedness to be validly and sufficiently subordinated.
Concurrently with the payment of amounts outstanding under the 2007 Credit Agreement, we incurred a loss on debt extinguishment related to the write-off of the unamortized balance of capitalized debt issuance costs of $5.3 million, which is included in Other Expense, net on our Unaudited Consolidated Condensed Statement of Income for the six months ended June 30, 2011. The amount of the write-off excludes debt issuance cost amortization, which is recorded as a component of interest expense. Fees incurred related to the execution of the 2011 Credit Agreement, totaling $8.2 million, were capitalized within Other Assets on our Unaudited Consolidated Condensed Balance Sheet and will be amortized over the term of the agreement.
Borrowings under the 2011 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 total leverage ratio. Interest payments are due quarterly in arrears for the term loan and on the last day of the selected interest period on revolver borrowings. Including the effect of the interest rate swap agreements described in Note 6, "Derivative Instruments and Hedging Activities," the weighted average interest rate on borrowings outstanding against the 2011 Credit Agreement at June 30, 2011 was 2.77%. We will pay a commitment fee based on the average daily unused amount of the Revolving Credit Facility. The commitment fee is subject to change in increments of 0.05% depending on our total leverage ratio. We will also pay a participation commission on outstanding letters of credit at an applicable rate based on our total leverage ratio, as well as a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears. Borrowings under the 2011 Credit Agreement at June 30, 2011 totaled $574.6 million, of which $12.5 million was classified as current maturities. As of June 30, 2011, there were $33.7 million of outstanding letters of credit. The amounts available under the Revolving Credit Facility are reduced by the amounts outstanding under letters of credit, and thus availability on the Revolving Credit Facility at June 30, 2011 was $388.6 million.
Borrowings under the 2007 Credit Agreement accrued interest at variable rates, which depended on the currency and the duration of the borrowing elected, plus an applicable margin. Including the effect of the interest rate swap agreements, the weighted average interest rate on borrowings outstanding under the 2007 Credit Agreement at December 31, 2010 was 3.97%. We also paid commitment fees on the unused portion of our revolving credit facilities, which ranged from 0.38% to 0.50% based on the currency of the borrowing elected. Borrowings under the 2007 Credit Agreement at December 31, 2010 totaled $590.1 million, of which $50.0 million was classified as current maturities.
|
|||
Note 6. 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, but we do not attempt to hedge our foreign currency and commodity price risks. We do not hold or issue derivatives for trading purposes.
At June 30, 2011, we had interest rate swap agreements in place to hedge a portion of the variable interest rate risk on our variable rate debt, with the objective of minimizing 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 the London InterBank Offered Rate ("LIBOR") on the notional amount. The interest rate swap agreements qualify as cash flow hedges, and we have elected to apply hedge accounting for these swap agreements. As a result, the effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income 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.
The following table summarizes the terms of our interest rate swap agreements as of June 30, 2011:
|
Notional Amount |
Effective Date |
Maturity Date |
Fixed Interest Rate* | |||
|
$250,000,000 |
October 14, 2010 | October 14, 2015 | 3.31% | |||
|
$100,000,000 |
April 14, 2011 | October 14, 2013 | 2.86% |
| * | Includes applicable margin of 1.75% per annum on LIBOR-based debt currently in effect under the 2011 Credit Agreement |
On March 25, 2011, Deutsche Bank AG, the counterparty on the Company's $100 million notional amount interest rate swap, assigned its obligation under the swap contract to Bank of America N.A because Deutsche Bank AG is not a secured lender under the 2011 Credit Agreement. We believe Bank of America N.A. is creditworthy to perform its obligation as the counterparty to the swap.
As of June 30, 2011, the fair market value of the $250 million notional amount swap was an asset of $0.9 million included in Other Assets on our Unaudited Consolidated Condensed Balance Sheet, while the fair market value of the $100 million notional amount swap was a liability of $0.9 million included in Other Noncurrent Liabilities on our Unaudited Consolidated Condensed Balance Sheet. As of December 31, 2010, the fair market value of these contracts was an asset of $4.8 million included in Other Assets. At December 31, 2010, we also held a $200 million notional amount swap that was a liability of $1.4 million included in Other Accrued Expenses.
The activity related to our interest rate swap agreements is as follows (in thousands):
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Gain (loss) in Accumulated Other Comprehensive Income |
$ | (7,908 | ) | $ | 75 | $ | (6,427 | ) | $ | (1,161 | ) | |||||
|
Loss reclassified to interest expense |
(1,224 | ) | (2,748 | ) | (3,270 | ) | (5,775 | ) | ||||||||
|
Gain (loss) from hedge ineffectiveness |
— | — | (225 | ) | — | |||||||||||
Our gain in Accumulated Other Comprehensive Income reported in the footnote disclosure of the Form 10-Q for the three months ended March 31, 2011 contained an immaterial error. The amount disclosed for the six months ended June 30, 2011 reflects the corrected year-to-date amount.
In connection with the execution of our 2011 Credit Agreement on March 25, 2011 as discussed in Note 5, "Long-Term Obligations," we temporarily experienced differences in critical terms between the interest rate swaps and the underlying debt. As a result, we incurred a loss of $0.2 million related to hedge ineffectiveness for the six months ended June 30, 2011. Beginning on April 14, 2011, we have held, and expect to continue to hold through the maturity of the interest rate swap agreements, at least $350 million of LIBOR-based debt, such that future ineffectiveness will be immaterial and the swaps will continue to be highly effective in hedging our variable rate debt.
As of June 30, 2011, we estimate that $2.4 million of derivative losses (net of tax) included in Accumulated Other Comprehensive Income will be reclassified into interest expense within the next 12 months.
|
|||
Note 7. Fair Value Measurements
We use the market and income approaches to value our financial assets and liabilities, and there were no changes in valuation techniques during the six months ended June 30, 2011. The tables below present information about our financial assets and liabilities that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques we utilized to determine such 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.
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 the interest rate swaps 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 LIBOR and forward interest rates.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010 (in thousands):
| Balance as of June 30, 2011 |
Fair Value Measurements as of June 30, 2011 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
|
Assets: |
||||||||||||||||
|
Cash surrender value of life insurance |
$ | 13,127 | $ | — | $ | 13,127 | $ | — | ||||||||
|
Interest rate swaps |
874 | — | 874 | — | ||||||||||||
|
Total Assets |
$ | 14,001 | $ | — | $ | 14,001 | $ | — | ||||||||
|
Liabilities: |
||||||||||||||||
|
Deferred compensation liabilities |
$ | 13,278 | $ | — | $ | 13,278 | $ | — | ||||||||
|
Interest rate swaps |
857 | — | 857 | — | ||||||||||||
|
Total Liabilities |
$ | 14,135 | $ | — | $ | 14,135 | $ | — | ||||||||
| Balance as of December 31, 2010 |
Fair Value Measurements as of December 31, 2010 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
|
Assets: |
||||||||||||||||
|
Cash surrender value of life insurance |
$ | 10,517 | $ | — | $ | 10,517 | $ | — | ||||||||
|
Interest rate swaps |
4,815 | — | 4,815 | — | ||||||||||||
|
Total Assets |
$ | 15,332 | $ | — | $ | 15,332 | $ | — | ||||||||
|
Liabilities: |
||||||||||||||||
|
Deferred compensation liabilities |
$ | 11,245 | $ | — | $ | 11,245 | $ | — | ||||||||
|
Interest rate swaps |
1,416 | — | 1,416 | — | ||||||||||||
|
Total Liabilities |
$ | 12,661 | $ | — | $ | 12,661 | $ | — | ||||||||
The cash surrender value of life insurance and deferred compensation liabilities are included in Other Assets and Other Noncurrent Liabilities, respectively, on our Unaudited Consolidated Condensed Balance Sheets
|
|||
Note 8. 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 June 30, 2011 are as follows (in thousands):
|
Six months ending December 31, 2011 |
$ | 35,250 | ||
|
Years ending December 31: |
||||
|
2012 |
65,505 | |||
|
2013 |
57,553 | |||
|
2014 |
45,708 | |||
|
2015 |
36,319 | |||
|
2016 |
27,392 | |||
|
Thereafter |
78,111 | |||
|
Future Minimum Lease Payments |
$ | 345,838 | ||
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 10. Business Combinations
During the six months ended June 30, 2011, we made seven acquisitions (five in the wholesale products business, one in the recycled heavy-duty truck products business and one self service retail operation). Our acquisitions included the purchase of an engine remanufacturer, included in the wholesale operating segment, which expanded our presence in the remanufacturing industry that we entered in 2010. Additionally, our acquisition of an automotive heating and cooling component distributor, also included in our wholesale operating segment, supplements our expansion into the automotive heating and cooling aftermarket products market. Our wholesale business acquisitions also included the purchase of the U.S. vehicle refinish paint distribution business of Akzo Nobel Automotive and Aerospace Coatings ("Akzo Nobel"), which will allow us to increase our paint and related product offerings and expand our geographic presence in the automotive paint market.
Total consideration for the acquisitions during the six months ended June 30, 2011 was $100.0 million, composed of $95.6 million of cash (net of cash acquired), $1.6 million of notes payable and $2.8 million of other purchase price obligations (non-interest bearing). In conjunction with the acquisition of the U.S. vehicle refinish paint distribution business of Akzo Nobel on May 27, 2011, we entered into a wholesaler agreement under which we became an authorized distributor of Akzo Nobel products in the acquired markets. Included in this agreement is a requirement to make an additional payment to Akzo Nobel in the event that our purchases of Akzo Nobel product do not meet specified thresholds from June 1, 2011 to May 31, 2014. The required payment will be calculated as the difference between our actual purchases and the targeted purchase levels outlined in the agreement for the specified period with a maximum payment of $21.0 million. As of June 30, 2011, we had not determined the acquisition-date fair value of this contingent consideration. We will disclose the fair value estimate in future filings if the calculated amount is material.
During the six months ended June 30, 2011, we recorded $28.2 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2010 acquisitions. Of this amount, approximately $16.4 million is expected to be deductible for income tax purposes. In the period between the acquisition dates and June 30, 2011, our 2011 acquisitions generated approximately $53.4 million of revenue and $1.9 million of operating income.
In July 2011, we completed four acquisitions (three in the wholesale products business and one self service retail business). We are in the process of completing the purchase accounting for these acquisitions, and as a result, we are unable to disclose the amounts recognized for each major class of assets acquired and liabilities assumed.
During the year ended December 31, 2010, we made 20 acquisitions (16 in the wholesale products business, one in the recycled heavy-duty truck products business, two self service retail operations and one tire recycling business). Our acquisitions included the purchase of an engine remanufacturer, included in the wholesale operating segment, which allowed us to further vertically integrate our supply chain. We expanded our product offerings through the acquisition of an automotive heating and cooling component business, included in the wholesale operating segment, as well as a tire recycling business, which supports all of our operating segments. Our 2010 acquisitions have also enabled us to expand our geographic presence, most notably in Canada through our acquisition of Cross Canada, an aftermarket product supplier.
Total consideration for the 2010 acquisitions was $170.4 million, composed of $143.6 million of cash (net of cash acquired), $5.5 million of notes payable, $6.4 million of other purchase price obligations (non-interest bearing) and $14.9 million in stock issued (689,655 shares). Other purchase price obligations included a contingent payment, the fair value of which was adjusted downward by $1.6 million in 2011 as a result of changes in the likelihood of meeting the specified performance targets.This adjustment was included in Other Income, net on our Unaudited Consolidated Condensed Statements of Income for the three and six month periods ended June 30, 2011. The $14.9 million of common stock was issued in connection with our acquisition of Cross Canada on November 1, 2010. The fair value of common stock issued was based on the market price of LKQ stock on the date of issuance. We recorded goodwill of $91.8 million for the 2010 acquisitions, of which $74.9 million is expected to be deductible for income tax purposes.
The acquisitions are being accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair market values at the dates of acquisition. The purchase price allocations for the acquisitions made during the six months ended June 30, 2011 and the last two quarters of 2010 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain of the inventories acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition-date fair value of certain liabilities assumed; 4) the final estimation of the tax basis of the entities acquired; and 5) the acquisition-date fair value of contingent consideration issued.
The purchase price allocations for the acquisitions completed during the six months ended June 30, 2011 and the year ended December 31, 2010 are as follows (in thousands):
| June 30, 2011 (Preliminary) |
December 31, 2010 (Preliminary) |
|||||||
|
Receivables |
$ | 20,731 | $ | 27,774 | ||||
|
Receivable reserves |
(620 | ) | (2,186 | ) | ||||
|
Inventory |
42,385 | 38,121 | ||||||
|
Prepaid expenses |
2,516 | 1,480 | ||||||
|
Property and equipment |
5,844 | 18,517 | ||||||
|
Goodwill |
28,156 | 91,757 | ||||||
|
Other intangibles |
2,246 | 6,163 | ||||||
|
Other assets |
9,132 | 1,529 | ||||||
|
Deferred income taxes |
2,565 | 2,922 | ||||||
|
Current liabilities assumed |
(12,989 | ) | (15,665 | ) | ||||
|
Other purchase price obligations |
(2,825 | ) | (6,359 | ) | ||||
|
Notes issued |
(1,550 | ) | (5,530 | ) | ||||
|
Stock issued |
— | (14,945 | ) | |||||
|
Cash used in acquisitions, net of cash acquired |
$ | 95,591 | $ | 143,578 | ||||
The primary reason for our acquisitions made during the six months ended June 30, 2011 and the year ended December 31, 2010 was to increase our stockholder value by leveraging our strategy of becoming a one-stop provider for alternative vehicle replacement products. These acquisitions enabled us to expand our market presence, expand our product offerings and enter new markets. These factors contributed to purchase prices that included, in many cases, a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during 2011 and 2010 as though the businesses had been acquired as of January 1, 2010, and is based upon unaudited financial information of the acquired entities (in thousands, except per share data):
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenue, as reported |
$ | 759,684 | $ | 584,681 | $ | 1,546,332 | $ | 1,188,197 | ||||||||
|
Revenue of purchased businesses for the period prior to acquisition |
15,449 | 116,703 | 40,827 | 237,564 | ||||||||||||
|
Pro forma revenue |
$ | 775,133 | $ | 701,384 | $ | 1,587,159 | $ | 1,425,761 | ||||||||
|
Income from continuing operations, as reported |
$ | 46,706 | $ | 37,906 | $ | 104,888 | $ | 89,889 | ||||||||
|
Net income of purchased businesses for the period prior to acquisition, including pro forma purchase accounting adjustments |
799 | 1,580 | 2,315 | 5,364 | ||||||||||||
|
Pro forma income from continuing operations |
$ | 47,505 | $ | 39,486 | $ | 107,203 | $ | 95,253 | ||||||||
|
Basic earnings per share from continuing operations, as reported |
$ | 0.32 | $ | 0.27 | $ | 0.72 | $ | 0.63 | ||||||||
|
Effect of purchased businesses for the period prior to acquisition |
0.01 | 0.01 | 0.02 | 0.04 | ||||||||||||
|
Pro forma basic earnings per share from continuing operations (a) |
$ | 0.33 | $ | 0.28 | $ | 0.74 | $ | 0.67 | ||||||||
|
Diluted earnings per share from continuing operations, as reported |
$ | 0.32 | $ | 0.26 | $ | 0.71 | $ | 0.62 | ||||||||
|
Effect of purchased businesses for the period prior to acquisition |
0.01 | 0.01 | 0.02 | 0.04 | ||||||||||||
|
Pro forma diluted earnings per share from continuing operations (a) |
$ | 0.32 | $ | 0.27 | $ | 0.72 | $ | 0.66 | ||||||||
| (a) | The sum of the individual earnings per share amounts may not equal the total due to rounding. |
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to net realizable value, adjustments to depreciation on acquired property and equipment, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. These pro forma results are not necessarily indicative either of what would have occurred if the acquisitions had been in effect for the period presented or of future results.
|
|||
Note 11. Restructuring and Integration Costs
Akzo Nobel Integration
With our acquisition of the U.S. vehicle refinish paint distribution business of Akzo Nobel, we have undertaken certain restructuring activities to integrate the acquired paint distribution locations into our existing business. Our restructuring plan, which is in the process of being finalized, includes the closure of duplicate facilities, elimination of overlapping delivery routes and termination of employees in connection with the consolidation of the overlapping facilities and delivery routes. We expect that these integration activities will be substantially completed by the end of 2011. During the six month period ended June 30, 2011, we incurred $2.1 million in charges primarily related to excess facility costs, which were expensed at the cease-use date for the facilities. These costs are included in Restructuring Expenses on the accompanying Unaudited Consolidated Condensed Statements of Income. We expect to incur approximately $0.8 million of additional charges as we integrate the business, including costs related to the closure of duplicate facilities, the movement of inventory between locations, and severance and related benefits for terminated employees.
Cross Canada Integration
We have undertaken certain restructuring activities in connection with our acquisition of Cross Canada in the fourth quarter of 2010. The restructuring plan includes the integration of our existing Canadian aftermarket operations into the Cross Canada business, as well as the transition of certain corporate functions to our corporate headquarters and our field support center in Nashville. Based on our analysis of the overlapping facilities, we identified aftermarket warehouses and corporate locations that will be closed in order to eliminate duplicate facilities. Related to the facilities that will be closed, we will terminate certain personnel including drivers, other facility personnel and corporate employees. During the six months ended June 30, 2011, we incurred $0.3 million related to these integration efforts, including $0.2 million for facility closure costs and $0.1 million for severance and benefits for terminated employees. We expect $1.2 million of additional charges in 2011 for further headcount reduction and facility closures. These charges may include restructuring expense related to lease termination or excess facility costs if we are unable to recover the rent from a sublease tenant after we vacate the facilities. These restructuring expenses will be expensed as incurred, or in the case of excess facility costs, at the cease-use date for the facility.
|
|||
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.
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 six months ended June 30, 2011 was 38.9% compared with 38.2% for the comparable prior year period. The effective income tax rate for the six months ended June 30, 2011 included a discrete charge of $0.2 million attributable to the revaluation of deferred taxes in connection with state tax rate changes, while the effective income tax rate for the comparable prior year period included a discrete benefit of $1.7 million resulting from the revaluation of deferred taxes in connection with a legal entity reorganization.
|
|||
Note 13. Subsequent Event
On April 1, 2009, we entered into a settlement agreement with Ford Motor Company and Ford Global Technologies, LLC that ended several legal actions alleging design patent infringement that were initiated by Ford with the United States International Trade Commission. Pursuant to the settlement, we (and our designees) became the sole distributor in the United States of aftermarket automotive parts that correspond to Ford collision parts that are covered by a United States design patent. We paid Ford an upfront fee for these rights and must pay a royalty for each such part we sell. The term of this arrangement is scheduled to expire September 30, 2011. In July 2011, we entered into a new agreement with Ford (which becomes effective October 1, 2011) to continue our arrangement through March 2015 with substantially the same terms as the 2009 agreement and subject to an additional upfront fee.
|
|||
| June 30, 2011 |
December 31, 2010 |
|||||||
|
Aftermarket and refurbished products |
$ | 313,230 | $ | 274,728 | ||||
|
Salvage and remanufactured products |
237,471 | 209,514 | ||||||
|
Core facilities inventory |
5,840 | 8,446 | ||||||
| $ | 556,541 | $ | 492,688 | |||||
|
Balance as of January 1, 2011 |
$ | 1,032,973 | ||
|
Business acquisitions and adjustments to previously recorded goodwill |
28,156 | |||
|
Exchange rate effects |
2,378 | |||
|
Balance as of June 30, 2011 |
$ | 1,063,507 | ||
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
|
Trade names and trademarks |
$ | 76,484 | $ | (13,981 | ) | $ | 62,503 | $ | 75,661 | $ | (12,020 | ) | $ | 63,641 | ||||||||||
|
Covenants not to compete |
1,889 | (629 | ) | 1,260 | 2,688 | (1,382 | ) | 1,306 | ||||||||||||||||
|
Customer relationships |
5,623 | (1,170 | ) | 4,453 | 4,355 | — | 4,355 | |||||||||||||||||
| $ | 83,996 | $ | (15,780 | ) | $ | 68,216 | $ | 82,704 | $ | (13,402 | ) | $ | 69,302 | |||||||||||
|
Balance as of January 1, 2011 |
$ | 2,063 | ||
|
Warranty expense |
10,298 | |||
|
Warranty claims |
(9,954 | ) | ||
|
Business acquisitions |
3,228 | |||
|
Balance as of June 30, 2011 |
$ | 5,635 | ||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Aftermarket, other new and refurbished products |
$ | 356,202 | $ | 290,271 | $ | 737,318 | $ | 602,644 | ||||||||
|
Recycled, remanufactured and related products and services |
269,700 | 214,159 | 545,482 | 429,382 | ||||||||||||
|
Other |
133,782 | 80,251 | 263,532 | 156,171 | ||||||||||||
| $ | 759,684 | $ | 584,681 | $ | 1,546,332 | $ | 1,188,197 | |||||||||
|
|||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenue |
$ | — | $ | — | $ | — | $ | 686 | ||||||||
|
Income before income tax provision |
— | — | — | 355 | ||||||||||||
|
Income tax provision |
— | — | — | 131 | ||||||||||||
|
Income from discontinued operations, net of taxes, before gain on sale of discontinued operations |
— | — | — | 224 | ||||||||||||
|
Gain on sale of discontinued operations, net of taxes of $1,015 |
— | — | — | 1,729 | ||||||||||||
|
Income from discontinued operations, net of taxes |
$ | — | $ | — | $ | — | $ | 1,953 | ||||||||
|
|||
| Shares Available For Grant |
Stock Options | Restricted Stock | RSUs | |||||||||||||||||||||||||
| Number Outstanding |
Weighted Average Exercise Price |
Number Outstanding |
Weighted Average Grant Date Fair Value |
Number Outstanding |
Weighted Average Grant Date Fair Value |
|||||||||||||||||||||||
|
Balance, January 1, 2011 |
2,140,090 | 8,073,965 | $ | 12.27 | 154,000 | $ | 19.00 | — | $ | — | ||||||||||||||||||
|
Granted |
(816,674 | ) | — | — | — | — | 816,674 | 23.59 | ||||||||||||||||||||
|
Shares issued for director compensation |
(9,481 | ) | — | — | — | — | — | — | ||||||||||||||||||||
|
Exercised |
— | (694,744 | ) | 7.35 | — | — | — | — | ||||||||||||||||||||
|
Restricted stock or RSUs vested |
— | — | — | (43,000 | ) | 19.07 | — | — | ||||||||||||||||||||
|
Cancelled |
102,409 | (93,575 | ) | 16.80 | — | — | (8,834 | ) | 23.54 | |||||||||||||||||||
|
Additional shares registered |
6,400,000 | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Balance, June 30, 2011 |
7,816,344 | 7,285,646 | $ | 12.68 | 111,000 | $ | 18.97 | 807,840 | $ | 23.59 | ||||||||||||||||||
|
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|
|||||||||||||||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Stock options |
$ | 2,057 | $ | 2,288 | $ | 4,147 | $ | 4,514 | ||||||||
|
Restricted stock |
228 | 228 | 453 | 453 | ||||||||||||
|
RSUs |
891 | — | 1,769 | — | ||||||||||||
|
Stock issued to non-employee directors |
84 | 72 | 233 | 145 | ||||||||||||
|
Total stock-based compensation expense |
$ | 3,260 | $ | 2,588 | $ | 6,602 | $ | 5,112 | ||||||||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Cost of goods sold |
$ | 79 | $ | 73 | $ | 168 | $ | 143 | ||||||||
|
Facility and warehouse expenses |
623 | 540 | 1,234 | 1,067 | ||||||||||||
|
Selling, general and administrative expenses |
2,558 | 1,975 | 5,200 | 3,902 | ||||||||||||
| 3,260 | 2,588 | 6,602 | 5,112 | |||||||||||||
|
Income tax benefit |
(1,252 | ) | (1,017 | ) | (2,555 | ) | (2,009 | ) | ||||||||
|
Total stock-based compensation expense, net of tax |
$ | 2,008 | $ | 1,571 | $ | 4,047 | $ | 3,103 | ||||||||
| Stock Options |
Restricted Stock |
RSUs | Total | |||||||||||||
|
Remainder of 2011 |
$ | 4,109 | $ | 460 | $ | 1,820 | $ | 6,389 | ||||||||
|
2012 |
6,930 | 913 | 3,785 | 11,628 | ||||||||||||
|
2013 |
4,743 | 208 | 3,785 | 8,736 | ||||||||||||
|
2014 |
3,117 | 139 | 3,700 | 6,956 | ||||||||||||
|
2015 |
78 | — | 3,652 | 3,730 | ||||||||||||
|
2016 |
— | — | 149 | 149 | ||||||||||||
|
Total unrecognized compensation expense |
$ | 18,977 | $ | 1,720 | $ | 16,891 | $ | 37,588 | ||||||||
|
Range of Exercise Prices |
Outstanding | Exercisable | ||||||||||||||||||||||
| Shares | Weighted Average Remaining Contractual Life (Yrs) |
Weighted Average Exercise Price |
Shares | Weighted Average Remaining Contractual Life (Yrs) |
Weighted Average Exercise Price |
|||||||||||||||||||
|
$0.75 - $5.00 |
1,600,290 | 2.6 | $ | 3.75 | 1,600,290 | 2.6 | $ | 3.75 | ||||||||||||||||
|
$5.01 - $10.00 |
618,820 | 4.5 | 9.31 | 618,820 | 4.5 | 9.31 | ||||||||||||||||||
|
$10.01 - $15.00 |
2,254,118 | 6.8 | 11.33 | 1,190,198 | 6.4 | 11.04 | ||||||||||||||||||
|
$15.01 - $20.00 |
2,786,918 | 7.7 | 19.56 | 996,392 | 7.1 | 19.33 | ||||||||||||||||||
|
$20.01 + |
25,500 | 6.9 | 21.43 | 14,900 | 6.9 | 21.47 | ||||||||||||||||||
| 7,285,646 | 6.0 | $ | 12.68 | 4,420,600 | 4.9 | $ | 10.06 | |||||||||||||||||
|
|||
| June 30, 2011 |
December 31, 2010 |
|||||||
|
Senior secured debt: |
||||||||
|
Term loans payable |
$ | 246,875 | $ | 590,099 | ||||
|
Revolving credit facility |
327,728 | — | ||||||
|
Notes payable to individuals through August 2019, interest at 2.0% to 8.0% |
11,758 | 10,855 | ||||||
| 586,361 | 600,954 | |||||||
|
Less current maturities |
(15,520 | ) | (52,888 | ) | ||||
| $ | 570,841 | $ | 548,066 | |||||
|
|||
|
Notional Amount |
Effective Date |
Maturity Date |
Fixed Interest Rate* | |||
|
$250,000,000 |
October 14, 2010 | October 14, 2015 | 3.31% | |||
|
$100,000,000 |
April 14, 2011 | October 14, 2013 | 2.86% |
| * | Includes applicable margin of 1.75% per annum on LIBOR-based debt currently in effect under the 2011 Credit Agreement |
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Gain (loss) in Accumulated Other Comprehensive Income |
$ | (7,908 | ) | $ | 75 | $ | (6,427 | ) | $ | (1,161 | ) | |||||
|
Loss reclassified to interest expense |
(1,224 | ) | (2,748 | ) | (3,270 | ) | (5,775 | ) | ||||||||
|
Gain (loss) from hedge ineffectiveness |
— | — | (225 | ) | — | |||||||||||
|
|||
| Balance as of June 30, 2011 |
Fair Value Measurements as of June 30, 2011 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
|
Assets: |
||||||||||||||||
|
Cash surrender value of life insurance |
$ | 13,127 | $ | — | $ | 13,127 | $ | — | ||||||||
|
Interest rate swaps |
874 | — | 874 | — | ||||||||||||
|
Total Assets |
$ | 14,001 | $ | — | $ | 14,001 | $ | — | ||||||||
|
Liabilities: |
||||||||||||||||
|
Deferred compensation liabilities |
$ | 13,278 | $ | — | $ | 13,278 | $ | — | ||||||||
|
Interest rate swaps |
857 | — | 857 | — | ||||||||||||
|
Total Liabilities |
$ | 14,135 | $ | — | $ | 14,135 | $ | — | ||||||||
| Balance as of December 31, 2010 |
Fair Value Measurements as of December 31, 2010 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
|
Assets: |
||||||||||||||||
|
Cash surrender value of life insurance |
$ | 10,517 | $ | — | $ | 10,517 | $ | — | ||||||||
|
Interest rate swaps |
4,815 | — | 4,815 | — | ||||||||||||
|
Total Assets |
$ | 15,332 | $ | — | $ | 15,332 | $ | — | ||||||||
|
Liabilities: |
||||||||||||||||
|
Deferred compensation liabilities |
$ | 11,245 | $ | — | $ | 11,245 | $ | — | ||||||||
|
Interest rate swaps |
1,416 | — | 1,416 | — | ||||||||||||
|
Total Liabilities |
$ | 12,661 | $ | — | $ | 12,661 | $ | — | ||||||||
|
|||
|
Six months ending December 31, 2011 |
$ | 35,250 | ||
|
Years ending December 31: |
||||
|
2012 |
65,505 | |||
|
2013 |
57,553 | |||
|
2014 |
45,708 | |||
|
2015 |
36,319 | |||
|
2016 |
27,392 | |||
|
Thereafter |
78,111 | |||
|
Future Minimum Lease Payments |
$ | 345,838 | ||
|
|||
| June 30, 2011 (Preliminary) |
December 31, 2010 (Preliminary) |
|||||||
|
Receivables |
$ | 20,731 | $ | 27,774 | ||||
|
Receivable reserves |
(620 | ) | (2,186 | ) | ||||
|
Inventory |
42,385 | 38,121 | ||||||
|
Prepaid expenses |
2,516 | 1,480 | ||||||
|
Property and equipment |
5,844 | 18,517 | ||||||
|
Goodwill |
28,156 | 91,757 | ||||||
|
Other intangibles |
2,246 | 6,163 | ||||||
|
Other assets |
9,132 | 1,529 | ||||||
|
Deferred income taxes |
2,565 | 2,922 | ||||||
|
Current liabilities assumed |
(12,989 | ) | (15,665 | ) | ||||
|
Other purchase price obligations |
(2,825 | ) | (6,359 | ) | ||||
|
Notes issued |
(1,550 | ) | (5,530 | ) | ||||
|
Stock issued |
— | (14,945 | ) | |||||
|
Cash used in acquisitions, net of cash acquired |
$ | 95,591 | $ | 143,578 | ||||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Revenue, as reported |
$ | 759,684 | $ | 584,681 | $ | 1,546,332 | $ | 1,188,197 | ||||||||
|
Revenue of purchased businesses for the period prior to acquisition |
15,449 | 116,703 | 40,827 | 237,564 | ||||||||||||
|
Pro forma revenue |
$ | 775,133 | $ | 701,384 | $ | 1,587,159 | $ | 1,425,761 | ||||||||
|
Income from continuing operations, as reported |
$ | 46,706 | $ | 37,906 | $ | 104,888 | $ | 89,889 | ||||||||
|
Net income of purchased businesses for the period prior to acquisition, including pro forma purchase accounting adjustments |
799 | 1,580 | 2,315 | 5,364 | ||||||||||||
|
Pro forma income from continuing operations |
$ | 47,505 | $ | 39,486 | $ | 107,203 | $ | 95,253 | ||||||||
|
Basic earnings per share from continuing operations, as reported |
$ | 0.32 | $ | 0.27 | $ | 0.72 | $ | 0.63 | ||||||||
|
Effect of purchased businesses for the period prior to acquisition |
0.01 | 0.01 | 0.02 | 0.04 | ||||||||||||
|
Pro forma basic earnings per share from continuing operations (a) |
$ | 0.33 | $ | 0.28 | $ | 0.74 | $ | 0.67 | ||||||||
|
Diluted earnings per share from continuing operations, as reported |
$ | 0.32 | $ | 0.26 | $ | 0.71 | $ | 0.62 | ||||||||
|
Effect of purchased businesses for the period prior to acquisition |
0.01 | 0.01 | 0.02 | 0.04 | ||||||||||||
|
Pro forma diluted earnings per share from continuing operations (a) |
$ | 0.32 | $ | 0.27 | $ | 0.72 | $ | 0.66 | ||||||||
| (a) | The sum of the individual earnings per share amounts may not equal the total due to rounding. |
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