|
|
|
|
|
|
|
|
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, 2011 filed with the SEC on February 27, 2012.
|
Note 2. 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 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 $24.3 million and $22.8 million at June 30, 2012 and December 31, 2011, 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 Consolidated Condensed Statements of Income and are shown as a current 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 recorded a reserve for uncollectible accounts of approximately $7.4 million and $8.3 million at June 30, 2012 and December 31, 2011, respectively.
Inventory
Inventory consists of the following (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Aftermarket and refurbished products |
$ | 462,472 | $ | 445,787 | ||||
Salvage and remanufactured products |
336,335 | 291,059 | ||||||
|
|
|
|
|||||
$ | 798,807 | $ | 736,846 | |||||
|
|
|
|
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, customer relationships and covenants not to compete.
The change in the carrying amount of goodwill during the six months ended June 30, 2012 is as follows (in thousands):
Balance as of January 1, 2012 |
$ | 1,476,063 | ||
Business acquisitions and adjustments to previously recorded goodwill |
98,907 | |||
Exchange rate effects |
3,635 | |||
|
|
|||
Balance as of June 30, 2012 |
$ | 1,578,605 | ||
|
|
The components of other intangibles are as follows (in thousands):
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
Trade names and trademarks |
$ | 116,493 | $ | (18,892 | ) | $ | 97,601 | $ | 115,954 | $ | (16,305 | ) | $ | 99,649 | ||||||||||
Customer relationships |
10,052 | (4,364 | ) | 5,688 | 10,050 | (3,065 | ) | 6,985 | ||||||||||||||||
Covenants not to compete |
3,426 | (1,138 | ) | 2,288 | 3,194 | (918 | ) | 2,276 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 129,971 | $ | (24,394 | ) | $ | 105,577 | $ | 129,198 | $ | (20,288 | ) | $ | 108,910 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks are amortized over a useful life ranging from 10 to 30 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. 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. Amortization expense for intangibles was approximately $4.2 million and $3.4 million during the six month periods ended June 30, 2012 and 2011, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2016 is $8.6 million, $7.8 million, $7.1 million, $6.4 million and $5.7 million, respectively.
Depreciation Expense
Included in Cost of Goods Sold on the Unaudited Consolidated Condensed Statements of Income is depreciation expense associated with our refurbishing, remanufacturing, and furnace operations and our distribution centers.
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 claim information to project future warranty claims activity. The changes in the warranty reserve during the six month period ended June 30, 2012 were as follows (in thousands):
Balance as of January 1, 2012 |
$ | 7,347 | ||
Warranty expense |
11,230 | |||
Warranty claims |
(12,059 | ) | ||
Business acquisitions |
645 | |||
|
|
|||
Balance as of June 30, 2012 |
$ | 7,163 | ||
|
|
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.
Recent Accounting Pronouncements
Effective January 1, 2012, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income” and ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” These ASUs eliminate the option to present the components of other comprehensive income in the statement of changes in stockholders’ equity. Instead, entities 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 amendments did not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. As a result, the adoption of this guidance did not affect our financial position, results of operations or cash flows. We have presented the components of net income, the components of other comprehensive income and total comprehensive income in two separate but consecutive statements.
Effective January 1, 2012, we adopted FASB ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This update clarifies 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. We applied the provisions of this ASU to our fair value measurements during the current year, however, the adoption did not have a material effect on our financial statements. Refer to Note 6, “Fair Value Measurements,” for the required disclosures.
|
Note 3. Equity Incentive Plans
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”). In the first quarter of 2012, our Board of Directors approved an amendment to the Equity Incentive Plan, which was subsequently approved by our stockholders at our 2012 Annual Meeting in May 2012, to explicitly allow participation of our non-employee directors, to allow issuance of shares of our common stock to non-employee directors in lieu of cash compensation, to increase the number of shares available for issuance under the Equity Incentive Plan by 544,417, and to make certain updating amendments.
In connection with the amendment to the Equity Incentive Plan, our Board of Directors approved the termination of the Stock Option and Compensation Plan for Non-Employee Directors (the “Director Plan”), other than with respect to any options currently outstanding under the Director Plan. We had not issued options under the Director Plan since 2007. The increase in the number of shares available for issuance under the Equity Incentive Plan as approved by our Board of Directors in the first quarter of 2012 represented the remaining number of shares available for issuance under the Director Plan as of December 31, 2011.
Most of our RSUs, stock options, and restricted stock vest over a period of five years. Vesting of the awards is subject to a continued service condition. Each RSU converts into one share of LKQ common stock on the applicable vesting date. Shares of restricted stock may not be sold, pledged or otherwise transferred until they vest. Stock options expire ten years from the date they are granted. We expect to issue new shares of common stock to cover past and future equity grants.
A summary of transactions in our stock-based compensation plans for the six months ended June 30, 2012 is as follows:
Shares Available For Grant |
RSUs | Stock Options | Restricted Stock | |||||||||||||||||||||||||
Number Outstanding |
Weighted Average Grant Date Fair Value |
Number Outstanding |
Weighted Average Exercise Price |
Number Outstanding |
Weighted Average Grant Date Fair Value |
|||||||||||||||||||||||
Balance, January 1, 2012 |
7,876,185 | 716,791 | $ | 23.59 | 6,539,046 | $ | 12.93 | 106,000 | $ | 18.98 | ||||||||||||||||||
Granted |
(752,205 | ) | 752,205 | 31.72 | — | — | — | — | ||||||||||||||||||||
Exercised |
— | — | — | (938,064 | ) | 10.78 | — | — | ||||||||||||||||||||
Vested |
— | (86,782 | ) | 24.14 | — | — | (43,000 | ) | 19.07 | |||||||||||||||||||
Cancelled |
112,764 | (34,419 | ) | 28.20 | (78,345 | ) | 16.29 | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, June 30, 2012 |
7,236,744 | 1,347,795 | $ | 27.97 | 5,522,637 | $ | 13.25 | 63,000 | $ | 18.92 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2012, we used a forfeiture rate of 8% for grants to employees and a forfeiture rate of 0% for grants to directors and executive officers. The fair value of RSUs that vested during the six months ended June 30, 2012 was approximately $2.8 million.
We recognize compensation expense on a straight-line basis over the requisite service period of the award. The components of pre-tax stock-based compensation expense are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
RSUs |
$ | 2,019 | $ | 891 | $ | 4,083 | $ | 1,769 | ||||||||
Stock options |
1,721 | 2,057 | 3,442 | 4,147 | ||||||||||||
Restricted stock |
228 | 228 | 453 | 453 | ||||||||||||
Stock issued to non-employee directors |
— | 84 | — | 233 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense |
$ | 3,968 | $ | 3,260 | $ | 7,978 | $ | 6,602 | ||||||||
|
|
|
|
|
|
|
|
The following table sets forth the classification of 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, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of goods sold |
$ | 96 | $ | 79 | $ | 199 | $ | 168 | ||||||||
Facility and warehouse expenses |
609 | 623 | 1,303 | 1,234 | ||||||||||||
Selling, general and administrative expenses |
3,263 | 2,558 | 6,476 | 5,200 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
3,968 | 3,260 | 7,978 | 6,602 | |||||||||||||
Income tax benefit |
(1,548 | ) | (1,252 | ) | (3,112 | ) | (2,555 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense, net of tax |
$ | 2,420 | $ | 2,008 | $ | 4,866 | $ | 4,047 | ||||||||
|
|
|
|
|
|
|
|
We have not capitalized any stock-based compensation costs during either of the six month periods ended June 30, 2012 or 2011.
As of June 30, 2012, unrecognized compensation expense related to unvested RSUs, stock options and restricted stock is expected to be recognized as follows (in thousands):
RSUs | Stock Options |
Restricted Stock |
Total | |||||||||||||
Remainder of 2012 |
$ | 4,094 | $ | 3,441 | $ | 460 | $ | 7,995 | ||||||||
2013 |
8,332 | 4,722 | 208 | 13,262 | ||||||||||||
2014 |
8,268 | 3,116 | 139 | 11,523 | ||||||||||||
2015 |
8,063 | 78 | — | 8,141 | ||||||||||||
2016 |
4,498 | — | — | 4,498 | ||||||||||||
2017 |
143 | — | — | 143 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total unrecognized compensation expense |
$ | 33,398 | $ | 11,357 | $ | 807 | $ | 45,562 | ||||||||
|
|
|
|
|
|
|
|
|
Note 4. Long-Term Obligations
Long-Term Obligations consist of the following (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Senior secured debt financing facility: |
||||||||
Term loans payable |
$ | 431,875 | $ | 240,625 | ||||
Revolving credit facility |
508,288 | 660,730 | ||||||
Notes payable through October 2018 at weighted average interest rates of 1.9% and 2.0%, respectively |
46,378 | 38,338 | ||||||
Other long-term debt at weighted average interest rates of 2.4% and 3.2%, respectively |
13,905 | 16,383 | ||||||
|
|
|
|
|||||
1,000,446 | 956,076 | |||||||
Less current maturities |
(46,379 | ) | (29,524 | ) | ||||
|
|
|
|
|||||
$ | 954,067 | $ | 926,552 | |||||
|
|
|
|
On March 25, 2011, we entered into a 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, which was amended on September 30, 2011 (as amended, the “Credit Agreement”). The Credit Agreement provides for borrowings up to $1.4 billion, consisting of (1) a $950 million revolving credit facility (the “Revolving Credit Facility”), (2) a $250 million term loan facility (the “Term Loan Facility”) and (3) an additional term loan facility of up to $200 million (“New Term Loan Facility”). Under the Revolving Credit Facility, we are permitted to draw up to the U.S. dollar equivalent of $500 million in Canadian dollars, pounds sterling, euros, and other agreed-upon currencies. The Credit Agreement also provides for (a) the issuance of up to $125 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 are taken into account when determining availability under the Revolving Credit Facility. In January 2012, we borrowed the full $200 million available under the New Term Loan Facility, which we used to pay down a portion of our Revolving Credit Facility borrowings.
Amounts under the Revolving Credit Facility are due and payable upon maturity of the 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 is due and payable on the maturity date of the Credit Agreement. Amounts under the New Term Loan Facility are due and payable in quarterly installments beginning after March 31, 2012, with the annual payments equal to 5% of the original principal amount in the first and second years and 10% of the original principal amount in the third and fourth years. The remaining balance under the New Term Loan Facility is due and payable on the maturity date of the Credit Agreement. We are required to prepay the Term Loan Facility and the New 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 Credit Agreement.
The 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 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 may increase 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 Credit Agreement as of June 30, 2012 and December 31, 2011.
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 total 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 5, “Derivative Instruments and Hedging Activities,” the weighted average interest rates on borrowings outstanding against the Credit Agreement at June 30, 2012 and December 31, 2011 were 2.57% and 2.59%, respectively. We also 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. In addition, we 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 Credit Agreement totaled $940.2 million and $901.4 million at June 30, 2012 and December 31, 2011, respectively, of which $25.6 million and $12.5 million were classified as current maturities, respectively. As of June 30, 2012, there were $47.1 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, 2012 was $394.6 million.
During the six months ended June 30, 2011, we incurred a loss on debt extinguishment of $5.3 million related to the write off of the unamortized balance of capitalized debt issuance costs under our previous debt agreement. The amount of the write off excludes debt issuance cost amortization, which is recorded as a component of interest expense. We incurred $8.2 million in fees related to the execution of the Credit Agreement during the six month period ended June 30, 2011. These fees were capitalized within Other Assets on our Unaudited Consolidated Condensed Balance Sheets and are amortized over the term of the agreement.
|
Note 5. 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. For certain of our foreign operations, we also use short-term foreign currency forward contracts to manage our exposure to variability in foreign currency denominated transactions. With our acquisition of a precious metal extraction business during the second quarter of 2012 (see Note 9, “Business Combinations), we began entering into certain commodity forward contracts to manage our exposure to changing metals prices. We do not hold or issue derivatives for trading purposes.
Interest Rate Swaps
At June 30, 2012, 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 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 have received and will receive payment at a variable rate of interest based on the London InterBank Offered Rate (“LIBOR”) or the Canadian Dealer Offered Rate (“CDOR”) for the respective currency of each interest rate swap agreement’s 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 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.
The following table summarizes the terms of our interest rate swap agreements as of June 30, 2012:
Notional Amount |
Effective Date |
Maturity Date |
Fixed Interest Rate* |
|||
USD $250,000,000 |
October 14, 2010 | October 14, 2015 | 3.06% | |||
USD $100,000,000 |
April 14, 2011 | October 14, 2013 | 2.61% | |||
USD $60,000,000 |
November 30, 2011 | October 31, 2016 | 2.70% | |||
USD $60,000,000 |
November 30, 2011 | October 31, 2016 | 2.69% | |||
USD $50,000,000 |
December 30, 2011 | December 30, 2016 | 2.69% | |||
GBP £50,000,000 |
November 30, 2011 | October 30, 2016 | 2.86% | |||
CAD $25,000,000 |
December 30, 2011 | March 24, 2016 | 2.92% |
* | Includes applicable margin of 1.50% per annum on LIBOR or CDOR-based debt in effect as of June 30, 2012 under the Credit Agreement. |
As of June 30, 2012 and December 31, 2011, the fair market value of the interest rate swap contracts was a liability of $15.3 million and $10.6 million, respectively, included in Other Noncurrent Liabilities on our Unaudited Consolidated Condensed Balance Sheets.
Changes in Accumulated Other Comprehensive Income (Loss) related to our interest rate swap agreements were as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Beginning balance |
$ | (6,540 | ) | $ | 4,289 | $ | (6,890 | ) | $ | 2,176 | ||||||
Pretax loss |
(6,718 | ) | (7,908 | ) | (7,709 | ) | (6,427 | ) | ||||||||
Income tax benefit |
2,333 | 2,847 | 2,722 | 2,314 | ||||||||||||
Reversal of unrealized loss |
1,636 | 1,224 | 3,112 | 3,270 | ||||||||||||
Reversal of deferred income taxes |
(592 | ) | (440 | ) | (1,116 | ) | (1,177 | ) | ||||||||
Hedge ineffectiveness |
— | — | — | (225 | ) | |||||||||||
Income tax benefit |
— | — | — | 81 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | (9,881 | ) | $ | 12 | $ | (9,881 | ) | $ | 12 | ||||||
|
|
|
|
|
|
|
|
In connection with the execution of our credit agreement on March 25, 2011 as discussed in Note 4, “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 respective interest rate swap agreements, at least the notional amount of each agreement in the respective variable-rate 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, 2012, we estimate that $3.9 million of derivative losses (net of tax) included in Accumulated Other Comprehensive Loss will be reclassified into interest expense within the next 12 months.
Foreign Currency Forward Contracts
In order to manage the risk of changes in exchange rates associated with certain foreign currency transactions in our European operations, such as our purchases of inventory denominated in a currency other than the pound sterling, we have entered into short-term foreign currency forward contracts. These contracts are adjusted to fair value each balance sheet date. The notional amount and fair value of these contracts at June 30, 2012 and December 31, 2011, along with the effect on our results of operations for the three and six month periods ended June 30, 2012, were immaterial. We did not hold any foreign currency forward contracts during the six month period ended June 30, 2011.
Commodity Forward Contracts
In order to manage the risk of changes in prices for certain precious metals, including gold, silver, platinum and palladium, we have entered into short-term commodity forward contracts. These contracts are adjusted to fair value each balance sheet date. The notional amount and fair value of our commodity forward contracts at June 30, 2012 and the effect on our results of operations for the three and six month periods ended June 30, 2012 were immaterial.
|
Note 6. 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 there were no significant changes in valuation techniques or inputs during the six months ended June 30, 2012. 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.
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 June 30, 2012 and December 31, 2011 (in thousands):
Balance as of June 30, 2012 |
Fair Value Measurements as of June 30, 2012 | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
Cash surrender value of life insurance |
$ | 17,597 | $ | — | $ | 17,597 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 17,597 | $ | — | $ | 17,597 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contingent consideration liabilities |
$ | 88,037 | $ | — | $ | — | $ | 88,037 | ||||||||
Deferred compensation liabilities |
17,706 | — | 17,706 | — | ||||||||||||
Interest rate swaps |
15,268 | — | 15,268 | — | ||||||||||||
Foreign currency forwards |
105 | — | 105 | — | ||||||||||||
Commodity forwards |
83 | — | 83 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
$ | 121,199 | $ | — | $ | 33,162 | $ | 88,037 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of December 31, 2011 |
Fair Value Measurements as of December 31, 2011 | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
Cash surrender value of life insurance |
$ | 13,413 | $ | — | $ | 13,413 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 13,413 | $ | — | $ | 13,413 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contingent consideration liabilities |
$ | 82,382 | $ | — | $ | — | $ | 82,382 | ||||||||
Deferred compensation liabilities |
14,071 | — | 14,071 | — | ||||||||||||
Interest rate swaps |
10,576 | — | 10,576 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
$ | 107,029 | $ | — | $ | 24,647 | $ | 82,382 | ||||||||
|
|
|
|
|
|
|
|
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. The contingent consideration liabilities are classified as separate line items in both current and noncurrent liabilities on our Unaudited Consolidated Condensed Balance Sheets based on the expected timing of the related payments.
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 current and forward interest rates. The fair value of our foreign currency forward contracts is estimated based on quoted foreign exchange rates, forward foreign exchange rates and interest rates. The fair value of our commodity forward contracts is estimated based on quoted commodity rates, forward commodity rates and interest rates.
Our contingent consideration liabilities are related to our business acquisitions as further described in Note 9, “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 unobservable inputs include internally-developed assumptions of the probabilities of achieving specified targets, which are used to determine the resulting cash flows and the applicable discount rate. Our Level 3 fair value measurements are established and updated quarterly by our corporate accounting department using current information about these key assumptions, with the input and oversight of our operational and executive management teams. We evaluate the performance of the business during the period compared to our previous expectations, along with any changes to our future projections, and update the estimated cash flows accordingly. In addition, we consider changes to our cost of capital and changes to the probability of achieving the earnout payment targets when updating our discount rate on a quarterly basis.
The significant unobservable inputs used in the fair value measurements of our Level 3 contingent consideration liabilities were as follows:
Unobservable Input |
June 30, 2012 Weighted Average |
December 31,
2011 Weighted Average |
||||||
Probability of achieving payout targets |
79.8 | % | 78.1 | % | ||||
Discount rate |
6.5 | % | 3.0 | % |
A significant decrease in the assessed probabilities of achieving the targets or a significant increase in the discount rate, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the liabilities are recorded in Change in Fair Value of Contingent Consideration Liabilities within Other Expense (Income) on our Unaudited Consolidated Condensed Statements of Income.
Changes in the fair value of our contingent consideration obligations for the three and six month periods ended June 30, 2012 and 2011 were as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Beginning balance |
$ | 82,909 | $ | 2,600 | $ | 82,382 | $ | 2,000 | ||||||||
Contingent consideration liabilities recorded for business acquisitions |
5,433 | — | 5,540 | 600 | ||||||||||||
Payments |
— | — | (600 | ) | — | |||||||||||
Loss (gain) included in earnings |
1,240 | (1,615 | ) | (105 | ) | (1,615 | ) | |||||||||
Exchange rate effects |
(1,545 | ) | — | 820 | — | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 88,037 | $ | 985 | $ | 88,037 | $ | 985 | ||||||||
|
|
|
|
|
|
|
|
The loss and gain included in earnings for the three and six month periods ended June 30, 2012, respectively, are related to contingent consideration obligations outstanding as of June 30, 2012. The gain included in earnings for the three and six months ended June 30, 2011 is related to a contingent consideration obligation that was settled prior to June 30, 2012. The changes in the fair value of contingent consideration obligations during the respective periods in 2012 and 2011 are a result of the quarterly assessment of the fair value inputs. The gain during the six month period ended June 30, 2012 also includes the impact related to the adoption of FASB ASU No. 2011-04 as described in Note 2, “Financial Statement Information” (which adoption did not have a material impact).
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Consolidated Condensed Balance Sheets at cost. Based on current market conditions as of June 30, 2012, the fair value of our credit facility borrowings (see Note 4, “Long-Term Obligations”) reasonably approximated the carrying value of $940 million. This fair value measurement is classified as Level 2 within the fair value hierarchy since it is determined based upon significant inputs observable in the market including interest rates on recent financing transactions to entities with a credit rating similar to ours. 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, 2012 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.
|
Note 7. 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, 2012 are as follows (in thousands):
Six months ending December 31, 2012 |
$ | 45,082 | ||
Years ending December 31: |
||||
2013 |
84,992 | |||
2014 |
73,623 | |||
2015 |
64,206 | |||
2016 |
49,962 | |||
2017 |
38,322 | |||
Thereafter |
98,691 | |||
|
|
|||
Future Minimum Lease Payments |
$ | 454,878 | ||
|
|
Litigation and Related Contingencies
We are a plaintiff in a class action lawsuit against several aftermarket product suppliers. In January 2012, we reached a settlement agreement with certain of the defendants, under which we recognized a gain of $8.3 million. Additionally, in April 2012, the class action lawsuit against certain other defendants was settled, under which we recognized a gain of $8.4 million. These gains were recorded as a reduction of Cost of Goods Sold during the six months ended June 30, 2012. The class action is still pending against two defendants, the results of which are not expected to be material to our results of operations or cash flows. If there is a class settlement with (or a favorable judgment entered against) each of the remaining defendants, we will recognize the gains from such settlement or judgment when substantially all uncertainties regarding their timing and amount are resolved and realization is assured.
We also 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 9. Business Combinations
During the six months ended June 30, 2012, we made 11 acquisitions in North America, which included seven wholesale businesses and four self service retail operations. Our wholesale acquisitions included the purchase of a precious metals refining and reclamation business, which we acquired with the goal of improving the profitability of our scrap recovery process related to the precious metals we extract from our salvage vehicle parts such as catalytic converters. Our other 2012 acquisitions enabled us to expand our geographic presence and enter new markets.
Total acquisition date fair value of the consideration for the acquisitions during the six months ended June 30, 2012 was $129.9 million, composed of $116.5 million of cash (net of cash acquired), $7.9 million of notes payable and $5.5 million of contingent payments to former owners. The contingent consideration arrangements made in connection with our 2012 acquisitions have a maximum potential payout of $6.5 million.
During the six months ended June 30, 2012, we recorded $98.9 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2011 acquisitions. Approximately $76.1 million of the $98.9 million of goodwill recorded is expected to be deductible for income tax purposes. In the period between the acquisition dates and June 30, 2012, our 2012 acquisitions generated $22.9 million of revenue and $2.2 million of operating income.
On October 3, 2011, LKQ Corporation, LKQ Euro Limited (“LKQ Euro”), a subsidiary of LKQ Corporation, and Draco Limited (“Draco”) entered into an Agreement for the Sale and Purchase of Shares of Euro Car Parts Holdings Limited (the “Sale and Purchase Agreement”). Under the terms of the Sale and Purchase Agreement, effective October 1, 2011, LKQ Euro acquired all of the shares in the capital of Euro Car Parts Holdings Limited (“ECP”), an automotive aftermarket products distributor in the United Kingdom, from Draco and the other shareholders of ECP. With the acquisition of ECP, we expanded our geographic presence beyond North America into the European market. Our acquisition of ECP established our Wholesale – Europe operating segment. Total acquisition date fair value of the consideration for the ECP acquisition was £261.6 million ($403.7 million), composed of £190.3 million ($293.7 million) of cash (net of cash acquired), £18.4 million ($28.3 million) of notes payable, £2.7 million ($4.1 million) of other purchase price obligations (non-interest bearing) and a contingent payment to the former owners of ECP. Pursuant to the contingent payment terms, if certain annual performance targets are met by ECP, we will be obligated to pay between £22 million and £25 million and between £23 million and £30 million for the years ending December 31, 2012 and 2013, respectively. We assessed the acquisition date fair value of these contingent payments to be £50.2 million ($77.5 million at the exchange rate on October 3, 2011). Refer to Note 6, “Fair Value Measurements” for information on changes to the fair value of our contingent consideration liabilities during each of the three and six month periods ended June 30, 2011 and 2012.
We recorded goodwill of $337.0 million for the ECP acquisition, which will not be deductible for income tax purposes.
In addition to our acquisition of ECP, we made 20 acquisitions in North America in 2011 (12 wholesale businesses, five recycled heavy-duty truck products businesses and three self service retail operations). Our acquisitions included the purchase of two engine remanufacturers, which expanded our presence in the remanufacturing industry that we entered in 2010. Additionally, our acquisition of an automotive heating and cooling component distributor supplements our expansion into the automotive heating and cooling aftermarket products market. Our North American wholesale business acquisitions also included the purchase of the U.S. vehicle refinish paint distribution business of Akzo Nobel Automotive and Aerospace Coatings (the “Akzo Nobel paint business”), which allowed us to increase our paint and related product offerings and expand our geographic presence in the automotive paint market. Our other 2011 acquisitions enabled us to expand our geographic presence and enter new markets.
Total acquisition date fair value of the consideration for these 20 acquisitions was $207.3 million, composed of $193.2 million of cash (net of cash acquired), $5.9 million of notes payable, $4.5 million of other purchase price obligations (non-interest bearing) and $3.7 million of contingent payments to former owners. In conjunction with the acquisition of the Akzo Nobel paint business on May 26, 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 products do not meet specified thresholds from June 1, 2011 to May 31, 2014. This contingent 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. The contingent consideration liability recorded in 2011 also includes two additional arrangements that have a maximum potential payout of $4.6 million. The acquisition date fair value of these contingent consideration agreements is immaterial.
During the year ended December 31, 2011, we recorded $105.2 million of goodwill related to these 20 acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2010 acquisitions. Of this amount, approximately $88.3 million is expected to be deductible for income tax purposes.
Our acquisitions are accounted for under the purchase method of accounting and are included in our unaudited consolidated condensed 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, 2012 and the last two quarters of 2011 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; and 4) the final estimation of the tax basis of the entities acquired.
The purchase price allocations for the acquisitions completed during the six months ended June 30, 2012 and the year ended December 31, 2011 are as follows (in thousands):
Six Months Ended June 30, 2012 (Preliminary) |
Year Ended December 31, 2011 | |||||||||||||||
ECP (Preliminary) |
Other Acquisitions (Preliminary) |
Total (Preliminary) |
||||||||||||||
Receivables |
$ | 4,989 | $ | 54,225 | $ | 23,538 | $ | 77,763 | ||||||||
Receivable reserves |
(505 | ) | (3,832 | ) | (1,121 | ) | (4,953 | ) | ||||||||
Inventory |
30,109 | 93,835 | 59,846 | 153,681 | ||||||||||||
Prepaid expenses and other current assets |
258 | 3,189 | 2,820 | 6,009 | ||||||||||||
Property and equipment |
7,779 | 41,830 | 10,614 | 52,444 | ||||||||||||
Goodwill |
98,907 | 337,031 | 105,177 | 442,208 | ||||||||||||
Other intangibles |
479 | 39,583 | 7,683 | 47,266 | ||||||||||||
Other assets |
102 | 13 | 9,420 | 9,433 | ||||||||||||
Deferred income taxes |
(657 | ) | (13,218 | ) | 7,235 | (5,983 | ) | |||||||||
Current liabilities assumed |
(11,535 | ) | (135,390 | ) | (17,257 | ) | (152,647 | ) | ||||||||
Debt assumed |
— | (13,564 | ) | — | (13,564 | ) | ||||||||||
Other noncurrent liabilities assumed |
— | — | (619 | ) | (619 | ) | ||||||||||
Contingent consideration liabilities |
(5,540 | ) | (77,539 | ) | (3,700 | ) | (81,239 | ) | ||||||||
Other purchase price obligations |
— | (4,136 | ) | (4,510 | ) | (8,646 | ) | |||||||||
Notes issued |
(7,936 | ) | (28,302 | ) | (5,917 | ) | (34,219 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash used in acquisitions, net of cash acquired |
$ | 116,450 | $ | 293,725 | $ | 193,209 | $ | 486,934 | ||||||||
|
|
|
|
|
|
|
|
The primary reason for our acquisitions made during the six months ended June 30, 2012 and the year ended December 31, 2011 was to leverage our strategy of becoming a one-stop provider for alternative vehicle replacement products. These acquisitions enabled us to expand our market presence, widen our product offerings and enter new markets. When we identify potential acquisitions, we attempt to target companies with a leading market share, an experienced management team and workforce that provide a fit with our existing operations and strong cash flows. In many cases, acquiring companies with these characteristics can result in purchase prices that include a significant amount of goodwill.
Most notably, our acquisition of ECP in 2011 marks our entry into the European automotive aftermarket business, which provides an opportunity to us as that market has historically had a low penetration of alternative collision parts. Additionally, ECP is a leading distributor of alternative automotive products reaching most major markets in the U.K., with a developed distribution network, experienced management team, and established workforce. These factors contributed to the $337 million of goodwill recognized related to this acquisition.
The following pro forma summary presents the effect of the businesses acquired during the first six months of 2012 as though the businesses had been acquired as of January 1, 2011 and the businesses acquired during the year ended December 31, 2011 as though they had been acquired as of January 1, 2010. The pro forma adjustments are 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, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue, as reported |
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | ||||||||
Revenue of purchased businesses for the period prior to acquisition: |
||||||||||||||||
ECP |
— | 134,921 | — | 265,498 | ||||||||||||
Other acquisitions |
25,573 | 93,193 | 64,337 | 194,741 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma revenue |
$ | 1,032,104 | $ | 987,798 | $ | 2,102,645 | $ | 2,006,571 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income, as reported |
$ | 63,998 | $ | 46,706 | $ | 144,989 | $ | 104,888 | ||||||||
Net income of purchased businesses for the period prior to acquisition, including pro forma purchase accounting adjustments: |
||||||||||||||||
ECP |
— | 6,019 | — | 10,952 | ||||||||||||
Other acquisitions |
1,335 | 4,658 | 4,469 | 9,999 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma net income |
$ | 65,333 | $ | 57,383 | $ | 149,458 | $ | 125,839 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share-basic, as reported |
$ | 0.43 | $ | 0.32 | $ | 0.98 | $ | 0.72 | ||||||||
Effect of purchased businesses for the period prior to acquisition: |
||||||||||||||||
ECP |
— | 0.04 | — | 0.08 | ||||||||||||
Other acquisitions |
0.01 | 0.03 | 0.03 | 0.07 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma earnings per share-basic (a) |
$ | 0.44 | $ | 0.39 | $ | 1.01 | $ | 0.86 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share-diluted, as reported |
$ | 0.43 | $ | 0.32 | $ | 0.97 | $ | 0.71 | ||||||||
Effect of purchased businesses for the period prior to acquisition: |
||||||||||||||||
ECP |
— | 0.04 | — | 0.07 | ||||||||||||
Other acquisitions |
0.01 | 0.03 | 0.03 | 0.07 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma earnings per share-diluted (a) |
$ | 0.44 | $ | 0.39 | $ | 1.00 | $ | 0.85 | ||||||||
|
|
|
|
|
|
|
|
(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 10. Restructuring and Acquisition Related Expenses
Refurbished Bumper and Wheel Restructuring
In the second quarter of 2012, we initiated a restructuring plan to improve the operational efficiency of our refurbished product operations and to reduce the cost structure of the related refurbished bumper and wheel product lines. As part of the restructuring plan, we are consolidating certain of our bumper and wheel refurbishing operations, with a focus on increasing output at the remaining operations to improve economies of scale. Restructuring costs include the write off of disposed assets, severance costs for termination of overlapping headcount, costs to move equipment and inventory, and excess facility costs. These costs are expensed as incurred, when the costs meet the criteria to be accrued, or, in the case of non-performing lease reserves, at the cease-use date of the facility. For the three and six months ended June 30, 2012, we incurred $1.1 million related to this restructuring plan. We are in the process of finalizing our restructuring plan, but currently anticipate we will incur up to an additional $0.5 million of expense to complete our plan in the second half of 2012.
Akzo Nobel Paint Business Integration
With our acquisition of the Akzo Nobel paint business, we completed certain restructuring activities to integrate the acquired paint distribution locations into our existing business. Our restructuring plan included 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. During the three and six month periods 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. While we substantially completed the integration activities related to the Akzo Nobel paint business acquisition in 2011, we may record adjustments to the excess facility reserves if we determine revisions are required to the underlying assumptions.
Other Acquisition Integration Plans
During the three and six month periods ended June 30, 2012, we incurred $1.1 million and $1.3 million, respectively, of restructuring and acquisition related expenses related to certain of our 2011 and 2012 acquisitions. Our integration activities included the closure of duplicate facilities, termination of employees in connection with the consolidation of overlapping facilities with our existing business, moving expenses, and other third party services directly related to our acquisitions. These integration activities were substantially completed as of June 30, 2012.
During the three and six month periods ended June 30, 2011, we incurred $0.3 million related the integration plan for our 2010 acquisition of Cross Canada. Our restructuring plan included the integration of Cross Canada into our existing Canadian operations, as well as the transition of certain corporate functions to our corporate headquarters and our field support center in Nashville. The integration plan related to the Cross Canada acquisition was substantially completed in 2011.
|
Note 11. 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, 2012 was 36.8% compared with 38.9% for the comparable prior year period. The effective income tax rate for the six months ended June 30, 2012 reflects the larger proportion of pretax income generated in lower rate jurisdictions, primarily as a result of the expansion of our international operations in the fourth quarter of 2011 through our acquisition of ECP.
|
Note 12. Segment and Geographic Information
We have four operating segments: Wholesale – North America; Wholesale – Europe; Self Service; and Heavy-Duty Truck. Our operations in North America, which include our Wholesale – North America, Self Service and Heavy-Duty Truck operating segments, are aggregated into one reportable segment because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Our Wholesale – Europe operating segment, formed with our acquisition of ECP effective October 1, 2011, marks our entry into the European automotive aftermarket business, and is presented as a separate reportable segment. Although the Wholesale – Europe operating segment shares many of the characteristics of our North American operations, including types of products offered, distribution methods, and procurement, we have provided separate financial information as we believe this data would be beneficial to users in understanding our results. Therefore, we present our reportable segments on a geographic basis.
The following table presents our financial performance, including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), and depreciation and amortization by reportable segment for the periods indicated (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue |
||||||||||||||||
North America |
$ | 841,335 | $ | 759,684 | $ | 1,712,419 | $ | 1,546,332 | ||||||||
Europe |
165,196 | — | 325,889 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
||||||||||||||||
North America |
$ | 109,687 | $ | 93,354 | $ | 241,875 | $ | 212,757 | ||||||||
Europe |
16,057 | — | 35,590 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total EBITDA |
$ | 125,744 | $ | 93,354 | $ | 277,465 | $ | 212,757 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Depreciation and Amortization |
||||||||||||||||
North America |
$ | 14,771 | $ | 12,871 | $ | 28,773 | $ | 24,797 | ||||||||
Europe |
2,418 | — | 4,673 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total depreciation and amortization |
$ | 17,189 | $ | 12,871 | $ | 33,446 | $ | 24,797 | ||||||||
|
|
|
|
|
|
|
|
EBITDA during the three and six months ended June 30, 2012 for our North American segment is inclusive of gains of $8.4 million and $16.7 million, respectively, resulting from lawsuit settlements with certain of our aftermarket product suppliers as discussed in Note 7, “Commitments and Contingencies.” Included within EBITDA of our European segment is a loss of $1.1 million and a gain of $0.2 million for the three and six month periods ended June 30, 2012, respectively, for the change in fair value of contingent consideration liabilities related to our ECP acquisition. Refer to Note 6, “Fair Value Measurements,” for further information on these changes in fair value of the contingent consideration obligations recorded in earnings during the periods.
The table below provides a reconciliation from EBITDA to Net Income (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
EBITDA |
$ | 125,744 | $ | 93,354 | $ | 277,465 | $ | 212,757 | ||||||||
Depreciation and amortization |
17,189 | 12,871 | 33,446 | 24,797 | ||||||||||||
Interest expense, net |
7,356 | 4,671 | 14,723 | 11,080 | ||||||||||||
Loss on debt extinguishment |
— | — | — | 5,345 | ||||||||||||
Provision for income taxes |
37,201 | 29,106 | 84,307 | 66,647 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 63,998 | $ | 46,706 | $ | 144,989 | $ | 104,888 | ||||||||
|
|
|
|
|
|
|
|
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment’s percentage of consolidated revenue. Segment EBITDA excludes depreciation, amortization, interest (including loss on debt extinguishment) and taxes. Loss on debt extinguishment is considered a component of interest in calculating EBITDA, as the write-off of debt issuance costs is similar to the treatment of debt issuance cost amortization.
The following table presents capital expenditures, which includes additions to property and equipment, by reportable segment (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Capital Expenditures |
||||||||||||||||
North America |
$ | 16,372 | $ | 24,447 | $ | 34,506 | $ | 42,540 | ||||||||
Europe |
3,914 | — | 7,109 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 20,286 | $ | 24,447 | $ | 41,615 | $ | 42,540 | |||||||||
|
|
|
|
|
|
|
|
The following table presents assets by reportable segment (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Receivables, net |
||||||||
North America |
$ | 249,407 | $ | 230,871 | ||||
Europe |
60,047 | 50,893 | ||||||
|
|
|
|
|||||
Total receivables, net |
309,454 | 281,764 | ||||||
|
|
|
|
|||||
Inventory |
||||||||
North America |
670,032 | 636,145 | ||||||
Europe |
128,775 | 100,701 | ||||||
|
|
|
|
|||||
Total inventory |
798,807 | 736,846 | ||||||
|
|
|
|
|||||
Property and Equipment, net |
||||||||
North America |
393,038 | 380,282 | ||||||
Europe |
50,527 | 43,816 | ||||||
|
|
|
|
|||||
Total property and equipment, net |
443,565 | 424,098 | ||||||
|
|
|
|
|||||
Other unallocated assets |
1,873,583 | 1,756,996 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,425,409 | $ | 3,199,704 | ||||
|
|
|
|
We report net trade receivables, inventories, and net property and equipment by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash, prepaid and other current and noncurrent assets, goodwill, intangibles and income taxes.
Our operations are primarily conducted in the U.S. Our European operations, which we started with the acquisition of ECP in the fourth quarter of 2011, are located in the U.K. Our operations in other countries include recycled and aftermarket operations in Canada, engine remanufacturing and bumper refurbishing operations in Mexico, and other alternative parts operations in Guatemala and Costa Rica.
The following table sets forth our revenue by geographic area (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue |
||||||||||||||||
United States |
$ | 789,346 | $ | 716,086 | $ | 1,610,311 | $ | 1,455,412 | ||||||||
United Kingdom |
165,196 | — | 325,889 | — | ||||||||||||
Other countries |
51,989 | 43,598 | 102,108 | 90,920 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | |||||||||
|
|
|
|
|
|
|
|
The following table sets forth our tangible long-lived assets by geographic area (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Long-lived Assets |
||||||||
United States |
$ | 372,978 | $ | 360,961 | ||||
United Kingdom |
50,527 | 43,816 | ||||||
Other countries |
20,060 | 19,321 | ||||||
|
|
|
|
|||||
$ | 443,565 | $ | 424,098 | |||||
|
|
|
|
The following table sets forth our revenue by product category (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Aftermarket, other new and refurbished products |
$ | 547,912 | $ | 356,202 | $ | 1,113,256 | $ | 737,318 | ||||||||
Recycled, remanufactured and related products and services |
323,669 | 269,700 | 649,373 | 545,482 | ||||||||||||
Other |
134,950 | 133,782 | 275,679 | 263,532 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | |||||||||
|
|
|
|
|
|
|
|
All of the product categories include revenue from our North American reportable segment, while our European segment, which is composed of ECP, an automotive aftermarket products distributor, generates revenue only from the sale of aftermarket products. Revenue from other sources includes scrap sales, bulk sales to mechanical remanufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. With our acquisition of a precious metals refining and reclamation business in the second quarter of 2012, revenue from other sources also includes the sales of precious metals harvested from various components, including certain of our salvage vehicle parts.
|
Revenue Recognition
The majority of our revenue is derived from the sale of vehicle parts. 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 recorded a reserve for estimated returns, discounts and allowances of approximately $24.3 million and $22.8 million at June 30, 2012 and December 31, 2011, 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 Consolidated Condensed Statements of Income and are shown as a current 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.
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, customer relationships and covenants not to compete.
The change in the carrying amount of goodwill during the six months ended June 30, 2012 is as follows (in thousands):
Balance as of January 1, 2012 |
$ | 1,476,063 | ||
Business acquisitions and adjustments to previously recorded goodwill |
98,907 | |||
Exchange rate effects |
3,635 | |||
|
|
|||
Balance as of June 30, 2012 |
$ | 1,578,605 | ||
|
|
The components of other intangibles are as follows (in thousands):
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
Trade names and trademarks |
$ | 116,493 | $ | (18,892 | ) | $ | 97,601 | $ | 115,954 | $ | (16,305 | ) | $ | 99,649 | ||||||||||
Customer relationships |
10,052 | (4,364 | ) | 5,688 | 10,050 | (3,065 | ) | 6,985 | ||||||||||||||||
Covenants not to compete |
3,426 | (1,138 | ) | 2,288 | 3,194 | (918 | ) | 2,276 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 129,971 | $ | (24,394 | ) | $ | 105,577 | $ | 129,198 | $ | (20,288 | ) | $ | 108,910 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks are amortized over a useful life ranging from 10 to 30 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. 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. Amortization expense for intangibles was approximately $4.2 million and $3.4 million during the six month periods ended June 30, 2012 and 2011, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2016 is $8.6 million, $7.8 million, $7.1 million, $6.4 million and $5.7 million, respectively.
Depreciation Expense
Included in Cost of Goods Sold on the Unaudited Consolidated Condensed Statements of Income is depreciation expense associated with our refurbishing, remanufacturing, and furnace operations and our distribution centers.
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 claim information to project future warranty claims activity. The changes in the warranty reserve during the six month period ended June 30, 2012 were as follows (in thousands):
Balance as of January 1, 2012 |
$ | 7,347 | ||
Warranty expense |
11,230 | |||
Warranty claims |
(12,059 | ) | ||
Business acquisitions |
645 | |||
|
|
|||
Balance as of June 30, 2012 |
$ | 7,163 | ||
|
|
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.
Recent Accounting Pronouncements
Effective January 1, 2012, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income” and ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” These ASUs eliminate the option to present the components of other comprehensive income in the statement of changes in stockholders’ equity. Instead, entities 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 amendments did not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. As a result, the adoption of this guidance did not affect our financial position, results of operations or cash flows. We have presented the components of net income, the components of other comprehensive income and total comprehensive income in two separate but consecutive statements.
Effective January 1, 2012, we adopted FASB ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This update clarifies 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. We applied the provisions of this ASU to our fair value measurements during the current year, however, the adoption did not have a material effect on our financial statements. Refer to Note 6, “Fair Value Measurements,” for the required disclosures.
|
Inventory consists of the following (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Aftermarket and refurbished products |
$ | 462,472 | $ | 445,787 | ||||
Salvage and remanufactured products |
336,335 | 291,059 | ||||||
|
|
|
|
|||||
$ | 798,807 | $ | 736,846 | |||||
|
|
|
|
The change in the carrying amount of goodwill during the six months ended June 30, 2012 is as follows (in thousands):
Balance as of January 1, 2012 |
$ | 1,476,063 | ||
Business acquisitions and adjustments to previously recorded goodwill |
98,907 | |||
Exchange rate effects |
3,635 | |||
|
|
|||
Balance as of June 30, 2012 |
$ | 1,578,605 | ||
|
|
The components of other intangibles are as follows (in thousands):
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net | Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||||||||||||
Trade names and trademarks |
$ | 116,493 | $ | (18,892 | ) | $ | 97,601 | $ | 115,954 | $ | (16,305 | ) | $ | 99,649 | ||||||||||
Customer relationships |
10,052 | (4,364 | ) | 5,688 | 10,050 | (3,065 | ) | 6,985 | ||||||||||||||||
Covenants not to compete |
3,426 | (1,138 | ) | 2,288 | 3,194 | (918 | ) | 2,276 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 129,971 | $ | (24,394 | ) | $ | 105,577 | $ | 129,198 | $ | (20,288 | ) | $ | 108,910 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the warranty reserve during the six month period ended June 30, 2012 were as follows (in thousands):
Balance as of January 1, 2012 |
$ | 7,347 | ||
Warranty expense |
11,230 | |||
Warranty claims |
(12,059 | ) | ||
Business acquisitions |
645 | |||
|
|
|||
Balance as of June 30, 2012 |
$ | 7,163 | ||
|
|
|
A summary of transactions in our stock-based compensation plans for the six months ended June 30, 2012 is as follows:
Shares Available For Grant |
RSUs | Stock Options | Restricted Stock | |||||||||||||||||||||||||
Number Outstanding |
Weighted Average Grant Date Fair Value |
Number Outstanding |
Weighted Average Exercise Price |
Number Outstanding |
Weighted Average Grant Date Fair Value |
|||||||||||||||||||||||
Balance, January 1, 2012 |
7,876,185 | 716,791 | $ | 23.59 | 6,539,046 | $ | 12.93 | 106,000 | $ | 18.98 | ||||||||||||||||||
Granted |
(752,205 | ) | 752,205 | 31.72 | — | — | — | — | ||||||||||||||||||||
Exercised |
— | — | — | (938,064 | ) | 10.78 | — | — | ||||||||||||||||||||
Vested |
— | (86,782 | ) | 24.14 | — | — | (43,000 | ) | 19.07 | |||||||||||||||||||
Cancelled |
112,764 | (34,419 | ) | 28.20 | (78,345 | ) | 16.29 | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance, June 30, 2012 |
7,236,744 | 1,347,795 | $ | 27.97 | 5,522,637 | $ | 13.25 | 63,000 | $ | 18.92 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of pre-tax stock-based compensation expense are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
RSUs |
$ | 2,019 | $ | 891 | $ | 4,083 | $ | 1,769 | ||||||||
Stock options |
1,721 | 2,057 | 3,442 | 4,147 | ||||||||||||
Restricted stock |
228 | 228 | 453 | 453 | ||||||||||||
Stock issued to non-employee directors |
— | 84 | — | 233 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense |
$ | 3,968 | $ | 3,260 | $ | 7,978 | $ | 6,602 | ||||||||
|
|
|
|
|
|
|
|
The following table sets forth the classification of 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, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of goods sold |
$ | 96 | $ | 79 | $ | 199 | $ | 168 | ||||||||
Facility and warehouse expenses |
609 | 623 | 1,303 | 1,234 | ||||||||||||
Selling, general and administrative expenses |
3,263 | 2,558 | 6,476 | 5,200 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
3,968 | 3,260 | 7,978 | 6,602 | |||||||||||||
Income tax benefit |
(1,548 | ) | (1,252 | ) | (3,112 | ) | (2,555 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation expense, net of tax |
$ | 2,420 | $ | 2,008 | $ | 4,866 | $ | 4,047 | ||||||||
|
|
|
|
|
|
|
|
As of June 30, 2012, unrecognized compensation expense related to unvested RSUs, stock options and restricted stock is expected to be recognized as follows (in thousands):
RSUs | Stock Options |
Restricted Stock |
Total | |||||||||||||
Remainder of 2012 |
$ | 4,094 | $ | 3,441 | $ | 460 | $ | 7,995 | ||||||||
2013 |
8,332 | 4,722 | 208 | 13,262 | ||||||||||||
2014 |
8,268 | 3,116 | 139 | 11,523 | ||||||||||||
2015 |
8,063 | 78 | — | 8,141 | ||||||||||||
2016 |
4,498 | — | — | 4,498 | ||||||||||||
2017 |
143 | — | — | 143 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total unrecognized compensation expense |
$ | 33,398 | $ | 11,357 | $ | 807 | $ | 45,562 | ||||||||
|
|
|
|
|
|
|
|
|
Long-Term Obligations consist of the following (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Senior secured debt financing facility: |
||||||||
Term loans payable |
$ | 431,875 | $ | 240,625 | ||||
Revolving credit facility |
508,288 | 660,730 | ||||||
Notes payable through October 2018 at weighted average interest rates of 1.9% and 2.0%, respectively |
46,378 | 38,338 | ||||||
Other long-term debt at weighted average interest rates of 2.4% and 3.2%, respectively |
13,905 | 16,383 | ||||||
|
|
|
|
|||||
1,000,446 | 956,076 | |||||||
Less current maturities |
(46,379 | ) | (29,524 | ) | ||||
|
|
|
|
|||||
$ | 954,067 | $ | 926,552 | |||||
|
|
|
|
|
The following table summarizes the terms of our interest rate swap agreements as of June 30, 2012:
Notional Amount |
Effective Date |
Maturity Date |
Fixed Interest Rate* |
|||
USD $250,000,000 |
October 14, 2010 | October 14, 2015 | 3.06% | |||
USD $100,000,000 |
April 14, 2011 | October 14, 2013 | 2.61% | |||
USD $60,000,000 |
November 30, 2011 | October 31, 2016 | 2.70% | |||
USD $60,000,000 |
November 30, 2011 | October 31, 2016 | 2.69% | |||
USD $50,000,000 |
December 30, 2011 | December 30, 2016 | 2.69% | |||
GBP £50,000,000 |
November 30, 2011 | October 30, 2016 | 2.86% | |||
CAD $25,000,000 |
December 30, 2011 | March 24, 2016 | 2.92% |
* | Includes applicable margin of 1.50% per annum on LIBOR or CDOR-based debt in effect as of June 30, 2012 under the Credit Agreement. |
Changes in Accumulated Other Comprehensive Income (Loss) related to our interest rate swap agreements were as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Beginning balance |
$ | (6,540 | ) | $ | 4,289 | $ | (6,890 | ) | $ | 2,176 | ||||||
Pretax loss |
(6,718 | ) | (7,908 | ) | (7,709 | ) | (6,427 | ) | ||||||||
Income tax benefit |
2,333 | 2,847 | 2,722 | 2,314 | ||||||||||||
Reversal of unrealized loss |
1,636 | 1,224 | 3,112 | 3,270 | ||||||||||||
Reversal of deferred income taxes |
(592 | ) | (440 | ) | (1,116 | ) | (1,177 | ) | ||||||||
Hedge ineffectiveness |
— | — | — | (225 | ) | |||||||||||
Income tax benefit |
— | — | — | 81 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | (9,881 | ) | $ | 12 | $ | (9,881 | ) | $ | 12 | ||||||
|
|
|
|
|
|
|
|
|
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 June 30, 2012 and December 31, 2011 (in thousands):
Balance as of June 30, 2012 |
Fair Value Measurements as of June 30, 2012 | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
Cash surrender value of life insurance |
$ | 17,597 | $ | — | $ | 17,597 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 17,597 | $ | — | $ | 17,597 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contingent consideration liabilities |
$ | 88,037 | $ | — | $ | — | $ | 88,037 | ||||||||
Deferred compensation liabilities |
17,706 | — | 17,706 | — | ||||||||||||
Interest rate swaps |
15,268 | — | 15,268 | — | ||||||||||||
Foreign currency forwards |
105 | — | 105 | — | ||||||||||||
Commodity forwards |
83 | — | 83 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
$ | 121,199 | $ | — | $ | 33,162 | $ | 88,037 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of December 31, 2011 |
Fair Value Measurements as of December 31, 2011 | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
Cash surrender value of life insurance |
$ | 13,413 | $ | — | $ | 13,413 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 13,413 | $ | — | $ | 13,413 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Contingent consideration liabilities |
$ | 82,382 | $ | — | $ | — | $ | 82,382 | ||||||||
Deferred compensation liabilities |
14,071 | — | 14,071 | — | ||||||||||||
Interest rate swaps |
10,576 | — | 10,576 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
$ | 107,029 | $ | — | $ | 24,647 | $ | 82,382 | ||||||||
|
|
|
|
|
|
|
|
The significant unobservable inputs used in the fair value measurements of our Level 3 contingent consideration liabilities were as follows:
Unobservable Input |
June 30, 2012 Weighted Average |
December 31,
2011 Weighted Average |
||||||
Probability of achieving payout targets |
79.8 | % | 78.1 | % | ||||
Discount rate |
6.5 | % | 3.0 | % |
Changes in the fair value of our contingent consideration obligations for the three and six month periods ended June 30, 2012 and 2011 were as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Beginning balance |
$ | 82,909 | $ | 2,600 | $ | 82,382 | $ | 2,000 | ||||||||
Contingent consideration liabilities recorded for business acquisitions |
5,433 | — | 5,540 | 600 | ||||||||||||
Payments |
— | — | (600 | ) | — | |||||||||||
Loss (gain) included in earnings |
1,240 | (1,615 | ) | (105 | ) | (1,615 | ) | |||||||||
Exchange rate effects |
(1,545 | ) | — | 820 | — | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 88,037 | $ | 985 | $ | 88,037 | $ | 985 | ||||||||
|
|
|
|
|
|
|
|
|
The future minimum lease commitments under these leases at June 30, 2012 are as follows (in thousands):
Six months ending December 31, 2012 |
$ | 45,082 | ||
Years ending December 31: |
||||
2013 |
84,992 | |||
2014 |
73,623 | |||
2015 |
64,206 | |||
2016 |
49,962 | |||
2017 |
38,322 | |||
Thereafter |
98,691 | |||
|
|
|||
Future Minimum Lease Payments |
$ | 454,878 | ||
|
|
|
The purchase price allocations for the acquisitions completed during the six months ended June 30, 2012 and the year ended December 31, 2011 are as follows (in thousands):
Six Months Ended June 30, 2012 (Preliminary) |
Year Ended December 31, 2011 | |||||||||||||||
ECP (Preliminary) |
Other Acquisitions (Preliminary) |
Total (Preliminary) |
||||||||||||||
Receivables |
$ | 4,989 | $ | 54,225 | $ | 23,538 | $ | 77,763 | ||||||||
Receivable reserves |
(505 | ) | (3,832 | ) | (1,121 | ) | (4,953 | ) | ||||||||
Inventory |
30,109 | 93,835 | 59,846 | 153,681 | ||||||||||||
Prepaid expenses and other current assets |
258 | 3,189 | 2,820 | 6,009 | ||||||||||||
Property and equipment |
7,779 | 41,830 | 10,614 | 52,444 | ||||||||||||
Goodwill |
98,907 | 337,031 | 105,177 | 442,208 | ||||||||||||
Other intangibles |
479 | 39,583 | 7,683 | 47,266 | ||||||||||||
Other assets |
102 | 13 | 9,420 | 9,433 | ||||||||||||
Deferred income taxes |
(657 | ) | (13,218 | ) | 7,235 | (5,983 | ) | |||||||||
Current liabilities assumed |
(11,535 | ) | (135,390 | ) | (17,257 | ) | (152,647 | ) | ||||||||
Debt assumed |
— | (13,564 | ) | — | (13,564 | ) | ||||||||||
Other noncurrent liabilities assumed |
— | — | (619 | ) | (619 | ) | ||||||||||
Contingent consideration liabilities |
(5,540 | ) | (77,539 | ) | (3,700 | ) | (81,239 | ) | ||||||||
Other purchase price obligations |
— | (4,136 | ) | (4,510 | ) | (8,646 | ) | |||||||||
Notes issued |
(7,936 | ) | (28,302 | ) | (5,917 | ) | (34,219 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash used in acquisitions, net of cash acquired |
$ | 116,450 | $ | 293,725 | $ | 193,209 | $ | 486,934 | ||||||||
|
|
|
|
|
|
|
|
The pro forma adjustments are 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, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue, as reported |
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | ||||||||
Revenue of purchased businesses for the period prior to acquisition: |
||||||||||||||||
ECP |
— | 134,921 | — | 265,498 | ||||||||||||
Other acquisitions |
25,573 | 93,193 | 64,337 | 194,741 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma revenue |
$ | 1,032,104 | $ | 987,798 | $ | 2,102,645 | $ | 2,006,571 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income, as reported |
$ | 63,998 | $ | 46,706 | $ | 144,989 | $ | 104,888 | ||||||||
Net income of purchased businesses for the period prior to acquisition, including pro forma purchase accounting adjustments: |
||||||||||||||||
ECP |
— | 6,019 | — | 10,952 | ||||||||||||
Other acquisitions |
1,335 | 4,658 | 4,469 | 9,999 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma net income |
$ | 65,333 | $ | 57,383 | $ | 149,458 | $ | 125,839 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share-basic, as reported |
$ | 0.43 | $ | 0.32 | $ | 0.98 | $ | 0.72 | ||||||||
Effect of purchased businesses for the period prior to acquisition: |
||||||||||||||||
ECP |
— | 0.04 | — | 0.08 | ||||||||||||
Other acquisitions |
0.01 | 0.03 | 0.03 | 0.07 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma earnings per share-basic (a) |
$ | 0.44 | $ | 0.39 | $ | 1.01 | $ | 0.86 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share-diluted, as reported |
$ | 0.43 | $ | 0.32 | $ | 0.97 | $ | 0.71 | ||||||||
Effect of purchased businesses for the period prior to acquisition: |
||||||||||||||||
ECP |
— | 0.04 | — | 0.07 | ||||||||||||
Other acquisitions |
0.01 | 0.03 | 0.03 | 0.07 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Pro forma earnings per share-diluted (a) |
$ | 0.44 | $ | 0.39 | $ | 1.00 | $ | 0.85 | ||||||||
|
|
|
|
|
|
|
|
(a) | The sum of the individual earnings per share amounts may not equal the total due to rounding. |
|
The following table presents our financial performance, including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), and depreciation and amortization by reportable segment for the periods indicated (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue |
||||||||||||||||
North America |
$ | 841,335 | $ | 759,684 | $ | 1,712,419 | $ | 1,546,332 | ||||||||
Europe |
165,196 | — | 325,889 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
||||||||||||||||
North America |
$ | 109,687 | $ | 93,354 | $ | 241,875 | $ | 212,757 | ||||||||
Europe |
16,057 | — | 35,590 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total EBITDA |
$ | 125,744 | $ | 93,354 | $ | 277,465 | $ | 212,757 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Depreciation and Amortization |
||||||||||||||||
North America |
$ | 14,771 | $ | 12,871 | $ | 28,773 | $ | 24,797 | ||||||||
Europe |
2,418 | — | 4,673 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total depreciation and amortization |
$ | 17,189 | $ | 12,871 | $ | 33,446 | $ | 24,797 | ||||||||
|
|
|
|
|
|
|
|
The table below provides a reconciliation from EBITDA to Net Income (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
EBITDA |
$ | 125,744 | $ | 93,354 | $ | 277,465 | $ | 212,757 | ||||||||
Depreciation and amortization |
17,189 | 12,871 | 33,446 | 24,797 | ||||||||||||
Interest expense, net |
7,356 | 4,671 | 14,723 | 11,080 | ||||||||||||
Loss on debt extinguishment |
— | — | — | 5,345 | ||||||||||||
Provision for income taxes |
37,201 | 29,106 | 84,307 | 66,647 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 63,998 | $ | 46,706 | $ | 144,989 | $ | 104,888 | ||||||||
|
|
|
|
|
|
|
|
The following table presents capital expenditures, which includes additions to property and equipment, by reportable segment (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Capital Expenditures |
||||||||||||||||
North America |
$ | 16,372 | $ | 24,447 | $ | 34,506 | $ | 42,540 | ||||||||
Europe |
3,914 | — | 7,109 | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 20,286 | $ | 24,447 | $ | 41,615 | $ | 42,540 | |||||||||
|
|
|
|
|
|
|
|
The following table presents assets by reportable segment (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Receivables, net |
||||||||
North America |
$ | 249,407 | $ | 230,871 | ||||
Europe |
60,047 | 50,893 | ||||||
|
|
|
|
|||||
Total receivables, net |
309,454 | 281,764 | ||||||
|
|
|
|
|||||
Inventory |
||||||||
North America |
670,032 | 636,145 | ||||||
Europe |
128,775 | 100,701 | ||||||
|
|
|
|
|||||
Total inventory |
798,807 | 736,846 | ||||||
|
|
|
|
|||||
Property and Equipment, net |
||||||||
North America |
393,038 | 380,282 | ||||||
Europe |
50,527 | 43,816 | ||||||
|
|
|
|
|||||
Total property and equipment, net |
443,565 | 424,098 | ||||||
|
|
|
|
|||||
Other unallocated assets |
1,873,583 | 1,756,996 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,425,409 | $ | 3,199,704 | ||||
|
|
|
|
The following table sets forth our revenue by geographic area (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue |
||||||||||||||||
United States |
$ | 789,346 | $ | 716,086 | $ | 1,610,311 | $ | 1,455,412 | ||||||||
United Kingdom |
165,196 | — | 325,889 | — | ||||||||||||
Other countries |
51,989 | 43,598 | 102,108 | 90,920 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | |||||||||
|
|
|
|
|
|
|
|
The following table sets forth our tangible long-lived assets by geographic area (in thousands):
June 30, 2012 |
December 31, 2011 |
|||||||
Long-lived Assets |
||||||||
United States |
$ | 372,978 | $ | 360,961 | ||||
United Kingdom |
50,527 | 43,816 | ||||||
Other countries |
20,060 | 19,321 | ||||||
|
|
|
|
|||||
$ | 443,565 | $ | 424,098 | |||||
|
|
|
|
The following table sets forth our revenue by product category (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Aftermarket, other new and refurbished products |
$ | 547,912 | $ | 356,202 | $ | 1,113,256 | $ | 737,318 | ||||||||
Recycled, remanufactured and related products and services |
323,669 | 269,700 | 649,373 | 545,482 | ||||||||||||
Other |
134,950 | 133,782 | 275,679 | 263,532 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,006,531 | $ | 759,684 | $ | 2,038,308 | $ | 1,546,332 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|