LKQ-2013.9.30-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________ 
FORM 10-Q
________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to
Commission File Number: 000-50404
________________________ 
LKQ CORPORATION
(Exact name of registrant as specified in its charter)
________________________ 
DELAWARE
 
36-4215970
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
500 WEST MADISON STREET,
SUITE 2800, CHICAGO, IL
 
60661
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (312) 621-1950
________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
At October 25, 2013, the registrant had issued and outstanding an aggregate of 300,620,041 shares of Common Stock.
 




PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements.

LKQ CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Condensed Balance Sheets
(In thousands, except share and per share data)
 
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Current Assets:
 
 
 
Cash and equivalents
$
107,337

 
$
59,770

Receivables, net
438,800

 
311,808

Inventory
1,018,169

 
900,803

Deferred income taxes
53,129

 
53,485

Prepaid income taxes
13,825

 
29,537

Prepaid expenses and other current assets
44,391

 
28,948

Total Current Assets
1,675,651

 
1,384,351

Property and Equipment, net
531,897

 
494,379

Intangible Assets:
 
 
 
Goodwill
1,920,916

 
1,690,284

Other intangibles, net
154,429

 
106,715

Other Assets
78,166

 
47,727

Total Assets
$
4,361,059

 
$
3,723,456

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
284,900

 
$
219,335

Accrued expenses:
 
 
 
Accrued payroll-related liabilities
66,366

 
44,400

Other accrued expenses
146,641

 
90,422

Income taxes payable
16,473

 
2,748

Contingent consideration liabilities
49,275

 
42,255

Other current liabilities
17,735

 
17,068

Current portion of long-term obligations
61,123

 
71,716

Total Current Liabilities
642,513

 
487,944

Long-Term Obligations, Excluding Current Portion
1,250,932

 
1,046,762

Deferred Income Taxes
118,693

 
102,275

Contingent Consideration Liabilities
5,210

 
47,754

Other Noncurrent Liabilities
89,605

 
74,627

Commitments and Contingencies

 

Stockholders’ Equity:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 and 500,000,000 shares authorized, 300,548,111 and 297,810,896 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
3,005

 
2,978

Additional paid-in capital
996,248

 
950,338

Retained earnings
1,243,778

 
1,010,019

Accumulated other comprehensive income
11,075

 
759

Total Stockholders’ Equity
2,254,106

 
1,964,094

Total Liabilities and Stockholders’ Equity
$
4,361,059

 
$
3,723,456


See notes to unaudited consolidated condensed financial statements.
2




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Income
(In thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
1,298,094

 
$
1,016,707

 
$
3,745,839

 
$
3,055,015

Cost of goods sold
780,187

 
607,002

 
2,216,110

 
1,775,996

Gross margin
517,907

 
409,705

 
1,529,729

 
1,279,019

Facility and warehouse expenses
108,349

 
86,739

 
311,480

 
254,039

Distribution expenses
109,593

 
93,652

 
320,033

 
277,391

Selling, general and administrative expenses
153,546

 
121,049

 
436,614

 
364,461

Restructuring and acquisition related expenses
2,206

 
116

 
7,391

 
2,558

Depreciation and amortization
20,818

 
16,715

 
57,850

 
46,961

Operating income
123,395

 
91,434

 
396,361

 
333,609

Other expense (income):
 
 
 
 
 
 
 
Interest expense, net
15,200

 
7,964

 
36,287

 
22,687

Loss on debt extinguishment




2,795



Change in fair value of contingent consideration liabilities
712

 
1,892

 
1,765

 
1,787

Other income, net
(1,562
)
 
(1,674
)
 
(1,737
)
 
(3,413
)
Total other expense, net
14,350

 
8,182

 
39,110

 
21,061

Income before provision for income taxes
109,045

 
83,252

 
357,251

 
312,548

Provision for income taxes
35,600

 
29,204

 
123,492

 
113,511

Net income
$
73,445

 
$
54,048

 
$
233,759

 
$
199,037

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.18

 
$
0.78

 
$
0.67

Diluted
$
0.24

 
$
0.18

 
$
0.77

 
$
0.66



Unaudited Consolidated Condensed Statements of Comprehensive Income
(In thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
73,445

 
$
54,048

 
$
233,759

 
$
199,037

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
28,514

 
10,182

 
6,330

 
12,518

Net change in unrecognized gains (losses) on derivative instruments, net of tax
625

 
(1,242
)
 
3,986

 
(4,233
)
Total other comprehensive income
29,139

 
8,940

 
10,316

 
8,285

Total comprehensive income
$
102,584

 
$
62,988

 
$
244,075

 
$
207,322


See notes to unaudited consolidated condensed financial statements.
3




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Cash Flows
(In thousands)
 
 
Nine Months Ended
 
September 30,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
233,759

 
$
199,037

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
61,868

 
51,574

Stock-based compensation expense
16,292

 
11,976

Excess tax benefit from stock-based payments
(15,998
)
 
(11,071
)
Other
7,424

 
3,961

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Receivables
(35,287
)
 
(12,394
)
Inventory
(18,207
)
 
(47,669
)
Prepaid income taxes/income taxes payable
40,551

 
2,688

Accounts payable
1,641

 
(7,892
)
Other operating assets and liabilities
48,886

 
(8,138
)
Net cash provided by operating activities
340,929

 
182,072

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(61,126
)
 
(60,636
)
Proceeds from sales of property and equipment
1,459

 
692

Investment in unconsolidated subsidiary
(9,136
)
 

Acquisitions, net of cash acquired
(395,974
)
 
(133,123
)
Net cash used in investing activities
(464,777
)
 
(193,067
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
13,647

 
14,187

Excess tax benefit from stock-based payments
15,998

 
11,071

Debt issuance costs
(16,912
)
 
(175
)
Proceeds from issuance of senior notes
600,000

 

Borrowings under revolving credit facility
399,758

 
500,087

Repayments under revolving credit facility
(745,313
)
 
(747,851
)
Borrowings under term loans
35,000

 
200,000

Repayments under term loans
(11,250
)
 
(14,375
)
Borrowings under receivables securitization facility
41,500

 
77,272

Repayments under receivables securitization facility
(111,500
)
 

Repayments of other long-term debt
(19,518
)
 
(8,336
)
Payments of other obligations
(32,091
)
 
(600
)
Net cash provided by financing activities
169,319

 
31,280

Effect of exchange rate changes on cash and equivalents
2,096

 
682

Net increase in cash and equivalents
47,567

 
20,967

Cash and equivalents, beginning of period
59,770

 
48,247

Cash and equivalents, end of period
$
107,337

 
$
69,214

Supplemental disclosure of cash paid for:
 
 
 
Income taxes, net of refunds
$
82,536

 
$
110,911

Interest
22,853

 
20,823

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Notes payable and long-term obligations, including notes issued in connection with business acquisitions
$
10,728

 
$
8,272

Contingent consideration liabilities
3,854

 
5,540

Non-cash property and equipment additions
2,657

 
9,487


See notes to unaudited consolidated condensed financial statements.
4




LKQ CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Condensed Statements of Stockholders’ Equity
(In thousands)
 
Common Stock
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Shares
Issued
 
Amount
 
BALANCE, December 31, 2012
297,811

 
$
2,978

 
$
950,338

 
$
1,010,019

 
$
759

 
$
1,964,094

Net income

 

 

 
233,759

 

 
233,759

Other comprehensive income

 

 

 

 
10,316

 
10,316

Restricted stock units vested
594

 
6

 
(6
)
 

 

 

Stock-based compensation expense

 

 
16,292

 

 

 
16,292

Exercise of stock options
2,143

 
21

 
13,626

 

 

 
13,647

Excess tax benefit from stock-based payments

 

 
15,998

 

 

 
15,998

BALANCE, September 30, 2013
300,548

 
$
3,005

 
$
996,248

 
$
1,243,778

 
$
11,075

 
$
2,254,106



See notes to unaudited consolidated condensed financial statements.
5




LKQ CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements

Note 1.
Interim Financial Statements
The unaudited financial statements presented in this report represent the consolidation of LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying unaudited 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.
During the 2013 Annual Meeting of Stockholders in May 2013, our stockholders approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 500 million to 1 billion. The increased number of authorized shares is reflected on our Unaudited Consolidated Condensed Balance Sheet as of September 30, 2013.
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, 2012 filed with the SEC on March 1, 2013.

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, delivered to or picked up by customers and title has transferred, subject to an allowance for estimated returns, discounts and allowances that we estimate based upon historical information. We recorded a reserve for estimated returns, discounts and allowances of $30.5 million and $24.7 million at September 30, 2013 and December 31, 2012, 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. We recognize revenue from the sale of scrap, cores and other metals when title has transferred, which typically occurs upon delivery to the customer.
Receivables
We recorded a reserve for uncollectible accounts of $14.1 million and $9.5 million at September 30, 2013 and December 31, 2012, respectively.
Inventory
Inventory consists of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
Aftermarket and refurbished products
$
649,768

 
$
523,677

Salvage and remanufactured products
368,401

 
377,126

 
$
1,018,169

 
$
900,803

Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer relationships and covenants not to compete.

6



The change in the carrying amount of goodwill by reportable segment during the nine months ended September 30, 2013 is as follows (in thousands):
 
North America
 
Europe
 
Total
Balance as of January 1, 2013
$
1,339,831

 
$
350,453

 
$
1,690,284

Business acquisitions and adjustments to previously recorded goodwill
17,623

 
209,638

 
227,261

Exchange rate effects
(4,407
)
 
7,778

 
3,371

Balance as of September 30, 2013
$
1,353,047

 
$
567,869

 
$
1,920,916

The components of other intangibles are as follows (in thousands):
 
September 30, 2013
 
December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Trade names and trademarks
$
144,254

 
$
(26,167
)
 
$
118,087

 
$
118,422

 
$
(21,599
)
 
$
96,823

Customer relationships
45,252

 
(10,616
)
 
34,636

 
14,426

 
(6,642
)
 
7,784

Covenants not to compete
3,822

 
(2,116
)
 
1,706

 
3,654

 
(1,546
)
 
2,108

 
$
193,328

 
$
(38,899
)
 
$
154,429

 
$
136,502

 
$
(29,787
)
 
$
106,715

During the nine months ended September 30, 2013, we recorded $24.7 million of trade names and $25.3 million of customer relationships for our acquisition of Sator Beheer B.V. ("Sator") as discussed in Note 9, "Business Combinations." 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 benefited (5 to 15 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 $9.0 million and $7.1 million during the nine month periods ended September 30, 2013 and 2012, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2017 is $13.0 million, $14.2 million, $12.8 million, $11.4 million and $10.5 million, respectively.
Investment in Unconsolidated Subsidiary
In August 2013, we entered into an agreement with Suncorp Group, a leading general insurance group in Australia and New Zealand, to develop an alternative vehicle replacement parts business in those countries. We hold a 49% equity interest in the entity and will contribute our experience to help establish automotive parts recycling operations and to facilitate the procurement of aftermarket parts; Suncorp Group holds a 51% equity interest and will supply salvage vehicles to the venture as well as assist in establishing relationships with repair shops as customers. We are accounting for our interest in this subsidiary using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. The total of our investment in the equity-method investee is included within Other Assets on our Unaudited Consolidated Condensed Balance Sheets. As of September 30, 2013, the carrying value of our investment in this unconsolidated subsidiary was $9.3 million. Our equity in the net earnings of the investee for the three months ended September 30, 2013 was not material.
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 also provide a limited lifetime warranty for certain of our aftermarket products. We record the estimated warranty costs at the time of sale using historical warranty claim information to project future warranty claims activity. The changes in the warranty reserve during the nine month period ended September 30, 2013 were as follows (in thousands):
 
Balance as of January 1, 2013
$
10,574

Warranty expense
22,652

Warranty claims
(21,109
)
Balance as of September 30, 2013
$
12,117


7



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, 2013, we adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The update does not change the items reported in other comprehensive income or when an item of other comprehensive income is reclassified to net income. As this guidance only revises the presentation and disclosures related to the reclassification of items out of accumulated other comprehensive income, the adoption of this guidance did not affect our financial position, results of operations or cash flows. See Note 12, "Accumulated Other Comprehensive Income" for the additional 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").
We have granted RSUs, stock options, and restricted stock under the Equity Incentive Plan. These awards vest over periods of up to 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.
In March 2013, the Compensation Committee approved the cancellation of 671,400 unvested RSUs held by our executive officers and approved the issuance of 946,800 RSUs containing both a performance-based vesting condition and a time-based vesting condition.  Of the 946,800 RSUs, 671,400 were granted as a replacement of the canceled RSUs and include a performance-based condition that the Company reports positive diluted earnings per share, subject to certain adjustments, during the year ending December 31, 2013.  In addition, these RSUs retain the same remaining time-based vesting conditions as the canceled RSUs (vesting in equal tranches each six months beginning July 2013 through either January 2016 or January 2017).  The remaining 275,400 RSUs granted in March 2013 include a performance-based condition that the Company reports positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date.  In addition, these RSUs include a time-based vesting condition, vesting in equal tranches each six months beginning July 2013 through January 2016. In all cases, both conditions must be met before any RSUs vest. If the applicable performance-based condition of an RSU is not met, the RSU is forfeited.  If and when the performance-based condition is met, all applicable RSUs that had previously met the time-based vesting condition will vest immediately and the remaining RSUs will vest according to the remaining schedule of the time-based condition. 
A summary of transactions in our stock-based compensation plans for the nine months ended September 30, 2013 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, 2013
14,643,932

 
2,351,362

 
$
14.02

 
9,355,070

 
$
6.90

 
116,000

 
$
9.47

Granted
(924,312
)
 
924,312

 
22.18

 

 

 

 

Exercised

 

 

 
(2,143,544
)
 
6.37

 

 

Vested

 
(593,671
)
 
15.04

 

 

 
(86,000
)
 
9.54

Canceled
177,174

 
(97,254
)
 
16.14

 
(79,920
)
 
8.80

 

 

Balance, September 30, 2013
13,896,794

 
2,584,749

 
$
16.63

 
7,131,606

 
$
7.04

 
30,000

 
$
9.30


8



The RSUs containing a performance-based vesting condition that were granted in replacement of canceled RSUs were accounted for as a modification of the original awards, and therefore are not reflected as grants or cancellations in the table above.
The fair value of RSUs is based on the market price of LKQ stock on the grant date. When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of historical forfeitures. For valuing RSUs granted during the nine month period ended September 30, 2013, we used forfeiture rates of 10% for grants to employees and 0% for grants to non-employee directors and executive officers. The fair value of RSUs that vested during the nine months ended September 30, 2013 was approximately $14.3 million.
For the 2013 RSU grants that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense under the accelerated attribution method, pursuant to which expense is recognized over the requisite service period for each separate vesting tranche of the award. For the RSUs that were canceled and replaced, the fair values of the RSUs immediately before and after the modification were the same. As a result, there was no charge recorded in the nine months ended September 30, 2013 and the expense for these RSUs was continued at the grant date fair value. During the three and nine months ended September 30, 2013, we recognized $2.3 million and $6.0 million, respectively, of stock-based compensation expense related to the RSUs containing a performance-based vesting condition. For all other awards, which are subject to only a time-based vesting condition, we recognize compensation expense on a straight-line basis over the requisite service period of the entire award.
The components of pre-tax stock-based compensation expense are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
RSUs
$
4,559

 
$
2,048

 
$
12,674

 
$
6,131

Stock options
1,124

 
1,720

 
3,457

 
5,162

Restricted stock
47

 
230

 
161

 
683

Total stock-based compensation expense
$
5,730

 
$
3,998

 
$
16,292

 
$
11,976

The following table sets forth the classification of total stock-based compensation expense included in our Unaudited Consolidated Condensed Statements of Income (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Cost of goods sold
$
98

 
$
99

 
$
294

 
$
298

Facility and warehouse expenses
687

 
648

 
2,058

 
1,951

Selling, general and administrative expenses
4,945

 
3,251

 
13,940

 
9,727

 
5,730

 
3,998

 
16,292

 
11,976

Income tax benefit
(2,235
)
 
(1,559
)
 
(6,354
)
 
(4,671
)
Total stock-based compensation expense, net of tax
$
3,495

 
$
2,439

 
$
9,938

 
$
7,305

We have not capitalized any stock-based compensation costs during either of the nine month periods ended September 30, 2013 or 2012.
As of September 30, 2013, 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 2013
$
4,459

 
$
1,123

 
$
47

 
$
5,629

2014
12,829

 
3,007

 
139

 
15,975

2015
9,421

 
75

 

 
9,496

2016
5,673

 

 

 
5,673

2017
2,575

 

 

 
2,575

2018
96

 

 

 
96

Total unrecognized compensation expense
$
35,053

 
$
4,205

 
$
186

 
$
39,444


9




Our stock-based compensation expense for the remainder of 2013 related to the RSUs containing a performance-based vesting condition is expected to be $2.3 million.

Note 4.
Long-Term Obligations
Long-Term Obligations consist of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
Senior secured credit agreement:
 
 
 
Term loans payable
$
444,375

 
$
420,625

Revolving credit facility
199,831

 
553,964

Senior notes
600,000

 

Receivables securitization facility
10,000

 
80,000

Notes payable through October 2018 at weighted average interest rates of 1.8% and 1.7%, respectively
38,941

 
42,398

Other long-term debt at weighted average interest rates of 3.5% and 3.3%, respectively
18,908

 
21,491

 
1,312,055

 
1,118,478

Less current maturities
(61,123
)
 
(71,716
)
 
$
1,250,932

 
$
1,046,762

Senior Secured Credit Agreement
On May 3, 2013, we entered into an amended and restated credit agreement (the "Credit Agreement") with the several lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, Bank of America N.A., as syndication agent, The Bank of Tokyo-Mitsubishi UFJ, LTD and RBS Citizens, N.A., as co-documentation agents, and Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Bank of Tokyo-Mitsubishi UFJ, LTD and RBS Citizens, N.A., as joint lead arrangers and joint bookrunners. The Credit Agreement retains many of the terms of the Company's amended and restated credit agreement dated September 30, 2011 (the "Original Credit Agreement") while also modifying certain terms to (1) extend the maturity date by approximately two years to May 3, 2018; (2) increase the total availability under the Credit Agreement from $1.4 billion to $1.8 billion (composed of $1.2 billion in the revolving credit facility's multicurrency component, $150 million in the revolving credit facility's US dollar component, and $450 million of term loans; (3) increase the amount of letters of credit that may be issued under the revolving credit facility to $150 million from $125 million; (4) raise the amount of swing line loans available under the revolving credit facility to $50 million from $25 million; (5) increase the maximum net leverage ratio covenant; (6) add certain subsidiaries as additional borrowers under the revolving credit facility; and (7) make other immaterial or clarifying modifications and amendments to the terms of the Original Credit Agreement. The Credit Agreement allows the Company to increase the amount of the revolving credit facility or obtain incremental term loans up to the greater of $400 million or the amount that may be borrowed while maintaining a senior secured leverage ratio of less than or equal to 2.50 to 1.00, subject to the agreement of the lenders. The proceeds of the Credit Agreement were used to repay amounts outstanding under the Original Credit Agreement, to pay fees related to the amendment and restatement, and for general corporate purposes.    
Amounts under the revolving credit facility are due and payable upon maturity of the Credit Agreement on May 3, 2018. Amounts under the initial and additional term borrowings are due and payable in quarterly installments equal to 1.25% of the original principal amount beginning on September 30, 2013, with the remaining balance due and payable on the maturity date of the Credit Agreement. We are required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds are not reinvested within twelve months. We also have the option to prepay outstanding amounts under the Credit Agreement without penalty.    
The Credit Agreement contains customary representations and warranties, and contains customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants under which we (i) may not exceed a maximum net leverage ratio of 3.50 to 1.00 (an increase from 3.00 to 1.00 under the Original Credit Agreement), 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 4.00 to 1.00 for the subsequent four fiscal quarters (an increase from 3.50 to 1.00 under the Original Credit Agreement) and (ii) are required to maintain a minimum interest coverage ratio of 3.00 to 1.00. We

10



were in compliance with all restrictive covenants under the Credit Agreement and the Original Credit Agreement as of September 30, 2013 and December 31, 2012, respectively.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on our net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 5, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding against the Credit Agreement at September 30, 2013 and December 31, 2012 were 3.08% and 2.85%, 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 net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, as well as a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears. Borrowings under the Credit Agreement totaled $644.2 million and $974.6 million at September 30, 2013 and December 31, 2012, respectively, of which $22.5 million and $31.9 million were classified as current maturities, respectively. As of September 30, 2013, there were letters of credit outstanding in the aggregate amount of $53.2 million. 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 September 30, 2013 was $1.1 billion.
Related to the execution of the Credit Agreement, we incurred $7.2 million of fees, of which $6.1 million were capitalized within Other Assets on our Unaudited Consolidated Condensed Balance Sheet and are amortized over the term of the agreement. The remaining $1.1 million of fees were expensed, together with $1.7 million of capitalized debt issuance costs related to the Original Credit Agreement, as a loss on debt extinguishment in our Unaudited Consolidated Condensed Statements of Income for the nine months ended September 30, 2013.
Senior Notes
On May 9, 2013, we completed an offering of $600 million aggregate principal amount of senior notes due May 15, 2023 (the "Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The proceeds from the offering were used to repay revolver borrowings under our Credit Agreement, including amounts borrowed to finance our acquisition of Sator in May 2013 as discussed further in Note 9, "Business Combinations," to pay related fees and expenses, and for general corporate purposes. The Notes are governed by the Indenture dated as of May 9, 2013 among LKQ Corporation, certain of our subsidiaries (the "Guarantors") and U.S. Bank National Association, as trustee.
The Notes bear interest at a rate of 4.75% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the Notes is payable in arrears on May 15 and November 15 of each year, beginning on November 15, 2013. The Notes are fully and unconditionally guaranteed by the Guarantors.
The Notes and the guarantees will be our and each Guarantor's senior unsecured obligations and will be subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Notes will be effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Notes to the extent of the assets of those subsidiaries.
The Notes will be redeemable, in whole or in part, at any time on or after May 15, 2018 on the redemption dates and at the respective redemption prices specified in the Indenture. In addition, we may redeem up to 35% of the notes before May 15, 2016 with the net cash proceeds from certain equity offerings. We may also redeem some or all of the notes before May 15, 2018 at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date, plus a "make whole" premium. We may be required to make an offer to purchase the notes upon the sale of certain assets, subject to certain exceptions, and upon a change of control.
In connection with the sale of the Notes, the Company entered into a Registration Rights Agreement dated as of May 9, 2013 (the "Registration Rights Agreement") with the Guarantors and the representative of the initial purchasers of the Notes identified therein. Under the Registration Rights Agreement, the Company and the Guarantors have agreed to (i) file an exchange offer registration statement to exchange the Notes for a new issue of debt securities registered under the Securities Act of 1933, with terms substantially identical to those of the Notes (except that the exchange notes will not contain terms with respect to additional interest, registration rights, or certain transfer restrictions); (ii) use their commercially reasonable efforts to consummate the exchange offer within 365 days after the issue date of the Notes; and (iii) in certain circumstances, file a shelf registration statement for the resale of the Notes. If the Company and the Guarantors fail to consummate the exchange offer within 365 days of the issue date of the Notes or otherwise fail to satisfy their registration obligations under the Registration Rights Agreement, then the annual interest rate on the Notes will increase by 0.25% per annum and by an additional 0.25% per annum for each subsequent 90-day period during which the registration default continues, up to a maximum additional interest rate of 1.0% per annum.

11



Fees incurred related to the offering of the Notes totaling $9.7 million were capitalized within Other Assets on our Unaudited Consolidated Condensed Balance Sheet and are amortized over the term of the Notes.
Receivables Securitization Facility
On September 28, 2012, we entered into a three year receivables securitization facility with The Bank of Tokyo-Mitsubishi UFJ, Ltd. ("BTMU"), as Administrative Agent. Under the facility, LKQ sells an ownership interest in certain receivables, related collections and security interests to BTMU for the benefit of conduit investors and/or financial institutions for up to $80 million in cash proceeds. Upon payment of the receivables by customers, rather than remitting to BTMU the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.     
The sale of the ownership interest in the receivables is accounted for as a secured borrowing in our Unaudited Consolidated Condensed Balance Sheets, under which the receivables included in the program collateralize the amounts invested by BTMU, the conduit investors and/or financial institutions. The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the investors. As of September 30, 2013 and December 31, 2012, $110.3 million and $116.9 million, respectively, of net receivables were collateral for the investment under the receivables facility.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) the London InterBank Offered Rate ("LIBOR") plus 1.25%, or (iii) base rates, and are payable monthly in arrears. Commercial paper rates will be the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate plus 1.25% or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. As of September 30, 2013 and December 31, 2012, the interest rate under the receivables facility was based on commercial paper rates and was 1.01% and 1.05%, respectively. The outstanding balances of $10.0 million and $80.0 million as of September 30, 2013 and December 31, 2012, respectively, were classified as long-term on the Unaudited Consolidated Condensed Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.


12



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, changing foreign exchange rates for certain foreign currency denominated transactions, and changes in metals prices. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
At September 30, 2013, 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 receive payment at a variable rate of interest based on LIBOR or the Canadian Dealer Offered Rate ("CDOR") for the respective currency of each interest rate swap agreement's notional amount. The effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense. Our interest rate swap contracts have maturity dates ranging from 2013 through 2016.
We hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of changing exchange rates on these future cash flows, as well as minimizing the impact of fluctuating exchange rates on our results of operations through the respective dates of settlement. Under the terms of the foreign currency forward contracts, we will sell euros and pounds sterling in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. The effective portion of the changes in fair value of the foreign currency forward contracts is recorded in Accumulated Other Comprehensive Income and reclassified to other income (expense) when the underlying transaction has an impact on earnings. These foreign currency forward contracts expire in 2014.
    
The following table summarizes the notional amounts and fair values of our designated cash flow hedges as of September 30, 2013 and December 31, 2012 (in thousands):
 
 
Notional Amount
 
Fair Value at September 30, 2013 (USD)
 
Fair Value at December 31, 2012 (USD)
 
 
September 30, 2013
 
December 31, 2012
 
Other Assets
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
 
Other Accrued Expenses
 
Other Noncurrent Liabilities
Interest rate swap agreements
 
 
 
 
 
 
 
 
 
 
USD denominated
 
$
420,000

 
$
520,000

 
$

 
$

 
$
8,631

 
$
705

 
$
12,791

GBP denominated
 
£
50,000

 
£
50,000

 

 

 
937

 

 
2,135

CAD denominated
 
C$
25,000

 
C$
25,000

 
52

 

 

 

 
12

Foreign currency forward contracts
 
 
 
 
 
 
 
 
 
 
EUR denominated
 
149,976

 

 

 
7,964

 

 

 

GBP denominated
 
£
70,000

 

 

 
7,439

 

 

 

Total cash flow hedges
 
 
$
52

 
$
15,403

 
$
9,568

 
$
705

 
$
14,938

 
While our derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis on our Unaudited Consolidated Condensed Balance Sheets. The impact of netting the fair values of these contracts would not have a material effect on our Unaudited Consolidated Condensed Balance Sheets at September 30, 2013 or December 31, 2012.
The activity related to our cash flow hedges is included in Note 12, "Accumulated Other Comprehensive Income." In May 2013, we repaid a portion of our variable rate U.S. dollar denominated credit agreement borrowings with the proceeds of our fixed rate senior notes, which resulted in one of our interest rate swap contracts, which expires in October 2013, no longer being designated as an effective cash flow hedge. As a result, we experienced an immaterial amount of hedge ineffectiveness during the three and nine month periods ended September 30, 2013. Hedge ineffectiveness related to our foreign currency forward contracts was immaterial to our results of operations during the three and nine months ended September 30, 2013. We expect future ineffectiveness related to our cash flow hedges will not have a material effect on our results of operations.
As of September 30, 2013, we estimate that $3.8 million of derivative losses (net of tax) included in Accumulated Other Comprehensive Income will be reclassified into our Unaudited Consolidated Condensed Statements of Income within the next 12 months.

13



Other Derivative Instruments
We hold other short-term derivative instruments, including foreign currency forward contracts and commodity forward contracts, to manage our exposure to variability in exchange rates related to purchases of inventory invoiced in a non-functional currency and to metals prices in certain of our operations. We have elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted to fair value through our results of operations at each balance sheet date, which could result in volatility in our earnings. The notional amount and fair value of these contracts at September 30, 2013 and December 31, 2012, along with the effect on our results of operations during each of the three and nine month periods ended September 30, 2013 and September 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 during the nine months ended September 30, 2013, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. In the second quarter of 2013, we entered into several foreign currency forward contracts as described in Note 5, "Derivative Instruments and Hedging Activities," which are recorded at fair market 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.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of September 30, 2013 and December 31, 2012 (in thousands):
 
Balance as of September 30, 2013
 
Fair Value Measurements as of September 30, 2013
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
23,847

 
$

 
$
23,847

 
$

Interest rate swaps
52

 
 
 
52

 
 
Total Assets
$
23,899

 
$

 
$
23,899

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
54,485

 
$

 
$

 
$
54,485

Deferred compensation liabilities
23,572

 

 
23,572

 

Foreign currency forward contracts
15,403

 

 
15,403

 

Interest rate swaps
9,606

 

 
9,606

 

Total Liabilities
$
103,066

 
$

 
$
48,581

 
$
54,485

 
Balance as of December 31, 2012
 
Fair Value Measurements as of December 31, 2012
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Cash surrender value of life insurance
$
19,492

 
$

 
$
19,492

 
$

Total Assets
$
19,492

 
$

 
$
19,492

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration liabilities
$
90,009

 
$

 
$

 
$
90,009

Deferred compensation liabilities
19,843

 

 
19,843

 

Interest rate swaps
15,643

 

 
15,643

 

Total Liabilities
$
125,495

 
$

 
$
35,486

 
$
90,009


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. The balance sheet classification of the

14



interest rate swaps and foreign currency forward contracts is presented in Note 5, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts using quoted market prices, investment allocations and reportable trades. We value our derivative instruments using a third party valuation model that performs a discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.
Our contingent consideration liabilities are related to certain of 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
September 30, 2013 Weighted Average
 
December 31, 2012 Weighted Average
Probability of achieving payout targets
71.7
%
 
79.7
%
Discount rate
6.5
%
 
6.6
%
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 liabilities for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Beginning balance
$
49,473

 
$
88,037

 
$
90,009

 
$
82,382

Contingent consideration liabilities recorded for business acquisitions
1,204

 

 
3,854

 
5,540

Payments

 

 
(38,349
)
 
(600
)
Loss included in earnings
712

 
1,892

 
1,765

 
1,787

Exchange rate effects
3,096

 
2,353

 
(2,794
)
 
3,173

Ending balance
$
54,485

 
$
92,282

 
$
54,485

 
$
92,282

The purchase price for our 2011 acquisition of Euro Car Parts Holdings Limited ("ECP") included contingent payments depending on the achievement of certain annual performance targets in 2012 and 2013. The performance target for 2012 was exceeded, and during the three months ended March 31, 2013, we paid £25.0 million, the maximum contingent payment, through a cash payment of $33.9 million (£22.4 million) and the issuance of notes for $3.9 million (£2.6 million). In April 2013, we amended the ECP contingent payment agreement, and as a result, we are obligated to pay Draco Limited, one of the sellers of ECP, approximately £27 million in the first quarter of 2014, which is equal to the maximum payment for Draco Limited's share of the contingent payment agreement for the 2013 performance period. The effect of the amendment did not have a material effect on our financial position or our results of operations, and we believe the amendment will not have a material effect on our future cash flows, as the fair value of the contingent payment liability prior to the amendment was

15



calculated assuming a high probability of achieving the performance targets for the maximum payment. See Note 9, "Business Combinations" for further information on the amendment.
Of the amounts included in earnings for the three and nine months ended September 30, 2013, $0.7 million and $2.8 million of losses, respectively, relate to contingent consideration liabilities outstanding as of September 30, 2013. The amounts included in earnings for the three and nine months ended September 30, 2012 included $0.9 million and $0.5 million of losses, respectively, related to contingent consideration liabilities outstanding as of September 30, 2013. The changes in the fair value of contingent consideration liabilities during the respective periods in 2013 and 2012 are a result of the quarterly assessment of the fair value inputs. The net loss during the nine month period ended September 30, 2012 also includes the impact related to the adoption of FASB ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" (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 market conditions as of September 30, 2013 and December 31, 2012, the fair value of our credit agreement borrowings reasonably approximated the carrying value of $644 million and $975 million, respectively. In addition, based on market conditions, the fair value of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $10 million and $80 million at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, the fair value of our senior notes was approximately $560 million compared to a carrying value of $600 million.
The fair value measurements of the borrowings under our credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at September 30, 2013 to assume these obligations. The fair value of our senior notes, which is determined using quoted market prices in the secondary market, is also classified as Level 2 within the fair value hierarchy because the market for these financial instruments is not considered an active market.

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 September 30, 2013 are as follows (in thousands):
Three months ending December 31, 2013
$
28,271

Years ending December 31:
 
2014
106,631

2015
94,988

2016
76,776

2017
60,730

2018
47,713

Thereafter
145,446

Future Minimum Lease Payments
$
560,555

Litigation and Related Contingencies
We are a plaintiff in a class action lawsuit against several aftermarket product suppliers. During the three and nine month periods ended September 30, 2012, we recognized gains of $0.5 million and $17.2 million, respectively, resulting from settlements with certain of the defendants. These gains were recorded as a reduction of Cost of Goods Sold on our Unaudited Consolidated Condensed Statements of Income.
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.


16



Note 8.
Earnings Per Share
The following chart sets forth the computation of earnings per share (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
73,445

 
$
54,048

 
$
233,759

 
$
199,037

Denominator for basic earnings per share—weighted average shares outstanding
300,223

 
296,437

 
299,213

 
295,338

Effect of dilutive securities:
 
 
 
 
 
 
 
RSUs
883

 
430

 
775

 
436

Stock options
3,564

 
4,241

 
3,765

 
4,398

Restricted stock
15

 
64

 
18

 
54

Denominator for diluted earnings per share—Adjusted weighted average shares outstanding
304,685

 
301,172

 
303,771

 
300,226

Earnings per share, basic
$
0.24

 
$
0.18

 
$
0.78

 
$
0.67

Earnings per share, diluted
$
0.24

 
$
0.18

 
$
0.77

 
$
0.66

There were no employee stock-based compensation awards that would have had an antidilutive effect on the computation of diluted earnings per share for the three and nine months ended September 30, 2013 or September 30, 2012.

Note 9.
Business Combinations
On May 1, 2013, LKQ Netherlands B.V., a subsidiary of LKQ Corporation, entered into a sale and purchase agreement with H2 Sator B.V., Cooperatieve H2 Sator U.A. and H2 Sator U.A. (collectively the "Sellers") to acquire the shares of Sator, an automotive aftermarket parts distribution company based in the Netherlands, with operations in the Netherlands, Belgium and Northern France.  With the acquisition of Sator, we expanded our geographic presence in the European automotive aftermarket products market into continental Europe to complement our existing U.K. operations. Total acquisition date fair value of the consideration for the acquisition of Sator was €209.8 million ($272.8 million) of cash, net of cash acquired. We recorded $139.2 million of goodwill related to our acquisition of Sator, which we do not expect will be deductible for income tax purposes. In the period between May 1, 2013 and September 30, 2013, Sator generated approximately $165.4 million of revenue and $4.4 million of net income.
In addition to our acquisition of Sator, we made sixteen acquisitions during the nine months ended September 30, 2013, including seven wholesale businesses in our European segment, eight wholesale businesses in North America and a self service operation. Our European acquisitions included five automotive paint distribution businesses in the U.K., which enabled us to expand our collision product offerings. Our other acquisitions completed during the nine months ended September 30, 2013 enabled us to expand into new product lines and enter new markets. Total acquisition date fair value of the consideration for these acquisitions was $133.1 million, composed of $122.4 million of cash (net of cash acquired), $6.8 million of notes payable, $0.1 million of other purchase price obligations (non-interest bearing) and $3.9 million for the estimated value of contingent payments to former owners. The maximum amount of the contingent payment is $4.9 million. During the nine months ended September 30, 2013, we recorded $88.1 million of goodwill related to these acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2012 acquisitions. We expect $9.5 million of the $88.1 million of goodwill recorded to be deductible for income tax purposes. In the period between the acquisition dates and September 30, 2013, these acquisitions generated $56.0 million of revenue and $2.2 million of net income.
The consideration for our 2011 acquisition of ECP included a contingent payment agreement with a potential payment of up to £30 million based on ECP's 2013 results. In April 2013, we entered into an agreement waiving for Draco Limited, one of the sellers of ECP, the condition of ECP achieving the 2013 performance target, subject to the closing of the Sator acquisition.  As a result of the waiver and the closing of the Sator acquisition in May 2013, we are obligated to pay Draco Limited approximately £27 million in the first quarter of 2014, which is equal to the maximum payment for Draco Limited's share of the contingent payment agreement. The waiver of the 2013 performance targets did not have a material impact on our financial position or results of operations, and it is not expected to have a material impact on our cash flows, as the fair value of the contingent payment liability prior to the waiver was calculated assuming a high probability of achieving the performance targets for the maximum payment. We also believe the waiver will improve our flexibility to execute our European strategy.
During the year ended December 31, 2012, we made 30 acquisitions in North America, including 22 wholesale businesses and 8 self service retail operations. These acquisitions enabled us to expand our geographic presence and to enter

17



new markets. Additionally, two of our acquisitions were completed with a goal of improving the recovery from scrap and other metals harvested from the vehicles we purchase: a precious metals refining and reclamation business and a scrap metal shredder.
Total acquisition date fair value of the consideration for the 2012 acquisitions was $284.6 million, composed of $261.5 million of cash (net of cash acquired), $16.0 million of notes payable, $1.6 million of other purchase price obligations (non-interest bearing) 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 year ended December 31, 2012, we recorded $197.6 million of goodwill related to these 30 acquisitions and immaterial adjustments to preliminary purchase price allocations related to certain of our 2011 acquisitions. Of this amount, approximately $157.8 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 nine months ended September 30, 2013 and the last three months of 2012 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the final estimation of the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations.
The preliminary purchase price allocations for the acquisitions completed during the nine months ended September 30, 2013 and the year ended December 31, 2012 are as follows (in thousands):
 
 
Nine Months Ended September 30, 2013
 
Year Ended
 
Sator
 
Other Acquisitions
 
Total
 
December 31, 2012
Receivables
$
61,639

 
$
38,329

 
$
99,968

 
$
15,473

Receivable reserves
(8,563
)
 
(3,023
)
 
(11,586
)
 
(1,459
)
Inventory
71,784

 
24,119

 
95,903

 
62,305

Prepaid expenses and other current assets
7,184

 
2,027

 
9,211

 
201

Property and equipment
19,484

 
12,517

 
32,001

 
31,930

Goodwill
139,158

 
88,103

 
227,261

 
201,742

Other intangibles
49,978

 
4,868

 
54,846

 
655

Other assets
2,049

 
1,232

 
3,281

 
187

Deferred income taxes
(15,222
)
 
49

 
(15,173
)
 
428

Current liabilities assumed
(49,593
)
 
(34,438
)
 
(84,031
)
 
(22,910
)
Debt assumed

 
(664
)
 
(664
)
 
(3,989
)
Other noncurrent liabilities assumed
(5,074
)
 

 
(5,074
)
 

Contingent consideration liabilities

 
(3,854
)
 
(3,854
)
 
(5,456
)
Other purchase price obligations

 
(86
)
 
(86
)
 
(1,647
)
Notes issued

 
(6,782
)
 
(6,782
)
 
(15,990
)
Cash used in acquisitions, net of cash acquired
$
272,824

 
$
122,397

 
$
395,221

 
$
261,470

Included in other noncurrent liabilities recorded for our Sator acquisition is a preliminary estimate for certain pension and other post-retirement obligations we assumed with the acquisition. Due to the immateriality of these plans, we have not provided the detailed disclosures otherwise prescribed by the accounting guidance on pensions and other post-retirement obligations.
The primary reason for our acquisitions made during the nine months ended September 30, 2013 and the year ended December 31, 2012 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, to widen our product offerings, including paint and related equipment in the U.K., and to enter new markets, including continental Europe through the Sator acquisition. 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. For certain of our acquisitions, we have

18



identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics can result in purchase prices that include a significant amount of goodwill.

The following pro forma summary presents the effect of the businesses acquired during the nine months ended September 30, 2013 as though they had been acquired as of January 1, 2012 and the effect of the businesses acquired during the year ended December 31, 2012 as though they had been acquired as of January 1, 2011. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue, as reported
$
1,298,094

 
$
1,016,707

 
$
3,745,839

 
$
3,055,015

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

 
89,991

 
126,309

 
276,656

Other acquisitions
13,344

 
93,311

 
113,011

 
349,180

Pro forma revenue
$
1,311,438

 
$
1,200,009

 
$
3,985,159

 
$
3,680,851

 
 
 
 
 
 
 
 
Net income, as reported
$
73,445

 
$
54,048

 
$
233,759

 
$
199,037

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

 
1,465

 
5,345

 
4,742

Other acquisitions
1,791

 
4,396

 
7,812

 
18,822

Pro forma net income
$
75,236

 
$
59,909

 
$
246,916

 
$
222,601

 
 
 
 
 
 
 
 
Earnings per share-basic, as reported
$
0.24

 
$
0.18

 
$
0.78

 
$
0.67

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

 
0.00

 
0.02

 
0.02

Other acquisitions
0.01

 
0.01

 
0.03

 
0.06

Pro forma earnings per share-basic (a) 
$
0.25

 
$
0.20

 
$
0.83

 
$
0.75

 
 
 
 
 
 
 
 
Earnings per share-diluted, as reported
$
0.24

 
$
0.18

 
$
0.77

 
$
0.66

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

 
0.00

 
0.02

 
0.02

Other acquisitions
0.01

 
0.01

 
0.03

 
0.06

Pro forma earnings per share-diluted (a) 
$
0.25

 
$
0.20

 
$
0.81

 
$
0.74


(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 rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our Sator acquisition reflects the elimination of acquisition related expenses totaling $3.6 million for the nine months ended September 30, 2013, which do not have a continuing impact on the our operating results. Additionally, the pro forma impact of our other acquisitions reflects the elimination of acquisition related expenses totaling $1.6 million and $2.0 million for the three and nine months ended September 30, 2013, respectively. Refer to Note 10, "Restructuring and Acquisition Related Expenses," for further information on our acquisition related expenses. 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.


19



Note 10.
Restructuring and Acquisition Related Expenses
Acquisition Related Expenses
Acquisition related expenses, which include external costs such as advisory, legal and accounting fees, totaled $2.0 million and $6.0 million for the three and nine months ended September 30, 2013. Expenses incurred during the three and nine months ended September 30, 2013 included $1.4 million related to our U.K. paint acquisitions. Expenses for the nine months ended September 30, 2013 also included $3.6 million related to our acquisition of Sator in May 2013. These costs are expensed as incurred.
Acquisition Integration Plans
During the three and nine months ended September 30, 2013, we incurred $0.2 million and $1.4 million, respectively, of restructuring expenses primarily related to the integration of certain of our 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. We expect our integration plans for these acquisitions to be completed by the end of 2013. Remaining costs to complete these integration activities are expected to be immaterial.
Beginning in the fourth quarter of 2013, we expect to initiate restructuring plans to integrate certain of our 2013 European acquisitions into our existing operations. Our restructuring plans include the closure of duplicate facilities, elimination of overlapping delivery routes and termination of employees in duplicate functions. Restructuring costs are estimated to be approximately $4.0 million, which includes severance, moving costs and other facility closure costs. The majority of the integration activities related to these acquisitions is expected to be completed by the end of 2014.
During the three and nine months ended September 30, 2012, we incurred $0.1 million and $1.4 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 in 2012.
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 consolidated 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 included 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. During the nine months ended September 30, 2012, we incurred $1.1 million related to this restructuring plan. These restructuring activities were substantially completed in 2012.

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 nine months ended September 30, 2013 was 34.6% compared with 36.3% for the comparable prior year period. We continued to expand our international operations during the last quarter of 2012 and the first nine months of 2013 with both acquisition related and organic growth in our European segment as well as acquisitions in Canada, which contributed to a lower effective tax rate as a larger proportion of our pretax income was generated in lower rate jurisdictions. In the nine months ended September 30, 2013 and 2012, we recorded favorable discrete tax adjustments of $2.6 million and $1.2 million, respectively. Our favorable discrete tax adjustments during the nine months ended September 30, 2013 and 2012 included $1.6 million and $0.9 million, respectively, related to the revaluation of our net U.K. deferred tax liabilities as a result of reductions in the U.K. corporate income tax rate. In addition, we recorded a $0.9 million favorable deferred tax adjustment in the nine months ended September 30, 2013 resulting from changes in state tax legislation.

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Note 12.
Accumulated Other Comprehensive Income
Changes in Accumulated Other Comprehensive Income were as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2013
 
September 30, 2012
 
 
Foreign
Currency Translation
 
Unrealized  (Loss)
Gain
on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Foreign
Currency
Translation
 
Unrealized  (Loss)
Gain
on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance
 
$
(11,334
)
 
$
(6,730
)
 
$
(18,064
)
 
$
265

 
$
(9,881
)
 
$
(9,616
)
Pretax income (loss)
 
28,514

 
(15,315
)
 
13,199

 
10,182

 
(3,557
)
 
6,625

Income tax effect
 

 
5,647

 
5,647

 

 
1,259

 
1,259

Reclassification of unrealized loss
 

 
15,956

 
15,956

 

 
1,641

 
1,641

Reclassification of deferred income taxes
 

 
(5,849
)
 
(5,849
)
 

 
(585
)
 
(585
)
Hedge ineffectiveness
 

 
293

 
293

 

 

 

Income tax effect
 

 
(107
)
 
(107
)
 

 

 

Ending balance
 
$
17,180

 
$
(6,105
)
 
$
11,075

 
$
10,447

 
$
(11,123
)
 
$
(676
)

 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2013
 
September 30, 2012
 
 
Foreign
Currency
Translation
 
Unrealized  (Loss)
Gain
on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Foreign
Currency
Translation
 
Unrealized  (Loss)
Gain
on Cash Flow Hedges
 
Accumulated
Other
Comprehensive
Income (Loss)
Beginning balance
 
$
10,850

 
$
(10,091
)
 
$
759

 
$
(2,071
)
 
$
(6,890
)
 
$
(8,961
)
Pretax income (loss)
 
6,330

 
(14,170
)
 
(7,840
)
 
12,518

 
(11,266
)
 
1,252

Income tax effect
 

 
5,305

 
5,305

 

 
3,981

 
3,981

Reclassification of unrealized loss
 

 
19,771

 
19,771

 

 
4,753

 
4,753

Reclassification of deferred income taxes
 

 
(7,211
)
 
(7,211
)
 

 
(1,701
)
 
(1,701
)
Hedge ineffectiveness
 

 
460

 
460

 

 

 

Income tax effect
 

 
(169
)
 
(169
)
 

 

 

Ending balance
 
$
17,180

 
$
(6,105
)
 
$
11,075

 
$
10,447

 
$
(11,123
)
 
$
(676
)
Unrealized losses on our foreign currency forward contracts totaling $14.4 million and $15.1 million were reclassified to other expense in our Unaudited Consolidated Condensed Statements of Income during the three and nine months ended September 30, 2013, respectively. These losses offset the remeasurement of certain of our intercompany balances as discussed in Note 5, "Derivative Instruments and Hedging Activities." The remaining reclassification of unrealized losses related to our interest rate swap contracts and was recorded to interest expense in our Unaudited Consolidated Condensed Statements of Income during the three and nine months ended September 30, 2013 and 2012. The deferred income taxes related to our cash flow hedges were reclassified from Accumulated Other Comprehensive Income to income tax expense during the three and nine months ended September 30, 2013 and 2012.

Note 13.
Segment and Geographic Information
We have three operating segments: Wholesale – North America; Wholesale – Europe; and Self Service. Our operations in North America, which include our Wholesale – North America and Self Service operating segments, are aggregated into one reportable segment because they possess similar economic characteristics and have common products and services, customers,

21



and methods of distribution. Our Wholesale – Europe operating segment, which includes Sator, is presented as a separate reportable segment. 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
North America
$
928,307

 
$
835,324

 
$
2,865,613

 
$
2,547,743

Europe
369,787

 
181,383

 
880,226

 
507,272

Total revenue
$
1,298,094

 
$
1,016,707

 
$
3,745,839

 
$
3,055,015

EBITDA
 
 
 
 
 
 
 
North America
$
108,314

 
$
89,265

 
$
362,281

 
$
331,140

Europe
38,088

 
20,079

 
95,920

 
55,669

Total EBITDA
$
146,402

 
$
109,344

 
$
458,201

 
$
386,809

Depreciation and Amortization
 
 
 
 
 
 
 
North America
$
16,417

 
$
14,830

 
$
48,555

 
$
43,603

Europe
5,740

 
3,298

 
13,313

 
7,971

Total depreciation and amortization
$
22,157

 
$
18,128

 
$
61,868

 
$
51,574

EBITDA for our North American segment included gains of $0.5 million and $17.2 million during the three and nine months ended September 30, 2012 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 are losses of $0.8 million and $2.1 million during the three months ended September 30, 2013 and 2012, respectively, from the change in fair value of contingent consideration liabilities, primarily related to our 2011 ECP acquisition. During the nine month periods ended September 30, 2013 and 2012, our European segment recognized losses of $2.7 million and $1.9 million, respectively, related to the remeasurement of these contingent consideration liabilities. See Note 6, "Fair Value Measurements" for further information on our contingent consideration liabilities. For the three and nine months ended September 30, 2013, EBITDA for our European segment also included restructuring and acquisition related expenses of $1.6 million and $5.3 million, respectively, primarily related to our acquisitions of Sator and five automotive paint distribution businesses in the U.K.
The table below provides a reconciliation from EBITDA to Net Income (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
EBITDA
$
146,402

 
$
109,344

 
$
458,201

 
$
386,809

Depreciation and amortization
22,157

 
18,128

 
61,868

 
51,574

Interest expense, net
15,200

 
7,964

 
36,287

 
22,687

Loss on debt extinguishment

 

 
2,795

 

Provision for income taxes
35,600

 
29,204

 
123,492

 
113,511

Net income
$
73,445

 
$
54,048

 
$
233,759

 
$
199,037

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 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.

22



The following table presents capital expenditures, which includes additions to property and equipment, by reportable segment (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Capital Expenditures
 
 
 
 
 
 
 
North America
$
14,960

 
$
15,015

 
$
48,662

 
$
49,521

Europe
6,015

 
4,006

 
12,464

 
11,115

 
$
20,975

 
$
19,021

 
$
61,126

 
$
60,636

The following table presents assets by reportable segment (in thousands):
 
September 30,
2013
 
December 31,
2012
Receivables, net
 
 
 
North America
$
260,413

 
$
241,627

Europe
178,387

 
70,181

Total receivables, net
438,800

 
311,808

Inventory
 
 
 
North America
725,213

 
750,565

Europe
292,956

 
150,238

Total inventory
1,018,169

 
900,803

Property and Equipment, net
 
 
 
North America
441,940

 
434,010

Europe
89,957

 
60,369

Total property and equipment, net
531,897

 
494,379

Other unallocated assets
2,372,193

 
2,016,466

Total assets
$
4,361,059

 
$
3,723,456

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.