Segment and Geographic Information

9 Months Ended

Sep. 30, 2019

We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Our reportable segments are organized based on a combination of geographic areas served and type of product lines offered. The reportable segments are managed separately as each business serves different customers (i.e. geographic in the case of North America and Europe and product type in the case of Specialty) and is affected by different economic conditions. Therefore, we present three reportable segments: North America, Europe and Specialty.

The following tables present our financial performance by reportable segment for the periods indicated (in thousands):



	North America		Europe		Specialty		Eliminations			Consolidated
Three Months Ended September 30, 2019
Revenue:
Third Party	$	1,302,086	$	1,451,483	$	394,204	$	—		$	3,147,773
Intersegment	61		—		1,110		(1,171		)	—
Total segment revenue	$	1,302,147	$	1,451,483	$	395,314	$	(1,171	)	$	3,147,773
Segment EBITDA	$	166,310	$	124,712	$	45,464	$	—		$	336,486
Depreciation and amortization ⁽¹⁾	23,593		47,302		6,983		—			77,878
Three Months Ended September 30, 2018
Revenue:
Third Party	$	1,262,657	$	1,470,856	$	388,865	$	—		$	3,122,378
Intersegment	142		—		1,196		(1,338		)	—
Total segment revenue	$	1,262,799	$	1,470,856	$	390,061	$	(1,338	)	$	3,122,378
Segment EBITDA	$	154,049	$	129,358	$	42,937	$	—		$	326,344
Depreciation and amortization ⁽¹⁾	22,151		52,139		7,183		—			81,473



	North America		Europe		Specialty		Eliminations			Consolidated
Nine Months Ended September 30, 2019
Revenue:
Third Party	$	3,925,962	$	4,413,264	$	1,157,023	$	—		$	9,496,249
Intersegment	260		—		3,664		(3,924		)	—
Total segment revenue	$	3,926,222	$	4,413,264	$	1,160,687	$	(3,924	)	$	9,496,249
Segment EBITDA	$	532,994	$	346,291	$	135,790	$	—		$	1,015,075
Depreciation and amortization ⁽¹⁾	68,257		141,087		20,895		—			230,239
Nine Months Ended September 30, 2018
Revenue:
Third Party	$	3,927,282	$	3,795,439	$	1,151,172	$	—		$	8,873,893
Intersegment	526		—		3,554		(4,080		)	—
Total segment revenue	$	3,927,808	$	3,795,439	$	1,154,726	$	(4,080	)	$	8,873,893
Segment EBITDA	$	506,772	$	315,785	$	140,974	$	—		$	963,531
Depreciation and amortization ⁽¹⁾	64,985		124,697		21,295		—			210,977

(1) Amounts presented include depreciation and amortization expense recorded within cost of goods sold.

The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and acquisition related expenses (which includes restructuring expenses recorded in Cost of goods sold), change in fair value of contingent consideration liabilities, other gains and losses related to acquisitions, equity method investments, or divestitures, equity in losses and earnings of unconsolidated subsidiaries, and impairment charges. EBITDA, which is the basis for Segment EBITDA, is calculated as net income, less net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.

The table below provides a reconciliation of Net Income to Segment EBITDA (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net income	$	152,593		$	134,480		$	403,761		$	445,109
Less: net (loss) income attributable to continuing noncontrolling interest	(46		)	378			2,321			1,040
Less: net income attributable to discontinued noncontrolling interest	376			—			568			—
Net income attributable to LKQ stockholders	152,263			134,102			400,872			444,069
Subtract:
Net income from discontinued operations	781			—			1,179			—
Net income attributable to discontinued noncontrolling interest	(376		)	—			(568		)	—
Net income from continuing operations attributable to LKQ stockholders	151,858			134,102			400,261			444,069
Add:
Depreciation and amortization	71,513			76,701			213,349			196,322
Depreciation and amortization - cost of goods sold	5,223			4,772			15,748			14,655
Depreciation and amortization - restructuring expenses - cost of goods sold	168			—			168			—
Depreciation and amortization - restructuring expenses	974			—			974			—
Interest expense, net of interest income	31,976			40,860			103,949			107,647
Provision for income taxes	57,747			46,068			165,122			156,427
EBITDA	319,459			302,503			899,571			919,120
Subtract:
Equity in earnings (losses) of unconsolidated subsidiaries ⁽¹⁾	4,232			(20,284		)	(33,745		)	(18,326		)
Fair value gain on Mekonomen derivative instrument ⁽¹⁾	—			2,509			—			2,509
Gains on bargain purchase	—			—			—			328
Add:
Restructuring and acquisition related expenses ⁽²⁾	7,955			6,614			19,639			26,546
Restructuring expenses - cost of goods sold ⁽³⁾	17,130			—			17,130			—
Inventory step-up adjustment - acquisition related	—			—			—			403
Impairment of net assets held for sale ^{(4) (5)}	(3,601		)	—			44,919			2,438
Change in fair value of contingent consideration liabilities	(225		)	(548		)	71			(465		)
Segment EBITDA	$	336,486		$	326,344		$	1,015,075		$	963,531


(1)	Refer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Financial Statement Information," for further information.


(2)	Excludes $1 million of depreciation expense that is reported in Restructuring and acquisition related expenses in our Unaudited Condensed Consolidated Statements of Income. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information.


(3)	Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information.

(4) Refer to "Net Assets Held for Sale" in Note 4, "Financial Statement Information," for further information.

(5) In 2018, amounts were recorded in Other income, net in our Unaudited Condensed Consolidated Statements of Income.

The following table presents capital expenditures by reportable segment (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Capital Expenditures
North America	$	29,430	$	27,996	$	83,833	$	86,864
Europe	30,916		23,904		72,333		69,582
Specialty	3,937		4,442		9,385		15,317
Total capital expenditures	$	64,283	$	56,342	$	165,551	$	171,763

The following table presents assets by reportable segment (in thousands):



	September 30,		December 31,
	2019		2018
Receivables, net
North America	$	405,218	$	411,818
Europe	705,031		649,174
Specialty	112,948		93,091
Total receivables, net	1,223,197		1,154,083
Inventories
North America	975,561		1,076,306
Europe	1,274,483		1,410,264
Specialty	332,144		349,505
Total inventories	2,582,188		2,836,075
Property, plant and equipment, net
North America	582,157		570,508
Europe	516,106		562,600
Specialty	85,925		87,054
Total property, plant and equipment, net	1,184,188		1,220,162
Operating lease assets, net ⁽¹⁾
North America	813,412		—
Europe	404,444		—
Specialty	85,404		—
Total operating lease assets, net	1,303,260		—
Equity method investments
North America	17,275		16,404
Europe⁽²⁾	126,734		162,765
Total equity method investments	144,009		179,169
Other unallocated assets	5,974,848		6,003,913
Total assets	$	12,411,690	$	11,393,402


(1)	Refer to Note 13, "Leases," for further information.


(2)	Refer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Financial Statement Information," for further information.

We report net receivables; inventories; net property, plant and equipment; net operating lease assets; and equity method investments 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 and cash equivalents, prepaid and other current and noncurrent assets, goodwill and other intangibles.

Our largest countries of operation are the U.S., followed by the U.K. and Germany. Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Poland, Slovakia, Austria, and other European countries. Our operations in other countries include operations in Canada, engine remanufacturing and bumper refurbishing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation.

The following table sets forth our revenue by geographic area (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenue
United States	$	1,579,691	$	1,535,557	$	4,735,134	$	4,716,927
United Kingdom	394,621		408,474		1,217,199		1,294,155
Germany	394,115		415,748		1,196,527		564,698
Other countries	779,346		762,599		2,347,389		2,298,113
Total revenue	$	3,147,773	$	3,122,378	$	9,496,249	$	8,873,893

The following table sets forth our tangible long-lived assets by geographic area (in thousands):



	September 30,		December 31,
	2019		2018
Long-lived assets⁽¹⁾
United States	$	1,485,843	$	620,125
Germany	295,570		217,476
United Kingdom	306,611		165,145
Other countries	399,424		217,416
Total long-lived assets	$	2,487,448	$	1,220,162

(1)

The increase in long-lived assets is primarily related to the net operating lease assets added as a result of the adoption of the new lease accounting standard. Refer to Note 13, "Leases," for further information.