AAP 10Q 1st Quarter
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended April 22, 2006
OR
o
|
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 001-16797
ADVANCE
AUTO PARTS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
54-2049910
(I.R.S.
Employer
Identification No.)
|
5673
Airport Road, Roanoke, Virginia 24012
(Address
of Principal Executive Offices)
(Zip
Code)
(540)
362-4911
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report).
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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
accelerated filer x
Accelerated filer p
Non-accelerated filer p
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
p
No
x
As
of May
30,
2006,
the registrant had outstanding 105,975,485
shares
of Common Stock, par value $0.0001 per share (the only class of common stock
of
the registrant outstanding).
PART
I. FINANCIAL INFORMATION
ITEM
1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND
SUBSIDIARIES
|
Condensed
Consolidated Balance Sheets
April
22, 2006 and December 31, 2005
(in
thousands, except per share data)
(unaudited)
|
|
April
22,
|
|
December
31,
|
|
Assets
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
55,350
|
|
$
|
40,783
|
|
Receivables,
net
|
|
|
84,779
|
|
|
94,689
|
|
Inventories,
net
|
|
|
1,420,889
|
|
|
1,367,099
|
|
Other
current assets
|
|
|
28,742
|
|
|
45,369
|
|
Total
current assets
|
|
|
1,589,760
|
|
|
1,547,940
|
|
Property
and equipment, net of accumulated depreciation of
|
|
|
|
|
|
|
|
$599,840
and $564,558
|
|
|
932,455
|
|
|
898,851
|
|
Assets
held for sale
|
|
|
5,106
|
|
|
8,198
|
|
Goodwill
|
|
|
67,208
|
|
|
67,094
|
|
Other
assets, net
|
|
|
21,199
|
|
|
20,066
|
|
|
|
$
|
2,615,728
|
|
$
|
2,542,149
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
overdrafts
|
|
$
|
21,923
|
|
$
|
50,170
|
|
Current
portion of long-term debt
|
|
|
35,261
|
|
|
32,760
|
|
Financed
vendor accounts payable
|
|
|
125,433
|
|
|
119,351
|
|
Accounts
payable
|
|
|
696,559
|
|
|
629,248
|
|
Accrued
expenses
|
|
|
282,916
|
|
|
265,437
|
|
Other
current liabilities
|
|
|
46,786
|
|
|
44,498
|
|
Total
current liabilities
|
|
|
1,208,878
|
|
|
1,141,464
|
|
Long-term
debt
|
|
|
395,343
|
|
|
406,040
|
|
Other
long-term liabilities
|
|
|
72,002
|
|
|
74,874
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, nonvoting, $0.0001 par value,
|
|
|
|
|
|
|
|
10,000
shares authorized; no shares issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, voting, $0.0001 par value, 200,000
|
|
|
|
|
|
|
|
shares
authorized; 108,017 shares issued and 106,960 outstanding
|
|
|
|
|
|
|
|
in
2006 and 109,637 issued and 108,198 outstanding in 2005
|
|
|
11
|
|
|
11
|
|
Additional
paid-in capital
|
|
|
502,072
|
|
|
564,965
|
|
Treasury
stock, at cost, 1,057 and 1,439 shares
|
|
|
(42,083
|
)
|
|
(55,668
|
)
|
Accumulated
other comprehensive income
|
|
|
4,530
|
|
|
3,090
|
|
Retained
earnings
|
|
|
474,975
|
|
|
407,373
|
|
Total
stockholders' equity
|
|
|
939,505
|
|
|
919,771
|
|
|
|
$
|
2,615,728
|
|
$
|
2,542,149
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to the condensed consolidated financial
statements
are
an
integral part of these statements.
Condensed
Consolidated Statements of
Operations
For
the Sixteen Week Periods Ended
April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
22,
|
|
April
23,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,393,010
|
|
$
|
1,258,364
|
|
Cost
of sales, including
purchasing and warehousing costs
|
|
|
727,842
|
|
|
657,433
|
|
Gross
profit
|
|
|
665,168
|
|
|
600,931
|
|
Selling,
general and administrative expenses
|
|
|
538,870
|
|
|
480,717
|
|
Operating
income
|
|
|
126,298
|
|
|
120,214
|
|
Other,
net:
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(10,163
|
)
|
|
(8,911
|
)
|
Other
income, net
|
|
|
620
|
|
|
320
|
|
Total
other, net
|
|
|
(9,543
|
)
|
|
(8,591
|
)
|
Income
before provision for income taxes
|
|
|
116,755
|
|
|
111,623
|
|
Provision
for income taxes
|
|
|
42,674
|
|
|
42,976
|
|
Net
income
|
|
$
|
74,081
|
|
$
|
68,647
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.69
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.68
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
107,879
|
|
|
107,261
|
|
Dilutive
effect of stock options
|
|
|
1,376
|
|
|
1,894
|
|
Average
common shares outstanding - assuming dilution
|
|
|
109,255
|
|
|
109,155
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to the condensed consolidated financial
statements
are
an
integral part of these statements.
Condensed
Consolidated Statements of Cash
Flows
For
the Sixteen Week Periods Ended
April
22, 2006 and April 23, 2005
(in
thousands)
(unaudited)
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
22,
|
|
April
23,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
74,081
|
|
$
|
68,647
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
39,833
|
|
|
35,010
|
|
Amortization
of deferred debt issuance costs
|
|
|
193
|
|
|
193
|
|
Stock-based
compensation
|
|
|
5,045
|
|
|
-
|
|
Loss
on disposal of property and equipment, net
|
|
|
173
|
|
|
372
|
|
Benefit
for deferred income taxes
|
|
|
(1,163
|
)
|
|
(2,640
|
)
|
Excess
tax benefit from stock-based compensation
|
|
|
(2,663
|
)
|
|
-
|
|
Tax
benefit related to exercise of stock options
|
|
|
-
|
|
|
4,062
|
|
Net
decrease (increase) in:
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
9,716
|
|
|
10,736
|
|
Inventories,
net
|
|
|
(53,790
|
)
|
|
(107,847
|
)
|
Other
assets
|
|
|
15,454
|
|
|
(8,558
|
)
|
Net
increase in:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
67,311
|
|
|
88,678
|
|
Accrued
expenses
|
|
|
10,130
|
|
|
40,791
|
|
Other
liabilities
|
|
|
1,974
|
|
|
3,957
|
|
Net
cash provided by operating activities
|
|
|
166,294
|
|
|
133,401
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(77,954
|
)
|
|
(59,497
|
)
|
Proceeds
from sales of property and equipment
|
|
|
5,111
|
|
|
1,414
|
|
Net
cash used in investing activities
|
|
|
(72,843
|
)
|
|
(58,083
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
(Decrease)
increase in bank overdrafts
|
|
|
(28,247
|
)
|
|
1,404
|
|
Increase
in financed vendor accounts payable
|
|
|
6,082
|
|
|
38,535
|
|
Dividends
paid
|
|
|
(6,479
|
)
|
|
-
|
|
Payments
on note payable
|
|
|
(21
|
)
|
|
-
|
|
Borrowings
under credit facilities
|
|
|
-
|
|
|
1,500
|
|
Payments
on credit facilities
|
|
|
(8,175
|
)
|
|
(9,425
|
)
|
Proceeds
from the issuance of common stock, primarily exercise
|
|
|
|
|
|
|
|
of
stock options
|
|
|
8,576
|
|
|
7,804
|
|
Excess
tax benefit from stock-based compensation
|
|
|
2,663
|
|
|
-
|
|
Repurchase
of common stock
|
|
|
(53,327
|
)
|
|
(42,978
|
)
|
Increase
in borrowings secured by trade receivables
|
|
|
44
|
|
|
3,209
|
|
Net
cash (used in) provided by financing activities
|
|
|
(78,884
|
)
|
|
49
|
|
Net
increase in cash and cash equivalents
|
|
|
14,567
|
|
|
75,367
|
|
Cash
and cash equivalents,
beginning of period
|
|
|
40,783
|
|
|
56,321
|
|
Cash
and cash equivalents,
end of period
|
|
$
|
55,350
|
|
$
|
131,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
7,373
|
|
$
|
6,079
|
|
Income
tax payments, net
|
|
|
20,622
|
|
|
17,809
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Accrued
purchases of property and equipment
|
|
|
36,852
|
|
|
22,355
|
|
Repurchases
of common stock not settled
|
|
|
13,154
|
|
|
-
|
|
Retirement
of common stock
|
|
|
79,177
|
|
|
-
|
|
Unrealized
gain (loss) on hedge arrangements
|
|
|
1,440
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
The
accompanying notes to the condensed consolidated financial
statements
are
an
integral part of these statements.
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
1. |
Basis
of Presentation:
|
The
accompanying condensed consolidated financial statements include the accounts
of
Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company.
All
significant intercompany balances and transactions have been eliminated in
consolidation.
The
condensed consolidated balance sheets as of April 22, 2006 and December 31,
2005, the condensed consolidated statements of operations for the sixteen week
periods ended April 22, 2006 and April 23, 2005, and the condensed consolidated
statements of cash flows for the sixteen week periods ended April 22, 2006
and
April 23, 2005, have been prepared by the Company. In the opinion of management,
all adjustments, consisting of only normal recurring adjustments, necessary
for
a fair presentation of the financial position of the Company, the results of
its
operations and cash flows have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
notes
thereto included in the Company’s consolidated financial statements for the
fiscal year ended December 31, 2005.
The
results of operations for the interim periods are not necessarily indicative
of
the operating results to be expected for the full fiscal year.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Vendor
Incentives
The
Company receives incentives in the form of reductions to amounts owed and/or
payments from vendors related to cooperative advertising allowances, volume
rebates and other promotional considerations. The Company accounts for vendor
incentives in accordance with Emerging Issues Task Force, or EITF, No. 02-16,
“Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor.” Many of the incentives are under long-term agreements
(terms in excess of one year), while others are negotiated on an annual basis.
Certain vendors require the Company to use cooperative advertising allowances
exclusively for advertising. The Company defines these allowances as restricted
cooperative advertising allowances and recognizes them as a reduction to
selling, general and administrative expenses as incremental advertising
expenditures are incurred. The remaining cooperative advertising allowances
not
restricted by the Company’s vendors and volume rebates are earned based on
inventory purchases and recorded as a reduction to inventory and recognized
through cost of sales as the inventory is sold.
The
Company recognizes other promotional incentives earned under long-term
agreements as a reduction to cost of sales. These incentives are recognized
based on the cumulative net purchases as a percentage of total estimated net
purchases over the life of the agreement. The Company's margins could be
impacted positively or negatively if actual purchases or results from any one
year differ from its estimates; however, the impact over the life of the
agreement would be the same. Short-term incentives (terms less than one year)
are recognized as a reduction to cost of sales over the course of the annual
agreements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
Amounts
received or receivable from vendors that are not yet earned are reflected as
deferred revenue in the accompanying condensed consolidated balance sheets.
Management's estimate of the portion of deferred revenue that will be realized
within one year of the balance sheet date has been included in other current
liabilities in the accompanying condensed consolidated balance sheets. Earned
amounts that are receivable from vendors are included in receivables, net on
the
accompanying condensed consolidated balance sheets, except for that portion
expected to be received after one year, which is included in other assets,
net
on the accompanying condensed consolidated balance sheets.
Preopening
Expenses
Preopening
expenses, which consist primarily of payroll and occupancy costs, are expensed
as incurred.
Sales
Returns and Allowances
The
Company’s accounting policy for sales returns and allowances consists of
establishing reserves for anticipates returns at the time of sale. The Company
anticipates returns based on current sales levels and the Company’s historical
return experience on a specific product basis.
Warranty
Costs
The
Company's vendors are primarily responsible for warranty claims. Warranty costs
relating to merchandise (primarily batteries) and services sold under warranty,
which are not covered by vendors' warranties, are estimated based on the
Company's historical experience and are recorded in the period the product
is
sold. The Company has applied the disclosure requirements of Financial
Accounting Standards Board, or FASB, Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including the Indirect
Guarantees of Indebtedness of Others" as they relate to warranties. The
following table presents changes in the Company’s defective and warranty
reserves.
|
|
April
22,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(16
weeks ended)
|
|
(52
weeks ended)
|
|
Defective
and warranty reserve, beginning of
period
|
|
$
|
11,352
|
|
$
|
10,960
|
|
Reserves
established
|
|
|
4,133
|
|
|
14,268
|
|
Reserves
utilized
|
|
|
(4,278
|
)
|
|
(13,876
|
)
|
Defective
and warranty reserve, end of period
|
|
$
|
11,207
|
|
$
|
11,352
|
|
Earnings
Per Share of Common Stock
Basic
earnings per share of common stock has been computed based on the
weighted-average number of common shares outstanding, less stock held in
treasury, during the period. Diluted earnings per share of common stock reflects
the increase in the weighted-average number of common shares outstanding
assuming the exercise of outstanding stock options, calculated on the treasury
stock method, and all currently outstanding deferred stock units.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
Stock
Split
On
August
10, 2005, the Company’s Board of Directors declared a three-for-two stock split
of the Company’s common stock, effected as a 50% stock dividend. The dividend
was distributed on September 23, 2005 to holders of record as of September
9,
2005 and the Company’s stock began trading on a post-split basis on September
26, 2005. All share and per share amounts in the accompanying condensed
consolidated financial statements have been restated to reflect the effect
of
the stock split.
Goodwill
and Other Intangible Assets
In
accordance with Statement
of Financial Accounting Standard,
or SFAS
No. 142, “Goodwill and Other Intangible Assets,” the Company tests goodwill for
impairment at least on an annual basis. Testing for impairment is a two-step
process as prescribed in SFAS No. 142. The first step is a review for potential
impairment, while the second step measures the amount of impairment, if any.
Under the guidelines of SFAS No. 142, the Company is required to perform an
impairment test at least on an annual basis at any time during the fiscal year
provided the test is performed at the same time every year. The Company has
elected to complete its annual impairment test as of the end of its third
quarter. An impairment loss would be recognized when the assets’ fair value is
below their carrying value.
Valuation
of Long-Lived Assets
The
Company evaluates the recoverability of its long-lived assets under the
provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” SFAS No. 144 requires the review for impairment of
long-lived assets, whenever events or changes in circumstances indicate that
the
carrying amount of an asset might not be recoverable and exceeds its fair
value.
Significant
factors triggering an impairment review would include significant negative
industry trends, significant changes in technology, significant underutilization
of assets and significant changes in how assets are used or are planned to
be
used.
When
such
an event occurs, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. These impairment
evaluations involve estimates of asset useful lives and future cash flows.
If
the undiscounted expected future cash flows are less than the carrying amount
of
the asset and the carrying amount of the asset exceeds its fair value, an
impairment loss is recognized. Management utilizes an expected present value
technique, which uses a risk-free rate and multiple cash flow scenarios
reflecting the range of possible outcomes, to estimate fair value of the asset.
Actual useful lives and cash flows could differ from those estimated by
management using these techniques, which could have a material affect on our
results of operations, financial position or liquidity. There were no reductions
to the carrying amounts currently assigned to the Company’s long-lived assets
during the sixteen weeks ended April 22, 2006 or April 23, 2005,
respectively
Financed
Vendor Accounts Payable
The
Company has a short-term financing program with a bank for certain merchandise
purchases. The substance of the program is for the Company to borrow money
from
the bank to finance its purchases from vendors. The Company records any discount
given by the vendor to the value of its inventory and accretes this discount
to
the resulting short-term payable to the bank through interest expense over
the
extended term. At April 22, 2006 and December 31, 2005, $125,433 and $119,351,
respectively, was payable to the bank by the Company under this program and
is
included in the accompanying condensed consolidated balance sheets as Financed
Vendor Accounts Payable.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
Lease
Accounting
The
Company leases certain store locations, distribution centers, office space,
equipment and vehicles. Initial terms for facility leases are typically 10
to 15
years, followed by additional terms containing renewal options at 5 year
intervals, and may include rent escalation clauses. The total amount of the
minimum rent is expensed on a straight-line basis over the initial term of
the
lease unless external economic factors exist such that renewals are reasonably
assured, in which case the Company would include the renewal period in its
amortization period. In
those
instances the renewal period would be included in the lease term for purposes
of
establishing an amortization period and determining if such lease qualified
as a
capital or operating lease. In
addition to minimum fixed rentals, some leases provide for contingent facility
rentals. Contingent facility rentals are determined on the basis of a percentage
of sales in excess of stipulated minimums for certain store facilities as
defined in the individual lease agreements. Most of the leases provide that
the
Company pay taxes, maintenance, insurance and certain other expenses applicable
to the leased premises and include options to renew. Management expects that,
in
the normal course of business, leases that expire will be renewed or replaced
by
other leases.
Closed
Store Liabilities
The
Company continually reviews the operating performance of its existing store
locations and closes certain locations identified as under performing. Closing
an under performing location has not resulted in the elimination of the
operations and associated cash flows from the Company’s ongoing operations as
the Company transfers those operations to another location in the local market.
The Company maintains closed store liabilities that include liabilities for
these exit activities and liabilities assumed through past acquisitions that
are
similar in nature but recorded by the acquired companies prior to acquisition.
The
Company had also maintained restructuring liabilities recorded through purchase
accounting that reflected costs of the plan to integrate the acquired operations
into the Company’s business.
New
provisions established for closed store liabilities include the present value
of
the remaining lease obligations and management’s estimate of future costs of
insurance, property tax and common area maintenance reduced by the present
value
of estimated revenues from subleases and lease buyouts and are established
by a
charge to selling, general and administrative costs in the accompanying
condensed consolidated statements of operations at the time the facilities
actually close. The Company currently uses discount rates ranging from 4.5%
to
7.8% for estimating these liabilities.
From
time
to time these estimates require revisions that affect the amount of the recorded
liability. This change in estimate relates primarily to changes in assumptions
associated with the revenue from subleases. The effect of changes in estimates
for the closed store liabilities is netted with new provisions and included
in
selling, general and administrative expenses in the accompanying condensed
consolidated statements of operations.
Changes
in estimates associated with restructuring liabilities resulted in adjustments
to the carrying value of property and equipment, net on the accompanying
consolidated balance sheets and did not affect the Company’s condensed
consolidated statement of operations. The closed store and restructuring
liabilities are recorded in accrued expenses (current portion) and other
long-term liabilities (long-term portion) in the accompanying condensed
consolidated balance sheets.
Hedge
Activities
The
Company has entered into interest rate swap agreements to limit its cash flow
risk on its variable rate debt. In March 2005, the Company entered into three
interest rate swap agreements on an aggregate of $175,000 of debt under its
senior credit facility. The detail for the individual swaps is as
follows:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
· |
The
first swap fixed the Company’s LIBOR rate at 4.153% on $50,000 of debt for
a term of 48 months, expiring in March 2009.
|
· |
The
second swap fixed the Company’s LIBOR rate at 4.255% on $75,000 of debt
for a term of 60 months, expiring in February
2010.
|
· |
Beginning
in March 2006, the third swap fixed the Company’s LIBOR rate at 4.6125% on
$50,000 of debt for a term of 54 months, expiring in September
2010.
|
Additionally,
a previous interest rate swap allowing the Company to fix its LIBOR rate at
2.269% on $75,000 of debt for a term of 36 months, expired in March 2006.
In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” the fair value of these hedges is recorded as an asset or liability
in the accompanying condensed consolidated balance sheets at April 22, 2006
and
December 31, 2005, respectively. The Company uses the “matched terms” accounting
method as provided by Derivative Implementation Group Issue No. G9, “Assuming No
Ineffectiveness When Critical Terms of the Hedging Instrument and the Hedge
Transaction Match in a Cash Flow Hedge” for the interest rate swaps.
Accordingly, the Company has matched the critical terms of each hedge instrument
to the hedged debt. Therefore, the Company has recorded all adjustments to
the
fair value of the hedge instruments in accumulated other comprehensive income
through the maturity date of the applicable hedge arrangement. The fair value
at
April 22, 2006 was an unrecognized gain of $4,530, net of the related tax
impact, on the swaps. Any amounts received or paid under these hedges will
be
recorded in the statement of operations as earned or incurred. Comprehensive
income for the sixteen weeks ended April 22, 2006, and April 23, 2005 is as
follows:
|
|
Sixteen
Weeks Ended
|
|
|
|
|
April
22,
|
|
April
23,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
74,081
|
|
$
|
68,647
|
|
|
Unrealized
gain (loss) on hedge
|
|
|
|
|
|
|
|
|
arrangements,
net of tax
|
|
|
1,440
|
|
|
(362
|
)
|
|
Comprehensive
income
|
|
$
|
75,521
|
|
$
|
68,285
|
|
|
|
|
|
|
|
|
|
|
|
Based
on
the estimated current and future fair values of the hedge arrangements at April
22, 2006, the Company estimates amounts currently included in accumulated other
comprehensive income that will be reclassified to earnings in the next 12 months
will consist of a gain of $1,310 associated with the interest rate
swaps.
Recent
Accounting Pronouncements
In
March
2006,
the FASB’s Emerging Issues Task Force released Issue 06-3, “How Sales Taxes
Collected From Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement,” or EITF
06-3. A
tentative consensus was reached that entities may adopt
a
policy of presenting sales taxes in the income statement on either a gross
or
net basis. If taxes are significant, an entity should disclose its policy of
presenting taxes and the amount of taxes if reflected on a gross basis in the
income statement. If a consensus is reached by the EITF, the guidance would
be
effective for periods beginning after December 15, 2006. The Company presents
sales net of sales taxes in its consolidated statement of operations and does
not anticipate changing its policy as a result of EITF
06-3.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS
No. 140, “Accounting for Transfers and
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
Servicing
of Financial Assets and Extinguishments of Liabilities,” with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
SFAS No. 156 is effective for fiscal years beginning after September 15,
2006. The Company does not expect the adoption of SFAS No. 156 to have a
material impact on its financial condition, results of operations or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140.” SFAS
No. 155 simplifies accounting for certain hybrid instruments currently governed
by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”
or SFAS No. 133, by allowing fair value remeasurement of hybrid instruments
that
contain an embedded derivative that otherwise would require bifurcation. SFAS
No. 155 also eliminates the guidance in SFAS No. 133 Implementation Issue No.
D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets,” which provides such beneficial interests are not subject to
SFAS No. 133. This statement amends SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125,”
by
eliminating the restriction on passive derivative instruments that a qualifying
special-purpose entity may hold. SFAS No. 155 is effective for financial
instruments acquired or issued after the beginning of the Company’s fiscal year
2007. The Company does not expect the adoption of SFAS No. 155 to have a
material impact on its financial condition, results of operations or cash
flows.
Share-Based
Payments
The
Company has stock-based compensation plans as allowed under its long-term
incentive plan, which includes fixed stock options and deferred stock units,
or
DSUs. The
stock
options authorized to be granted are non-qualified stock options and terminate
on the seventh anniversary of the grant date. Additionally, the stock options
vest over a three-year period in equal installments beginning on the first
anniversary grant date and contain no post-vesting restrictions. The Company
grants DSUs annually to its Board of Directors as provided for in the Advance
Auto Parts, Inc. Deferred Stock Unit Plan for Non-Employee Directors and
Selected Executives, or the DSU Plan. Each DSU is equivalent to one share of
common stock of the Company. The DSUs are immediately vested upon issuance
but
are held on behalf of the director until he or she ceases to be a director.
The
DSUs are then distributed to the director following his or her last date of
service. Additionally, the DSU Plan provides for the deferral of compensation
as
earned in the form of an annual retainer for board members and wages for certain
highly compensated employees of the Company. These deferred stock units are
payable to the participants at a future date or over a specified time period
as
elected by the participants in accordance with the DSU Plan. In
addition, the Company offers an employee stock purchase plan, or ESPP. Through
2005 all eligible employees, or team members, could elect to have a portion
of
compensation paid in the form of Company stock in lieu of cash calculated at
85%
of fair market value at the beginning or end of the quarterly purchase period.
Effective January 1, 2006, the ESPP was amended such that eligible team members
may purchase common stock at 95% of fair market value at the date of
purchase.
Prior
to
January 1, 2006, the Company accounted for its stock-based compensation plans
as
prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting
for Stock Issued to Employees,” or APB No. 25. The Company recorded no
compensation cost in its statement of operations prior to fiscal 2006 for its
fixed stock option grants as the exercise price equaled the fair market value
of
the underlying stock on the grant date. In addition, the Company did not
recognize compensation expense for its employee stock purchase plan since it
qualifies as a non-compensatory plan under Section 423 of the Internal Revenue
Code of 1986, as amended. The Company did recognize an insignificant amount
of
stock-based compensation expense related to the grant of deferred stock units
under its DSU Plan.
On
January 1, 2006, the Company adopted the provisions of SFAS
No.
123
(revised 2004), "Share-Based Payment," or SFAS No. 123R. SFAS No. 123R replaces
SFAS No. 123 and supersedes APB Opinion No. 25 and subsequently issued stock
option related guidance. The Company elected to use the modified-prospective
method of
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
implementation.
Under this transition method, stock-based compensation expense for the sixteen
weeks ended April 22, 2006 included compensation expense for all stock-based
awards granted subsequent to January 1, 2006 based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123R, and compensation
expense for all stock-based awards granted prior to but unvested as of January
1, 2006 based on the grant-date fair value estimated in accordance with original
provisions of SFAS No. 123.
The
Company uses the Black-Scholes option-pricing model to value all options and
the
straight-line method to amortize this fair value as compensation cost over
the
requisite service period. Total stock-based compensation expense included in
selling, general and administrative expenses in the Company’s statement of
operations for the sixteen weeks ended April 22, 2006 was $5,045. The related
income tax benefit was $1,846. The Company did not have any stock-based
compensation expense in accordance with APB No. 25 for the sixteen weeks ended
April 23, 2005. In accordance with the modified-prospective transition method
of
SFAS No. 123R, the Company has not restated prior periods.
As
a
result of adopting SFAS No. 123R on January 1, 2006, the Company’s earnings
before income tax expense and net earnings for the sixteen weeks ended April
22,
2006, were $5,045 and $3,199 lower, respectively, than if the Company had
continued to account for stock-based compensation under APB No. 25. The related
impact in 2006 to basic and diluted earnings per share is $0.03.
Prior
to
the adoption of SFAS No.123R, the Company reported all income tax benefits
resulting from the exercise of stock options as operating cash inflows in its
consolidated statements of cash flow. In accordance with SFAS No.123R, the
Company revised its statement of cash flows presentation to include the excess
tax benefits from the exercise of stock options as financing cash inflows rather
than operating cash inflows. Accordingly, for the sixteen weeks ended April
22,
2006, the Company reported $2,663 of excess tax benefits as a financing cash
inflow.
The
following table reflects the impact on net income and earnings per share as
if
the Company had applied the fair value based method of recognizing stock-based
compensation costs as prescribed by SFAS No. 123 for the sixteen weeks ended
April 23, 2005.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
|
|
April
23,
|
|
|
|
|
2005
|
|
|
|
|
(16
weeks ended)
|
|
|
Net
income, as reported
|
|
$
|
68,647
|
|
|
Add:
Total stock-based employee compensation
|
|
|
|
|
|
expense
included in reported net income, net
|
|
|
|
|
|
of
related tax effects
|
|
|
-
|
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
|
expense
determined under fair value based method
|
|
|
|
|
|
for
all awards, net of related tax effects
|
|
|
(2,353
|
)
|
|
Pro
forma net income
|
|
$
|
66,294
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
0.64
|
|
|
Basic,
pro forma
|
|
|
0.62
|
|
|
Diluted,
as reported
|
|
|
0.63
|
|
|
Diluted,
pro forma
|
|
|
0.61
|
|
|
The
following table summarizes the fixed stock option transactions for the sixteen
weeks ended April 22, 2006:
|
|
Number
of Options
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Contractual Term (in years)
|
|
Aggregate
Intrinsic Value
|
|
Fixed
Price Options
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
6,192
|
|
$
|
24.46
|
|
|
|
|
|
|
|
Granted
|
|
|
2,048
|
|
|
40.45
|
|
|
|
|
|
|
|
Exercised
|
|
|
(359
|
)
|
|
21.67
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(126
|
)
|
|
29.81
|
|
|
|
|
|
|
|
Outstanding
at April 22, 2006
|
|
|
7,755
|
|
$
|
28.73
|
|
|
5.19
|
|
$
|
82,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at April 22, 2006
|
|
|
3,538
|
|
$
|
20.24
|
|
|
4.05
|
|
$
|
66,107
|
|
The
aggregate intrinsic value in the preceding table is based on the Company’s
closing stock price of $38.92 as of the last trading day of the period ended
April 22, 2006. The aggregate intrinsic value of options (the amount by which
the market price of the stock on the date of exercise exceeded the exercise
price of the option) exercised during the sixteen weeks ended April 22, 2006
and
April 23, 2005 was $7,105 and $10,616, respectively. As of April 22, 2006,
there
was $39,334 of unrecognized compensation expense related to non-vested fixed
stock options that is expected to be recognized over a weighted average period
of 2.3 years.
The
weighted average fair value of stock options granted during the sixteen weeks
ended April 22, 2006 and April 23, 2005 was $10.69 and $10.54 per share,
respectively. The fair value of each stock option was estimated
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
on
the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
|
|
April
22,
|
|
April
23,
|
|
|
Black-Scholes
Option Valuation Assumptions (1)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate (2)
|
|
|
4.6%
|
|
|
3.7%
|
|
|
Expected
dividend yield
|
|
|
0.6%
|
|
|
-
|
|
|
Expected
stock price volatility (3)
|
|
|
28%
|
|
|
33%
|
|
|
Expected
life of stock options (in months) (4)
|
|
|
44
|
|
|
48
|
|
|
(1) |
Forfeitures
are based on historical experience.
|
(2) |
The
risk-free interest rate is based on a U.S. Treasury constant maturity
interest rate whose term is consistent with the expected life of
the
Company’s stock options.
|
(3) |
Expected
volatility is based on the historical volatility of the Company’s common
stock for the period consistent with the life of the Company’s stock
options.
|
(4) |
The
expected life of the Company’s stock options represents the estimated
period of time until exercise and is based on historical experience
of
such awards.
|
The
Company issues new shares of common stock upon exercise of stock options.
On
September 14, 2005, the Company completed its acquisition of Autopart
International, Inc., or AI. The acquisition, which included 61 stores throughout
New England and New York, a distribution center and AI’s wholesale distribution
business, complements the Company’s growing presence in the Northeast. AI serves
the growing commercial market in addition to warehouse distributors and jobbers.
The
acquisition has been accounted for under the provisions of SFAS No. 141,
“Business Combinations,” or SFAS No. 141. The total purchase price of AI
consisted of $87,511, of which $74,940 was paid upon closing with an additional
$12,500 of contingent consideration paid in March 2006 based upon AI satisfying
certain earnings before interest, taxes, depreciation and amortization targets
through December 31, 2005. Furthermore, an additional $12,500 is payable upon
the achievement of certain synergies, as defined in the Purchase Agreement,
through fiscal 2008. In accordance with SFAS No. 141, this additional payment
does not represent contingent consideration and will be reflected in the
statement of operations when earned. Due to the timing of this acquisition,
the
purchase price has preliminarily been allocated to the assets acquired and
the
liabilities assumed based upon estimates of fair values at the date of
acquisition. This preliminary allocation resulted in the recognition of $50,546
in goodwill, all of which is deductible for tax purposes, and is subject to
the
finalization of the valuation of certain identifiable intangibles.
The
following unaudited proforma information presents the results of operations
of
the Company as if the acquisition had taken place at the beginning of the
applicable period:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
|
|
April
23,
|
|
|
|
|
2005
|
|
|
|
|
(16
weeks ended)
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,287,027
|
|
|
Net
income
|
|
|
70,109
|
|
|
Earnings
per diluted share
|
|
$
|
0.64
|
|
|
Receivables
consist of the following:
|
|
April
22,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
14,478
|
|
$
|
13,733
|
|
|
Vendor
|
|
|
55,724
|
|
|
63,161
|
|
|
Installment
|
|
|
4,833
|
|
|
5,622
|
|
|
Insurance
recovery
|
|
|
10,660
|
|
|
13,629
|
|
|
Other
|
|
|
3,730
|
|
|
3,230
|
|
|
Total
receivables
|
|
|
89,425
|
|
|
99,375
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
(4,646
|
)
|
|
(4,686
|
)
|
|
Receivables,
net
|
|
$
|
84,779
|
|
$
|
94,689
|
|
|
Inventories
are stated at the lower of cost or market, cost being determined using the
last-in, first-out ("LIFO") method for approximately 93% of inventories at
both
April 22, 2006 and December 31, 2005. Under the LIFO method, the Company’s cost
of sales reflects the costs of the most currently purchased inventories while
the inventory carrying balance represents the costs relating to prices paid
in
prior years. The Company’s costs to acquire inventory have been generally
decreasing in recent years as a result of its significant growth. Accordingly,
the cost to replace inventory is less than the LIFO balances carried for similar
product. As a result of the LIFO method and the ability to obtain lower product
costs, the Company recorded reductions to cost of sales of $2,940 and $4,160
for
the sixteen weeks ended April 22, 2006 and April 23, 2005,
respectively.
An
actual
valuation of inventory under the LIFO method can be made only at the end of
each
fiscal year based on the inventory levels and costs at that time. Accordingly,
interim LIFO calculations must be based on management’s estimates of expected
fiscal year-end inventory levels and costs.
The
remaining inventories are comprised of product cores, which consist of the
non-consumable portion of certain parts and batteries and are valued under
the
first-in, first-out ("FIFO") method. Core values are included as part of the
Company’s merchandise costs and are either passed on to the customer or returned
to the vendor. Additionally, these products are not subject to the frequent
cost
changes like the Company’s other merchandise inventory, thus there is no
material difference from applying either the LIFO or FIFO valuation methods.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at April 22,
2006 and December 31, 2005, were $94,567 and $92,833, respectively. Inventories
consist of the following:
|
|
April
22,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Inventories
at FIFO
|
|
$
|
1,345,160
|
|
$
|
1,294,310
|
|
|
Adjustments
to state inventories at LIFO
|
|
|
75,729
|
|
|
72,789
|
|
|
Inventories
at LIFO
|
|
$
|
1,420,889
|
|
$
|
1,367,099
|
|
|
Replacement
cost approximated FIFO cost at April 22, 2006, and December 31,
2005.
Inventory
quantities are tracked through a perpetual inventory system. The Company uses
a
cycle counting program in all distribution centers; Parts Delivered Quickly
warehouses, or PDQs; Local Area Warehouses, or LAWs, and retail stores to ensure
the accuracy of the perpetual inventory quantities of both merchandise and
core
inventory. The Company establishes reserves for estimated shrink based on
historical accuracy and effectiveness of the cycle counting program. The Company
also establishes reserves for potentially excess and obsolete inventories based
on current inventory levels of discontinued product and the historical analysis
of the liquidation of discontinued inventory below cost. The nature of the
Company’s inventory is such that the risk of obsolescence is minimal and excess
inventory has historically been returned to the Company’s vendors for credit.
The Company provides reserves when less than full credit is expected from a
vendor or when liquidating product will result in retail prices below recorded
costs. The Company’s reserves against inventory for these matters were $26,110
and $22,825 at April 22, 2006 and December 31, 2005, respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
Long-term
debt consists of the following:
|
|
April
22,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Senior
Debt:
|
|
|
|
|
|
Tranche
A, Senior Secured Term Loan at variable interest
|
|
|
|
|
|
|
|
rates
(6.11% and 5.66% at April 22, 2006 and December 31,
2005,
|
|
|
|
|
|
|
|
respectively),
due September 2009
|
|
$
|
162,500
|
|
$
|
170,000
|
|
Tranche
B, Senior Secured Term Loan at variable interest
|
|
|
|
|
|
|
|
rates
(6.33% and 5.89% at April 22, 2006 and December 31, 2005,
|
|
|
|
|
|
|
|
respectively),
due September 2010
|
|
|
167,875
|
|
|
168,300
|
|
Delayed
Draw, Senior Secured Term Loan at variable interest
|
|
|
|
|
|
|
|
rates
(6.44% and 5.91% at April 22, 2006 and December 31, 2005,
|
|
|
|
|
|
|
|
respectively),
due September 2010
|
|
|
99,750
|
|
|
100,000
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
|
(6.11%
and 5.66% at April 22, 2006 and December 31, 2005,
|
|
|
|
|
|
|
|
respectively)
due September 2009
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
479
|
|
|
500
|
|
|
|
|
430,604
|
|
|
438,800
|
|
Less:
Current portion of long-term debt
|
|
|
(35,261
|
)
|
|
(32,760
|
)
|
Long-term
debt, excluding current portion
|
|
$
|
395,343
|
|
$
|
406,040
|
|
At
April
22, 2006, the Company’s senior credit facility provided for $430,125 in term
loans (as detailed above) and $200,000 under a revolving credit facility (which
provides for the issuance of letters of credit with a sub limit of $70,000).
As
of April 22,
2006,
the Company had $54,564 in letters of credit outstanding, which reduced
availability under the revolver to $145,436. In addition to the letters of
credit, the Company maintains approximately $1,607 in surety bonds issued by
its
insurance provider primarily to utility providers and the departments of revenue
for certain states. These letters of credit and surety bonds generally have
a
term of one year or less.
The
tranche A term loan currently requires scheduled repayments of $7,500 on June
30, 2006 and quarterly thereafter through December 31, 2006, $10,000 on March
31, 2007 and quarterly thereafter through December 31, 2007, $12,500 on March
31, 2008 and quarterly thereafter through June 30, 2009 and $25,000 due at
maturity on September 30, 2009. The tranche B term loan currently requires
scheduled repayments of $425 on June 30, 2006 and quarterly thereafter, with
a
final payment of $160,650 due at maturity on September 30, 2010. The delayed
draw term loan currently requires scheduled repayments of 0.25% of the aggregate
principal amount outstanding on June 30, 2006 and quarterly thereafter, with
a
final payment due at maturity on September 30, 2010. The revolver expires on
September 30, 2009. In addition, the Pennsylvania Department of Community and
Economic Development machinery and equipment loan fund, or MELF, loan currently
requires nominal monthly principal repayments ranging from $5 to $7 until
maturity on January 1, 2010.
The
interest rates on the tranche A and B term loans, the delayed term loan and
the
revolver are based, at the Company’s option, on an adjusted LIBOR rate, plus a
margin, or an alternate base rate, plus a margin. The current margin for the
tranche A term loan and revolver is 1.25% and 0.25% per annum for the adjusted
LIBOR and alternate base rate borrowings, respectively. The current margin
for
the tranche B loan and the delayed draw term loan is 1.50% and 0.50% per annum
for the adjusted LIBOR and alternative base rate borrowings,
respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
22, 2006 and April 23, 2005
(in
thousands, except per share data)
(unaudited)
Additionally,
a commitment fee of 0.25% per annum will be charged on the unused portion of
the
revolver, payable in arrears. The effective interest rate on the MELF loan
is
2.75%.
Under
the
senior credit facility, the Company is required to comply with financial
covenants with respect to limits on annual capital expenditures, a maximum
leverage ratio, a minimum interest coverage ratio, a minimum current assets
to
funded senior debt ratio and a maximum senior leverage ratio. The Company was
in
compliance with the above covenants under the senior credit facility at April
22, 2006.
6. |
Stock
Repurchase
Program:
|
During
the third quarter of fiscal 2005, the Company's Board of Directors authorized
a
stock repurchase program of up to $300,000 of the Company's common stock plus
related expenses. The program allows the Company to repurchase its common stock
on the open market or in privately negotiated transactions from time to time
in
accordance with the requirements of the Securities and Exchange Commission.
Under this program, the Company repurchased 1,615 shares of common stock at
an
aggregate cost of $65,543, or an average price of $40.58 per share, excluding
related expenses during the sixteen weeks ended April 22, 2006. At April 22,
2006, the Company has repurchased a total of 3,146 shares of common stock under
this program at an aggregate cost of $124,995, or an average price of $39.74
per
share, excluding related expenses. At April 22, 2006, 336 shares remained
unsettled representing $13,154.
During
the first quarter of fiscal 2006, the Company also retired 1,997 shares of
common stock, all of which was repurchased under the $300,000 stock repurchase
program.
The
Company provides certain health and life insurance benefits for eligible retired
team members through a postretirement plan, or the Plan. These benefits are
subject to deductibles, co-payment provisions and other limitations.
The
Plan
has no assets and is funded on a cash basis as benefits are paid. The
discount rate that the Company utilizes for determining its postretirement
benefit obligation is actuarially determined. The discount rate utilized at
December 31, 2005 was 5.5%, and remained unchanged through the sixteen weeks
ended April 22, 2006. The
Company expects fiscal 2006 plan contributions to completely offset benefits
paid, consistent with fiscal 2005.
The
components of net periodic postretirement benefit cost for the sixteen weeks
ended April 22, 2006, and April 23, 2005 respectively, are as
follows:
|
|
Sixteen
Weeks Ended
|
|
|
|
|
April
22,
|
|
April
23,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
$
|
-
|
|
|
Interest
cost
|
|
|
223
|
|
|
247
|
|
|
Amortization
of prior service cost
|
|
|
(178
|
)
|
|
(178
|
)
|
|
Amortization
of unrecognized net losses
|
|
|
64
|
|
|
73
|
|
|
|
|
$
|
109
|
|
$
|
142
|
|
|
The
following discussion of our consolidated historical results of operations and
financial condition should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included elsewhere
in
this report. Our first quarter consists of 16 weeks and our other three quarters
consist of 12 weeks each.
Certain
statements in this report are "forward-looking statements" within the meaning
of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are usually identified by the use of
words such as "will," "anticipates," "believes," "estimates," "expects,"
"projects," "forecasts," "plans," "intends," "should" or similar expressions.
We
intend those forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and are included in this statement for purposes
of
complying with these safe harbor provisions.
These
forward-looking statements reflect current views about our plans, strategies
and
prospects, which are based on the information currently available and on current
assumptions.
Although
we believe that our plans, intentions and expectations as reflected in or
suggested by those forward-looking statements are reasonable, we can give no
assurance that the plans, intentions or expectations will be achieved. Listed
below and discussed in our annual report on Form 10-K for the year ended
December 31, 2005 are some important risks, uncertainties and contingencies
which could cause our actual results, performances or achievements to be
materially different from the forward-looking statements made in this report.
These risks, uncertainties and contingencies include, but are not limited to,
the following:
· the
implementation of our business strategies and goals;
· our
ability to expand our business;
· competitive
pricing and other competitive pressures;
· a
decrease in demand for our products;
· the
occurrence of natural disasters and/or extended periods of inclement
weather;
· our
ability to obtain affordable insurance against the financial impacts of natural
disaters;
· the
availability of suitable real estate locations;
· deterioration
in general economic conditions;
· our
ability to attract and retain qualified team members;
· integration
of acquisitions;
· our
relationship with our vendors;
· our
involvement as a defendant in litigation or incurrence of judgments, fines
or
legal costs;
· adherence
to the restrictions and covenants imposed under our senior credit facility;
and
· acts
of
terrorism.
We
assume
no obligation to update publicly any forward-looking statements, whether as
a
result of new information, future events or otherwise. In evaluating
forward-looking statements, you should consider these risks and uncertainties,
together with the other risks described from time to time in our other reports
and documents filed with the Securities and Exchange Commission, and you should
not place undue reliance on those statements.
Management
Overview
During
the first quarter of fiscal 2006, we produced solid earnings per diluted share
of $0.68 compared to $0.63 for the same quarter of fiscal 2005. These results
were primarily driven by increased sales in the form of a 3.9% comparable store
net sales increase offset by higher operating expenses, including the
recognition of stock-based compensation expense for the first time and the
costs
of our store manager conference, which is held every other year. We believe
several external factors such as an unseasonably mild winter, higher interest
rates, increasing energy prices and the higher required minimum payments by
our
customers on their existing credit card balances had a weakening effect on
the
comparisons of our first quarter results to the same quarter of last
year.
While
the
current economic environment is challenging, the factors that favorably impact
our industry continue to remain strong. The number of registered vehicles on
the
road is at an all time high and continues to increase. The average age of
vehicles has now increased to over nine years old. Additionally, technological
changes in newer models and the shift from cars to light trucks and sport
utility vehicles have resulted in more expensive replacement parts for these
vehicles. We believe the combination of the execution of our key business
initiatives, as previously discussed, and favorable industry dynamics will
continue to drive our earnings per share growth into the foreseeable
future.
The
following table highlights certain operating results and key metrics for the
sixteen weeks ended April 22, 2006, and April 23, 2005.
|
|
Sixteen
Weeks Ended
|
|
|
|
|
April
22, 2006
|
|
April
23, 2005
|
|
|
|
|
|
|
|
|
|
Total
net sales (in
thousands)
|
|
$
|
1,393,010
|
|
$
|
1,258,364
|
|
|
Total
commercial net sales (in
thousands)
|
|
$
|
348,850
|
|
$
|
259,710
|
|
|
Comparable
store net sales growth
|
|
|
3.9%
|
|
|
9.2%
|
|
|
DIY
comparable store net sales growth
|
|
|
0.5%
|
|
|
5.1%
|
|
|
DIFM
comparable store net sales growth
|
|
|
16.3%
|
|
|
27.2%
|
|
|
Average
net sales per store (in
thousands)
|
|
$
|
1,567
|
|
$
|
1,494
|
|
|
Inventory
per store
|
|
$
|
485,442
|
|
$
|
489,457
|
|
|
Inventory
turnover
|
|
|
1.70
|
|
|
1.67
|
|
|
Gross
margin
|
|
|
47.8%
|
|
|
47.8%
|
|
|
Operating
margin
|
|
|
9.1%
|
|
|
9.6%
|
|
|
|
Note:
|
These
metrics should be read along with the footnotes to the table setting
forth
our selected store data in Item 6. "Selected Financial Data" in our
annual
report on Form 10-K for the fiscal year ended December 31, 2005,
which was
filed with the SEC on March 16, 2006. The footnotes describe the
calculation of the metrics. Average net sales per store and inventory
turnover for the interim periods presented above were calculated
using
results of operations from the last 13 accounting
periods.
|
Store
Count
At
April
22, 2006, we operated 2,927 stores within the United States, Puerto Rico and
the
Virgin Islands. We operated 2,824 stores throughout 40 states in the
Northeastern, Southeastern and Midwestern regions of the United States. These
stores operated under the “Advance Auto Parts” trade name except for certain
stores in the state of Florida, which operated under the “Advance Discount Auto
Parts” trade name. These stores offer automotive replacement parts, accessories
and maintenance items, with no significant concentration in any specific product
area. In addition, we operated 37 stores under the “Western Auto” and “Advance
Auto Parts” trade names, located primarily in Puerto Rico and the Virgin
Islands. The Western Auto stores offer automotive tires and service in addition
to automotive parts, accessories and maintenance items. At April 22, 2006,
we
also operated 66 stores under the “Autopart International” trade name throughout
the Northeastern region of the United States.
The
following table sets forth information about our stores, including the number
of
new, closed and relocated stores, during the sixteen weeks ended April 22,
2006.
We lease approximately 81% of our stores.
|
|
Sixteen
|
|
|
|
|
Weeks
Ended
|
|
|
|
|
April
22, 2006
|
|
|
Number
of stores at beginning of period
|
|
|
2,872
|
|
|
New
stores
|
|
|
58
|
|
|
Closed
stores
|
|
|
(3
|
)
|
|
Number
of stores, end of period
|
|
|
2,927
|
|
|
Relocated
stores
|
|
|
11
|
|
|
Stores
with commercial programs (a)
|
|
|
2,370
|
|
|
(a) |
As
of April 22, 2006, these commercial programs include the 66 AI stores.
|
We
anticipate that we will add a total of approximately 185 to 195 new stores
during 2006 primarily through new store openings, excluding any
acquisitions.
Commercial
Program
Our
commercial program produced strong results during the first quarter of fiscal
2006. We attribute this performance to the execution of our commercial plan,
which consists of:
|
· |
Targeting commercial customers with
a hard
parts focus; |
|
· |
Targeting
commercial customers who need access to a wide selection of
inventory;
|
|
· |
Targeting
customers within a tight delivery radius of our
stores;
|
|
· |
Moving inventory closer to our commercial
customers to ensure quicker deliveries; |
|
· |
Growing
our market share of the commercial market through internal growth
and
selected acquisitions;
|
|
· |
Providing trained parts experts to assist
commercial customers’ merchandise selections; and |
|
· |
Providing
credit solutions to our commercial customers through our commercial
credit
program.
|
Commercial
sales represented approximately 25% of our total sales for the first quarter
compared to almost 21% in the first quarter of fiscal 2005. As of April 22,
2006, we operated commercial programs in 81% of our total stores, including
the
66 AI stores, an increase from approximately 75% at the end of the prior year
quarter. We anticipate growing our number of commercial programs to
approximately 85% of our total store base over time. We believe we have the
potential to grow profitably our share of the commercial business in each of
our
markets.
We
believe the continued execution of our commercial plan and growth in our
commercial programs will result in double-digit comparable store net sales
growth in our commercial business for the foreseeable future. We believe the
acquisition of AI will supplement our commercial growth due to AI’s established
delivery programs and knowledge of the commercial industry, particularly for
foreign makes and models of vehicles.
Share-Based
Payments
On
January 1, 2006, we adopted the provisions of Statement
of Financial Accounting Standard, or SFAS, No.
123
(revised 2004), "Share-Based Payment," or SFAS No. 123R. SFAS No. 123R replaces
SFAS No. 123 and supersedes APB Opinion No. 25 and subsequently issued stock
option related guidance. We elected to use the modified-prospective method
of
implementation. Under this transition method, stock-based compensation expense
for the sixteen weeks ended April 22, 2006 included compensation expense for
all
stock-based awards granted subsequent to January 1, 2006 based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123R, and
compensation expense for all stock-based awards granted prior to but unvested as
of January 1, 2006 based on the grant-date fair value estimated in accordance
with original provisions of SFAS No. 123.
We
use
the Black-Scholes option-pricing model to value all options and straight-line
method to amortize this fair value as compensation cost over the requisite
service period. Total stock-based compensation expense included in selling,
general and administrative expenses in our statement of operations for the
sixteen weeks ended April 22, 2006 was $5.0 million. The related income tax
benefit was $1.8 million. We did not have any stock-based
compensation
expense in accordance with APB No. 25 for the sixteen weeks ended April 23,
2005. In accordance with the modified-prospective transition method of SFAS
No.
123R, we have not restated prior periods.
As
a
result of adopting SFAS No. 123R on January 1, 2006, our earnings before income
tax expense and net earnings for the sixteen weeks ended April 22, 2006, were
$5.0 million and $3.2 million lower, respectively, than if we had continued
to
account for stock-based compensation under APB No. 25. The related impact in
2006 to basic and diluted earnings per share is $0.03.
As
of
April 22, 2006, we have $39.3 million of unrecognized compensation expense
related to non-vested fixed stock options we expect to recognize over a weighted
average period of 2.3 years.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting policies
generally accepted in the United States of America. Our discussion and analysis
of the financial condition and results of operations are based on these
financial statements. The preparation of these financial statements requires
the
application of accounting policies in addition to certain estimates and
judgments by our management. Our estimates and judgments are based on currently
available information, historical results and other assumptions we believe
are
reasonable. Actual results could differ from these estimates. During the first
quarter of fiscal 2006, we consistently applied the critical accounting policies
discussed in our annual report on Form 10-K for the year ended December 31,
2005. For a complete discussion regarding these critical accounting policies,
refer to this annual report on Form 10-K. In
addition to these critical accounting policies, we have added “Share-Based
Payments” as a critical accounting policy upon the adoption of SFAS No. 123R as
of January 1, 2006.
Share-Based
Payments
We
account for our stock-based compensation plans as prescribed by the fair value
provisions of SFAS No. 123R. We use the Black-Scholes option-pricing model
to
determine the fair value of our stock options. This model requires the input
of
certain assumptions, including the expected life of stock options, expected
stock price volatility and the estimate of stock option
forfeitures. If actual results are different from
these assumptions, the stock-based compensation expense reported in our
financial statements may not be representative of the actual economic cost
of
the stock-based compensation. In addition, significant changes in these
assumptions could materially impact our stock-based compensation expense on
future awards.
Components
of Statement of Operations
Net
Sales
Net
sales
consist primarily of comparable store sales and new store net sales. We
calculate comparable store sales based on the change in net sales starting
once
a store has been opened for 13 complete accounting periods. We include
relocations in comparable store sales from the original date of opening. We
exclude net sales from the 37 Western Auto retail stores and 66 AI stores from
our comparable store sales as a result of their unique product offerings.
Cost
of Sales
Our
cost
of sales consists of merchandise costs, net of incentives under vendor programs,
inventory shrinkage and warehouse and distribution expenses. Gross profit as
a
percentage of net sales may be affected by variations in our product mix, price
changes in response to competitive factors and fluctuations in merchandise
costs
and vendor programs. We seek to avoid fluctuation in merchandise costs and
instability of supply by entering into long-term purchase agreements with
vendors when we believe it is advantageous.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist of store payroll, store occupancy
(including rent), advertising expenses, other store expenses and general and
administrative expenses, including salaries and related benefits of store
support center team members, stock option compensation expense, store support
center administrative expenses, data processing, professional expenses and
other
related expenses.
Results
of Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
|
|
Sixteen
Week Periods Ended
|
|
|
|
|
(unaudited)
|
|
|
|
|
April
22,
|
|
April
23,
|
|
|
|
|
2006
|
|
2005
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost
of sales, including purchasing and warehousing costs
|
|
|
52.2
|
|
|
52.2
|
|
|
Gross
profit
|
|
|
47.8
|
|
|
47.8
|
|
|
Selling,
general and administrative expenses
|
|
|
38.7
|
|
|
38.2
|
|
|
Operating
income
|
|
|
9.1
|
|
|
9.6
|
|
|
Interest
expense
|
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
Other
income, net
|
|
|
0.0
|
|
|
0.0
|
|
|
Provision
for income taxes
|
|
|
3.1
|
|
|
3.4
|
|
|
Net
income
|
|
|
5.3
|
%
|
|
5.5
|
%
|
|
Sixteen
Weeks Ended April 22, 2006 Compared to Sixteen Weeks Ended April 23,
2005
Net
sales
for the sixteen weeks ended April 22, 2006 were $1,393.0 million, an
increase of $134.6 million, or 10.7%, as compared to net sales for the
sixteen weeks ended April 23, 2005. The net sales increase was due to an
increase in comparable store sales of 3.9%, contributions from new stores opened
within the last year and sales from operations acquired mid-year fiscal 2005.
The comparable store sales increase resulted from an increase in average ticket
sales and customer traffic in our DIFM markets and an increase in average ticket
sales by our DIY customers offset by a decrease in customer count.
Gross
profit for the sixteen weeks ended April 22, 2006 was $665.2 million, or 47.8%
of net sales, as compared to $600.9 million, or 47.8% of net sales, for the
sixteen weeks ended April 23, 2005. Gross profit remained flat as a percentage
of net sales for the quarter reflecting a change in our sales mix from higher
margin hard parts categories in last year’s quarter driven primarily by milder
winter weather and other general economic factors affecting our customers.
Selling,
general and administrative expenses increased to $538.9 million, or 38.7% of
net
sales, for the sixteen weeks ended April 22, 2006, from $480.7 million, or
38.2%
of net sales, for the sixteen weeks ended April 23, 2005. Selling, general
and
administrative expenses increased as a percentage of sales as a result of
recording stock-based compensation of approximately 0.4% of net sales upon
the
implementation of SFAS 123R at the beginning of this quarter. Additionally,
the
Company incurred approximately 0.3% of expenses associated with its store
manager conference held every two years and approximately 0.2% of unplanned
expenses related to the resolution of certain legal matters and property damage
costs.
Interest
expense for the sixteen weeks ended April 22, 2006 was $10.2 million, or 0.7%
of
net sales, as compared to $8.9 million, or 0.7% of net sales, for the sixteen
weeks ended April 23, 2005. While interest expense was flat as a percentage
of
sales, the increased expense is reflective of overall higher borrowing rates,
as
compared to the sixteen weeks ended April 23, 2005.
Income
tax expense for the sixteen weeks ended April 22, 2006 was $42.7 million, as
compared to $43.0 million for the sixteen weeks ended April 23, 2005. Our
effective income tax rate was 36.6% for the sixteen weeks ended April 22, 2006
compared to 38.5% for the same period ended April 23, 2005. The decrease in
our
effective rate was driven by the favorable resolution of certain tax
contingencies.
We
produced net income of $74.1 million, or $0.68 per diluted share, for the
sixteen weeks ended April 22, 2006, as compared to $68.6 million, or $0.63
per
diluted share, for the sixteen weeks ended April 23, 2005. As a percentage
of
net sales, net income for the sixteen weeks ended April 22, 2006 was 5.3%,
as
compared to 5.5% for
the
sixteen weeks ended April 23, 2005. Our
earnings
per diluted share results reflect the impact on both earnings and the diluted
share count of implementing FAS 123R as further explained in this management’s
discussion and analysis and in the notes to our financial statements contained
elsewhere in this Form 10-Q. Our earnings per diluted share also reflect the
three-for-two stock split of our common stock effective September 23,
2005.
Liquidity
and Capital Resources
Overview
of Liquidity
Our
primary cash requirements include the purchase of inventory, capital
expenditures, payment of cash dividends and contractual obligations. In
addition, we have used available funds to repurchase shares of common stock
under our stock repurchase program. We have funded these requirements primarily
through cash generated from operations supplemented by borrowings under our
senior credit facility as needed.
At
April
22, 2006, our cash balance was $55.4 million, an increase of $14.6 million
compared to December 31, 2005. Our cash balance increased primarily due to
our
increased earnings and an overall net decrease in working capital during the
sixteen weeks ended April 22, 2006, offset by the repurchase of common stock
and
dividends paid to our shareholders. At
April
22, 2006, we had outstanding indebtedness consisting of borrowings of $430.6
million under our senior credit facility. Additionally, we had $54.6 million
in
letters of credit outstanding, which reduced our availability under the
revolving credit facility to $145.4 million.
On
February 15, 2006, our Board of Directors declared a quarterly dividend of
$0.06
per share to all common stockholders of record as of March 24, 2006. The
dividend was paid on April 7, 2006. Subsequent to April 22, 2006, our Board
of
Directors declared a second quarterly dividend of $0.06 per share to all common
stockholders of record as of June 23, 2006.
Capital
Expenditures
Our
primary capital requirements have been the funding of our continued store
expansion program, including new store openings and store acquisitions, store
relocations and remodels, inventory requirements, the construction and upgrading
of distribution centers, the development and implementation of proprietary
information systems and our acquisitions.
Our
capital expenditures were $78.0 million for the sixteen weeks ended April 22,
2006. These amounts included costs related to new store openings, the upgrade
of
our information systems, remodels and relocations of existing stores. In 2006,
we anticipate that our capital expenditures will be approximately $260.0 million
to $280.0 million.
Our
future capital requirements will depend in large part on the number of and
timing for new stores we open or acquire within a given year and the number
of
stores we relocate or remodel. We anticipate adding approximately 185 to
195 new stores during 2006 primarily through new store openings. As of
April 22, 2006, 58 new stores had been added.
Vendor
Financing Program
Historically,
we have negotiated extended payment terms from suppliers that help finance
inventory growth, and we believe that we will be able to continue financing
much
of our inventory growth through such extended payment terms. We have a
short-term financing program with a bank for certain merchandise purchases.
The
substance of the program is for us to borrow money from the bank to finance
purchases from our vendors. This program allows us to further reduce our working
capital invested in current inventory levels and finance future inventory
growth. Our current capacity under this program is $150 million and this
capacity will increase to $200 million during the second quarter of fiscal
2006.
At April 22, 2006, $125.4 million was payable to the bank by us under this
program.
Stock
Repurchase Program
During
the third quarter of fiscal 2005, our Board of Directors authorized a stock
repurchase program of up to $300 million of our common stock plus related
expenses. The program allows us to repurchase our common stock on the open
market or in privately negotiated transactions from time to time in accordance
with the requirements of the Securities and Exchange Commission. Under this
program, we repurchased 1.6 million shares of common stock at an aggregate
cost
of $65.5 million, or an average price of $40.58 per share, excluding related
expenses during the sixteen weeks ended April 22, 2006. At April 22, 2006,
we
had repurchased a total of 3.1 million shares of common stock under this program
at an aggregate cost of $125.0 million, or an average price of $39.74 per share,
excluding related expenses. At April 22, 2006, 0.3 million shares remained
unsettled representing $13.1 million.
During
the first quarter of fiscal 2006, we also retired 2.0 million shares of common
stock under the $300 million stock repurchase program. As of May 30, 2006,
we
had repurchased an additional 1.0 million shares of common stock at an aggregate
cost of $41.1 million subsequent to April 22, 2006.
Deferred
Compensation and Postretirement Plans
We
maintain a non-qualified deferred compensation plan established for certain
of
our key team members. This plan provides for a minimum and maximum deferral
percentage of the team member’s base salary and bonus, as determined by our
Retirement Plan Committee. We fund the plan liability by remitting the team
members’ deferrals to a Rabbi Trust where these deferrals are invested in
certain life insurance contracts. Accordingly, the cash surrender value on
these
contracts is held in the Rabbi Trust to fund the deferred compensation
liability. At April 22, 2006, the liability related to this plan was $3.1
million, all of which is current.
We
provide certain health care and life insurance benefits for eligible retired
team members through our postretirement plan. At April 22, 2006, our accrued
benefit cost related to this plan was $16.2 million. The plan has no assets
and
is funded on a cash basis as benefits are paid. The discount rate that we
utilize for determining our postretirement benefit obligation is actuarially
determined. The discount rate utilized at December 31, 2005 was 5.5%, and
remained unchanged through the sixteen weeks ended April 22, 2006. We reserve
the right to change or terminate the benefits or contributions at any time.
We
also continue to evaluate ways in which we can better manage these benefits
and
control costs. Any changes in the plan or revisions to assumptions that affect
the amount of expected future benefits may have a significant impact on the
amount of the reported obligation and annual expense.
Analysis
of Cash Flows
An
analysis of our cash flows for the sixteen week period ended April 22, 2006
as
compared to the sixteen week period ended April 23, 2005 is included
below.
|
|
Sixteen
Week Periods Ended
|
|
|
|
|
April
22,
|
|
April
23,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
$
|
166.3
|
|
$
|
133.4
|
|
|
Cash
flows from investing activities
|
|
|
(72.8
|
)
|
|
(58.1
|
)
|
|
Cash
flows from financing activities
|
|
|
(78.9
|
)
|
|
0.1
|
|
|
Net
increase in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
$
|
14.6
|
|
$
|
75.4
|
|
|
Operating
Activities
For
the
sixteen weeks ended April 22, 2006, net cash provided by operating activities
increased $32.9 million to $166.3 million, as compared to the sixteen weeks
ended April 23, 2005. Significant components of this increase consisted of:
· |
$10.5
million increase in earnings exclusive of $5.0 million of non-cash
stock-based compensation expense compared to the same period in fiscal
2005;
|
· |
$54.1
million reduction in cash outflows as a result of reducing inventory
growth rates primarily needed for the opening of our Northeastern
distribution center during the first quarter of last
year;
|
· |
$24.0
million increase in cash flows from other assets related to the timing
of
payments for normal operating expenses, primarily our monthly
rent;
|
· |
$21.4
million decrease in cash flows from accounts payable reflective of
the
prior year increase in inventory discussed above; and
|
· |
$30.7
million decrease in cash flows from accrued expenses related to the
timing
of payments for normal operating
expenses.
|
Investing
Activities
For
the
sixteen weeks ended April 22, 2006, net cash used in investing activities
increased by $14.8 million to $72.8 million, as compared to the sixteen weeks
ended April 23, 2005. Significant
components of this increase consisted of:
· |
increase
in capital expenditures of $18.5 million used primarily to accelerate
our
square footage growth through adding new stores (including ownership
of
selected new stores).
|
Financing
Activities
For
the
sixteen weeks ended April 22, 2006, net cash used in financing activities
increased to $78.9 million, as compared to the sixteen weeks ended April 23,
2005. Significant components of this increase consisted of:
· |
a
$29.7 million cash outflow resulting from timing of bank
overdrafts;
|
· |
a
$32.5 million cash outflow associated with inventory purchased under
our
vendor financing program;
|
· |
a
$6.5 million reduction in cash used to pay dividends;
and
|
· |
a
$10.3 million cash outflow resulting from the repurchase of common
stock.
|
Contractual
Obligations
Our
future contractual obligations related to long-term debt, operating leases
and
other contractual obligations at April 22, 2006 were as follows:
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
|
|
Contractual
Obligations
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
430,604
|
|
$
|
24,564
|
|
$
|
32,093
|
|
$
|
63,450
|
|
$
|
52,771
|
|
$
|
257,573
|
|
$
|
153
|
|
Interest
payments
|
|
$
|
87,612
|
|
$
|
16,920
|
|
$
|
24,336
|
|
$
|
21,236
|
|
$
|
17,690
|
|
$
|
7,427
|
|
$
|
3
|
|
Letters
of credit
|
|
$
|
54,564
|
|
$
|
3,854
|
|
$
|
45,710
|
|
$
|
5,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
leases
|
|
$
|
1,722,478
|
|
$
|
151,891
|
|
$
|
207,189
|
|
$
|
186,877
|
|
$
|
167,755
|
|
$
|
147,109
|
|
$
|
861,657
|
|
Purchase
obligations (1)
|
|
$
|
1,696
|
|
$
|
1,071
|
|
$
|
500
|
|
$
|
125
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other
long-term liabilities(2)
|
|
$
|
72,002
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
(1) |
For
the purposes of this table, purchase obligations are defined as agreements
that are enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing
of the
transaction. Our open purchase orders are based on current inventory
or
operational needs and are fulfilled by our vendors within short periods
of
time. We currently do not have minimum purchase commitments under
our
vendor supply agreements nor are our open purchase orders for goods
and
services binding agreements.
|
|
Accordingly,
we have excluded open purchase orders from this table. The purchase
obligations consist of the amount of fuel required to be purchased
by us
under our fixed price fuel supply agreement and certain commitments
for
training and development. These agreements expire in May 2006 and
March
2008, respectively.
|
(2) |
Primarily
includes employee benefit accruals, restructuring and closed store
liabilities and deferred income taxes for which no contractual
payment
schedule exists.
|
Long
Term Debt
Senior
Credit Facility.
At April
22, 2006, our senior credit facility consisted of (1) a tranche A term loan
facility with a balance of $162.5 million, a tranche B term loan facility
with a balance of $167.9 million, a delayed draw term loan with a balance of
$99.8 million and (2) a $200.0 million revolving credit facility (including
a
letter of credit sub facility) (of which $145.4 million was available as a
result of $54.6 million in letters of credit outstanding). The senior credit
facility is jointly and severally guaranteed by all of our domestic subsidiaries
and is secured by all of our assets and the assets of our existing and future
domestic subsidiaries.
The
tranche A term loan currently requires scheduled repayments of $7.5 million
on
June 30, 2006 and quarterly thereafter through December 31, 2006, $10.0 million
on March 31, 2007 and quarterly thereafter through December 31, 2007, $12.5
million on March 31, 2008 and quarterly thereafter through June 30, 2009 and
$25.0 million due at maturity on September 30, 2009. The tranche B term loan
currently requires scheduled repayments of $0.4 million on June 30, 2006 and
quarterly thereafter, with a final payment of $160.7 million due at maturity
on
September 30, 2010. The delayed draw term loan currently requires scheduled
repayments of 0.25% of the aggregate principal amount outstanding on June 30,
2006 and quarterly thereafter, with a final payment due at maturity on September
30, 2010. The revolver expires on September 30, 2009.
The
interest rates on the tranche A and B term loans, the delayed draw term loan
and
the revolver are based, at our option, on an adjusted LIBOR rate, plus a margin,
or an alternate base rate, plus a margin. The current margin for the tranche
A
term loan and revolver is 1.25% and 0.25% per annum for the adjusted LIBOR
and
alternate base rate borrowings, respectively. The current margin for the tranche
B term loan and the delayed draw term loan is 1.50% and 0.50% per annum for
the
adjusted LIBOR and alternate base rate borrowings, respectively. Additionally,
a
commitment fee of 0.25% per annum is charged on the unused portion of the
revolver, payable in arrears.
In
March
2005, we entered into three interest rate swap agreements on an aggregate of
$175 million of debt under our senior credit facility. Through the first swap
we
fixed our LIBOR rate at 4.153% on $50 million of debt for a term of 48 months,
expiring March 2009. Through the second swap we fixed our LIBOR rate at 4.255%
on $75 million of debt for a term of 60 months, expiring February 2010.
Effective March 2006, the third swap fixed our LIBOR rate at 4.6125% on $50
million of debt for a term of 54 months, expiring in September
2010.
We
are
required to comply with financial covenants in the senior credit facility with
respect to (a) limits on annual aggregate capital expenditures, (b) a maximum
leverage ratio, (c) a minimum interest coverage ratio, (d) a ratio of current
assets to funded senior debt and (e) a maximum senior leverage ratio. We were
in
compliance with the above covenants under the senior credit facility at April
22, 2006. For additional information regarding our senior credit facility,
refer
to our annual report on Form 10-K for the fiscal year ended December 31,
2005.
Credit
Ratings
At
April
22, 2006, we had a credit rating on our senior credit facility from Standard
& Poor’s of BB+ and a credit rating of Ba1 from Moody’s Investor Service.
The current pricing grid used to determine our borrowing rates under our senior
credit facility is based on such credit ratings. If these credit ratings
decline, our interest expense may increase. Conversely, if these credit ratings
increase, our interest expense may decrease.
Seasonality
Our
business is somewhat seasonal in nature, with the highest sales occurring in
the
spring and summer months. In addition, our business can be affected by weather
conditions. While unusually heavy precipitation tends to soften sales as
elective maintenance is deferred during such periods, extremely hot or cold
weather tends to
enhance
sales by causing automotive parts to fail at an accelerated rate.
New
Accounting Pronouncements
In
March
2006,
the
FASB’s Emerging Issues Task Force, or EITF, released Issue 06-3, “How Sales
Taxes Collected From Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement,” or EITF 06-3. A tentative consensus was
reached that entities may adopt a policy of presenting sales taxes in the income
statement on either a gross or net basis. If taxes are significant, an entity
should disclose its policy of presenting taxes and the amount of taxes if
reflected on a gross basis in the income statement. If a consensus is reached
by
the EITF, the guidance would be effective for periods beginning after December
15, 2006. We present sales net of sales taxes in our consolidated statement
of
operations and do not anticipate changing our policy as a result of EITF
06-3.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140.” SFAS No. 156 amends SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for fiscal years beginning after September 15, 2006. We do not expect the
adoption of SFAS No. 156 to have a material impact on our financial condition,
results of operations or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140.” This
statement simplifies accounting for certain hybrid instruments currently
governed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” or SFAS No. 133, by allowing fair value remeasurement of hybrid
instruments that contain an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133
Implementation Issue No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets,” which provides such beneficial
interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,
“Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement No. 125,”
by
eliminating the restriction on passive derivative instruments that a qualifying
special-purpose entity may hold. SFAS No. 155 is effective for financial
instruments acquired or issued after the beginning of our fiscal year 2007.
We
do not expect the adoption of SFAS No. 155 to have a material impact on our
financial condition, results of operations or cash flows.
We
are
exposed to cash flow risk due to changes in interest rates with respect to
our
long-term debt. Our long-term debt currently consists of borrowings under a
senior credit facility and is primarily vulnerable to movements in the LIBOR
rate. While we cannot predict the impact interest rate movements will have
on
our debt, exposure to rate changes is managed through the use of hedging
activities. At April 22, 2006, $175 million of our bank debt was fixed in
accordance with the interest rate swaps described below.
Our
future exposure to interest rate risk is mitigated as a result of entering
into
three new interest rate swap agreements in March 2005 on an aggregate of $175
million of debt under our senior credit facility. The
first
swap fixed our LIBOR rate at 4.153% on $50 million of debt for a term of 48
months, expiring in March 2009. The second swap fixed our LIBOR rate at 4.255%
on $75 million of debt for a term of 60 months, expiring in February 2010.
Beginning in March 2006, the third swap fixed our LIBOR rate at 4.6125% on
$50
million of debt for a term of 54 months, expiring in September
2010.
A
previous interest rate swap, allowing us to fix our LIBOR rate at 2.269% on
$75
million of debt for a term of 36 months, expired
in March 2006.
The
table below presents principal cash flows and
related weighted average interest rates on our long-term debt outstanding at
April 22, 2006, by expected maturity dates. Additionally, the table includes
the
notional amounts
of
our
hedged debt and the impact of the anticipated average pay and receive rates
of
our interest rate swaps through their maturity dates. Expected maturity dates
approximate contract terms. Weighted average variable rates are based on implied
forward rates in the yield curve at April 22, 2006. Implied forward rates should
not be considered a predictor of actual future interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
|
|
|
|
Market
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Value
|
|
Long-term
debt:
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate
|
|
$
|
24,525
|
|
$
|
32,025
|
|
$
|
63,375
|
|
$
|
52,700
|
|
$
|
257,500
|
|
$
|
-
|
|
$
|
430,125
|
|
$
|
430,125
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
rate
|
|
|
6.6
|
%
|
|
6.6
|
%
|
|
6.7
|
%
|
|
6.8
|
%
|
|
6.9
|
%
|
|
-
|
|
|
6.7
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to fixed
(1)
|
|
$
|
175,000
|
|
$
|
175,000
|
|
$
|
175,000
|
|
$
|
175,000
|
|
$
|
125,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,530
|
|
Weighted
average pay rate
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
-
|
|
|
0.0
|
%
|
|
-
|
|
Weighted
average receive rate
|
|
|
0.9
|
%
|
|
0.9
|
%
|
|
0.9
|
%
|
|
0.9
|
%
|
|
0.8
|
%
|
|
-
|
|
|
0.9
|
%
|
|
-
|
|
(1)
Amounts
presented may not be outstanding for the entire year.
Our
management evaluated, with the participation of
our principal executive officeer and principal financial officeer, the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on this evaluation, our principa executive
officer and our principal financial officer have concluded that, as of the
end
of the period covered by this report, our disclosure controls and procedures
were effective. Disclosure controls and procedures mean our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in our reports that we file or submit under the Securities Exchange Act
of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in our reports that we file or submit
under the Secruities Exchange Act of 1934 is accumulated and communicated to
our
management, including our principal executive officeer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Due
to
the timing of the Autopart International acquisition, effective September 2005,
management has excluded the acquired operations from its evaluation of
disclosure controls and procedures for the period covered by this report.
Autopart International’s results of operations and financial position for the
first quarter ended April 22, 2006 were insignificant to our consolidated
financial statements.
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended April 22, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
The
following table sets forth information with respect to repurchases of our common
stock for the quarter ended April 22, 2006 (amounts in thousands, except per
share amounts):
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of
Shares
Purchased
as
Part
of Publicly
Announcing
Plans
or
Programs
(1)
|
|
Maximum
Dollar
Value
that May Yet
Be
Purchased
Under
the
Plans or
Programs
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2006, to January 28, 2006
|
|
|
58
|
|
$
|
43.11
|
|
|
58
|
|
$
|
238,035
|
|
January
29, 2006, to February 25, 2006
|
|
|
116
|
|
|
42.68
|
|
|
116
|
|
|
233,079
|
|
February
26, 2006, to March 25, 2006
|
|
|
384
|
|
|
41.75
|
|
|
384
|
|
|
217,056
|
|
March
26, 2006, to April 22, 2006
|
|
|
1,057
|
|
|
39.79
|
|
|
1,057
|
|
|
175,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,615
|
|
$
|
40.58
|
|
|
1,615
|
|
$
|
175,005
|
|
(1) |
All
of the above repurchases were made on the open market at prevailing
market
rates plus related expenses under our stock repurchase program, which
was
authorized by our Board of Directors and publicly announced on August
17,
2005 for a maximum of $300 million in common stock.
|
(2) |
The
maximum dollar value yet to be purchased under our stock repurchase
program excludes related expenses paid on previous purchases or
anticipated expenses on future
purchases.
|
|
3.1(1) |
Restated
Certificate of Incorporation of Advance Auto Parts, Inc. (“Advance Auto”)
(as amended on May 19, 2004).
|
|
|
|
|
3.2(2) |
Bylaws
of Advance Auto.
|
|
|
|
|
31.1 |
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
31.2 |
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
32.1 |
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
(1) |
Filed
on May 20, 2004 as an exhibit to Current Report on Form 8-K of Advance
Auto.
|
(2) |
Furnished
on August 31, 2001 as an exhibit to Registration Statement on Form
S-4
(No. 333-68858) of Advance Auto.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
ADVANCE
AUTO PARTS, INC. |
|
|
|
June
1, 2006 |
By: |
/s/ Michael O. Moore |
|
Michael
O. Moore
Executive
Vice President, Chief Financial
Officer
|
EXHIBIT
INDEX
Exhibit
|
|
|
Number
|
|
Exhibit
Description
|
|
|
|
3.1(1)
|
|
Restated
Certificate of Incorporation of Advance Auto (as amended on May
19,
2004).
|
|
|
|
3.2(2)
|
|
Bylaws
of Advance Auto.
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to Section
906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1)
Filed on May 20, 2004 as an exhibit to Current Report on Form 8-K
of
Advance Auto.
|
(2)
Furnished on August 31, 2001 as an exhibit to Registration Statement
on
Form S-4 (No. 333-68858) of Advance
Auto.
|