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 October 7, 2006 and December
31,
2005, the condensed consolidated statements of operations for the twelve
and
forty week periods ended October 7, 2006 and October 8, 2005, and the
condensed
consolidated statements of cash flows for the forty week periods ended
October
7, 2006 and October 8, 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 Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 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 anticipated 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.
|
|
October
7,
2006
|
|
December
31,
2005
|
|
|
|
|
(40
weeks ended)
|
|
(52
weeks ended)
|
|
|
|
|
|
|
|
|
|
Defective
and warranty reserve, beginning of period
|
|
$
|
11,352
|
|
$
|
10,960
|
|
|
Reserves
established
|
|
|
12,269
|
|
|
14,268
|
|
|
Reserves
utilized
|
|
|
(11,514
|
)
|
|
(13,876
|
)
|
|
|
|
|
|
|
|
|
|
|
Defective
and warranty reserve, end of period
|
|
$
|
12,107
|
|
$
|
11,352
|
|
|
Share-Based
Payments
The
Company has share-based compensation plans as allowed under its long-term
incentive plan, or LTIP, 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 of the grant date and contain no post-vesting restrictions
other
than normal trading black-out periods prescribed by the Company’s corporate
governance policies. 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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
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
whichever was lower. 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 share-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
qualified 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
share-based compensation expense related to the grant of deferred stock
units to
its Board of Directors 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 implementation. Under this transition method, share-based compensation
expense for the twelve and forty weeks ended October 7, 2006 included
compensation expense for all share-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 share-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 share-based compensation expense included
in
selling, general and administrative expenses in the accompanying condensed
consolidated statements of operations for the twelve and forty weeks
ended
October 7, 2006 was $4,580 and $14,473, respectively. The related income
tax
benefit was $1,721 and $5,408, respectively. The Company recognized $237
of
share-based compensation expense in accordance with APB No. 25 for
the forty weeks ended October 8, 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 twelve weeks ended
October 7,
2006, were $4,580 and $2,859 lower, respectively, than if the Company
had
continued to account for share-based compensation under APB No. 25. The
Company’s earnings before income tax expense and net earnings for the forty
weeks ended October 7, 2006, were $14,187 and $8,881 lower, respectively,
than
if the Company had continued to account for share-based compensation
under APB
No. 25. The related impact in 2006 to basic and diluted earnings per
share is
$0.03 and $0.08 for the twelve and forty weeks ended October 7, 2006,
respectively.
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 flows. 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 forty
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
weeks
ended October 7, 2006, the Company reported $4,398 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 share-based
compensation costs as prescribed by SFAS No. 123 for the twelve and forty
weeks
ended October 8, 2005.
|
|
Twelve
Weeks
Ended October 8, 2005
|
|
Forty
Weeks
Ended October 8, 2005
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
60,793
|
|
$
|
195,369
|
|
|
Add:
Total stock-based employee compensation
|
|
|
|
|
|
|
|
|
expense
included in reported net income, net
|
|
|
|
|
|
|
|
|
of
related tax effects
|
|
|
-
|
|
|
147
|
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
|
|
|
|
expense
determined under fair value based method
|
|
|
|
|
|
|
|
|
for
all awards, net of related tax effects
|
|
|
(2,226
|
)
|
|
(6,921
|
)
|
|
Pro
forma net income
|
|
$
|
58,567
|
|
$
|
188,595
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
$
|
0.56
|
|
$
|
1.80
|
|
|
Basic,
pro forma
|
|
$
|
0.54
|
|
$
|
1.74
|
|
|
Diluted,
as reported
|
|
$
|
0.55
|
|
$
|
1.78
|
|
|
Diluted,
pro forma
|
|
$
|
0.53
|
|
$
|
1.71
|
|
|
The
following table summarizes the fixed stock option transactions for the
forty
weeks ended October 7, 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
|
|
|
2,116
|
|
|
40.38
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(616
|
)
|
|
18.81
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(298
|
)
|
|
32.97
|
|
|
|
|
|
|
|
|
Outstanding
at October 7, 2006
|
|
|
7,394
|
|
$
|
29.15
|
|
|
4.79
|
|
$
|
52,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at October 7, 2006
|
|
|
3,428
|
|
$
|
21.03
|
|
|
3.69
|
|
$
|
46,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
The
aggregate intrinsic value in the preceding table is based on the Company’s
closing stock price of $34.56 as of the last trading day of the period
ended
October 7, 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 forty weeks ended October 7,
2006 and
October 8, 2005 was $11,837 and $73,396, respectively. As of October
7, 2006,
there was $30,883 of unrecognized compensation expense related to non-vested
fixed stock options that is expected to be recognized over a weighted
average
period of 2.0 years. Shares authorized for grant under the LTIP are 8,620 at
October 7, 2006.
The
weighted average fair value of stock options granted during the forty
weeks
ended October 7, 2006 and October 8, 2005 was $10.68 and $10.54 per share,
respectively. The fair value of each stock option was estimated on the
date of
grant using the Black-Scholes option-pricing model with the following
weighted
average assumptions:
Black-Scholes
Option Valuation Assumptions (1)
|
|
October
7,
2006
|
|
October
8,
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.
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 shares of common stock
outstanding assuming the exercise of outstanding stock options, calculated
on
the treasury stock method as modified by the adoption of SFAS 123R, and
all
currently outstanding deferred stock units.
Hedge
Activities
The
Company utilizes interest rate swaps to limit its cash flow risk on its
variable
rate debt. In connection with the refinancing of its credit facility
in October
2006, the Company entered into four new interest rate swap agreements
on an
aggregate of $225,000 of debt under its revolving credit facility. The
Company
settled its previous three interest rate swaps, and accordingly, recognized
income of $2,873 resulting from the reclassification of the previously
unrealized gain from other comprehensive income. The detail for the new
individual swaps is as follows:
· |
The
first swap fixed the Company’s LIBOR rate at 4.9675% on $75,000 of debt
for a term of 60 months,
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
|
expiring
in October 2011.
|
· |
The
second swap fixed the Company’s LIBOR rate at 4.968% on $50,000 of debt
for a term of 60 months, expiring in October
2011.
|
· |
The
third swap fixed the Company’s LIBOR rate at 4.98% on $50,000 of debt for
a term of 60 months, expiring in October 2011.
|
· |
The
fourth swap fixed the Company’s LIBOR rate at 4.965% on $50,000 of debt
for a term of 60 months, expiring in October
2011.
|
In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” the fair value of the Company’s outstanding hedges is recorded as
an asset or liability in the accompanying condensed consolidated balance
sheets
at October 7, 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 October 7, 2006 was an unrecognized gain
of $662,
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 twelve and forty weeks ended October
7,
2006 and October 8, 2005 is as follows:
|
|
Twelve
Weeks Ended
|
|
Forty
Weeks Ended
|
|
|
|
|
October
7,
2006
|
|
October
8,
2005
|
|
October
7,
2006
|
|
October
8,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
58,947
|
|
$
|
60,793
|
|
$
|
195,964
|
|
$
|
195,369
|
|
|
Unrealized
(loss) gain on hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
arrangements,
net of tax
|
|
|
(1,468
|
)
|
|
1,623
|
|
|
445
|
|
|
1,457
|
|
|
Reclassification
of net gain on hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
arrangements
into earnings, before tax
|
|
|
(2,873
|
)
|
|
-
|
|
|
(2,873
|
)
|
|
-
|
|
|
Comprehensive
income
|
|
$
|
54,606
|
|
$
|
62,416
|
|
$
|
193,536
|
|
$
|
196,826
|
|
|
Based
on
the estimated current and future fair values of the hedge arrangements
at
October 7, 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 545
associated with the interest rate swaps.
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 perform its annual impairment test as of the first day of
its fourth
quarter. An impairment loss would be recognized when the assets’ fair value is
below their carrying value.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
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 October 7, 2006 and December 31, 2005, $140,736 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.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment
of FASB
Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires recognition of
the overfunded or underfunded status of defined benefit postretirement
plans as
an asset or liability in the statement of financial position and to recognize
changes in that funded status in comprehensive income in the year in
which the
changes occur. SFAS No. 158 also requires measurement of the funded status
of a
plan as of the date of the statement of financial position. SFAS No.
158 is
effective for recognition of the funded status of the benefit plans for
fiscal
years ending after December 15, 2006 and is effective for the measurement
date
provisions for fiscal years ending after December 15, 2008. The Company
is
currently evaluating the impact of SFAS No. 158.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 clarifies the definition of fair value, establishes a framework
for
measuring fair value, and expands the disclosures on fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact of SFAS No.
157.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” or FIN 48. FIN 48 clarifies the accounting and reporting
for income taxes recognized in accordance with SFAS No. 109, “Accounting for
Income Taxes.” The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected
to be
taken in income tax returns. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of FIN 48.
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
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. EITF 06-3 is 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 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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
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.
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 $87,626
primarily consisted of $74,940 paid upon closing and 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.
During
the twelve weeks ended October 7, 2006, the Company finalized the allocation
of
the purchase price to the assets acquired and liabilities assumed. The
Company
allocated $29,000 to intangible assets based on valuation studies performed
by a
third party valuation consultant. A portion of these intangible assets
are
subject to amortization and are being amortized over their estimated
useful
lives ranging from 5 to 10 years using straight-line methods. Remaining
adjustments to the fair value of assets and liabilities acquired primarily
included inventory and deferred income taxes. Accordingly, the Company’s initial
goodwill balance was adjusted down to $17,625 as a result of these adjustments,
all of which is deductible for tax purposes. The
following table summarizes the final allocation of amounts assigned to
assets
acquired and liabilities assumed as of the date of
acquisition:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
|
|
September
14,
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
Cash
|
|
$
|
223
|
|
|
Receivables,
net
|
|
|
10,224
|
|
|
Inventories
|
|
|
32,914
|
|
|
Other
current assets
|
|
|
812
|
|
|
Property
and equipment
|
|
|
5,332
|
|
|
Goodwill
|
|
|
17,625
|
|
|
Intangible
assets, net
|
|
|
29,000
|
|
|
Other
assets
|
|
|
1,454
|
|
|
Total
assets acquired
|
|
|
97,584
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(5,690
|
)
|
|
Current
liabilities
|
|
|
(4,062
|
)
|
|
Other
long-term liabilities
|
|
|
(206
|
)
|
|
Total
liabilities assumed
|
|
|
(9,958
|
)
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
87,626
|
|
|
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:
|
|
Twelve
Weeks
Ended October 8,
2005
|
|
Forty
Weeks
Ended October 8,
2005
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,042,522
|
|
$
|
3,373,736
|
|
|
Net
income
|
|
|
62,006
|
|
|
198,934
|
|
|
Earnings
per diluted share
|
|
$
|
0.56
|
|
$
|
1.81
|
|
|
3. |
Goodwill
and Intangible
Assets:
|
The
carrying amount and accumulated amortization of acquired intangible
assets as of
October 7, 2006 include:
|
|
As
of October 7, 2006
|
|
|
Acquired
intangible assets
subject
to amortization:
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
9,600
|
|
$
|
(960
|
)
|
$
|
8,640
|
|
|
Other
|
|
|
600
|
|
|
(120
|
)
|
|
480
|
|
|
Total
|
|
$
|
10,200
|
|
$
|
(1,080
|
)
|
$
|
9,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
not
subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
and tradenames
|
|
$
|
18,800
|
|
$
|
-
|
|
$
|
18,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
The
Company recorded amortization expense of $1,080 for acquired intangible
assets
for the twelve and forty weeks ended October 7, 2006. The table below
shows
expected amortization expense for acquired intangible assets recorded
as of
October 7, 2006:
2006
|
|
$
|
249
|
|
|
2007
|
|
|
1,080
|
|
|
2008
|
|
|
1,080
|
|
|
2009
|
|
|
1,080
|
|
|
2010
|
|
|
1,052
|
|
|
2011
|
|
|
960
|
|
|
The
carrying amount of goodwill decreased from $67,094 at December 31, 2005
to
$33,765 at October 7, 2006 as a result of the completion of certain purchase
accounting adjustments associated with the AI acquisition (Note 2).
Receivables
consist of the following:
|
|
October
7,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
13,587
|
|
$
|
13,733
|
|
|
Vendor
|
|
|
59,173
|
|
|
63,161
|
|
|
Installment
|
|
|
3,459
|
|
|
5,622
|
|
|
Insurance
recovery
|
|
|
9,512
|
|
|
13,629
|
|
|
Other
|
|
|
2,876
|
|
|
3,230
|
|
|
Total
receivables
|
|
|
88,607
|
|
|
99,375
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
(4,874
|
)
|
|
(4,686
|
)
|
|
Receivables,
net
|
|
$
|
83,733
|
|
$
|
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
October 7, 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 $8,967 and
$4,011 for
the forty weeks ended October 7, 2006 and October 8, 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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
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.
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at October
7,
2006 and December 31, 2005, were $93,657 and $92,833, respectively. Inventories
consist of the following:
|
|
October
7,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
|
|
Inventories
at FIFO
|
|
$
|
1,380,311
|
|
$
|
1,294,310
|
|
|
Adjustments
to state inventories at LIFO
|
|
|
81,756
|
|
|
72,789
|
|
|
Inventories
at LIFO
|
|
$
|
1,462,067
|
|
$
|
1,367,099
|
|
|
Replacement
cost approximated FIFO cost at October 7, 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 $31,730
and $22,825 at October 7, 2006 and December 31, 2005, respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
Long-term
debt consists of the following:
|
|
October
7,
2006
|
|
December
31,
2005
|
|
|
Senior
Debt:
|
|
|
|
|
|
|
Tranche
A, Senior Secured Term Loan at variable interest
|
|
|
|
|
|
|
|
|
rates
(5.66% at December 31, 2005), redeemed October 2006
|
|
$
|
-
|
|
$
|
170,000
|
|
|
Tranche
B, Senior Secured Term Loan at variable interest
|
|
|
|
|
|
|
|
|
rates
(5.89% at December 31, 2005), redeemed October 2006
|
|
|
-
|
|
|
168,300
|
|
|
Delayed
Draw, Senior Secured Term Loan at variable interest
|
|
|
|
|
|
|
|
|
rates
(5.91% at December 31, 2005), redeemed October 2006
|
|
|
-
|
|
|
100,000
|
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
|
|
(6.16%
and 5.66% at October 7, 2006 and December 31, 2005,
|
|
|
|
|
|
|
|
|
respectively)
due October 2011
|
|
|
450,475
|
|
|
-
|
|
|
Other
|
|
|
451
|
|
|
500
|
|
|
|
|
|
450,926
|
|
|
438,800
|
|
|
Less:
Current portion of long-term debt
|
|
|
(67
|
)
|
|
(32,760
|
)
|
|
Long-term
debt, excluding current portion
|
|
$
|
450,859
|
|
$
|
406,040
|
|
|
On
October 5, 2006, the Company entered into a new $750,000 unsecured five-year
revolving credit facility with Advance Stores Company, Incorporated,
a
subsidiary of the Company, serving as the borrower. This new facility
replaced
the Company’s term loans and revolver under the previous credit facility.
Proceeds from this revolving loan were used to repay $433,775 of principal
outstanding on the Company’s term loans and revolver under its previous
credit facility. In conjunction with this refinancing, the Company wrote-off
existing deferred financing costs related to the Company’s previous term loans
and revolver. The write-off of these costs of $1,887 was combined with
a related
gain on settlement of interest rate swaps of $2,873 for a net gain on
extinguishment of debt of $986. As
of
October 7,
2006,
the Company had borrowed $450,475 under the revolver and had $66,768
in letters
of credit outstanding, which reduced availability under the new revolver
to
$232,757.
Additionally,
the new facility provides for the issuance of letters of credit with
a sub limit
of $300,000 and swingline loans in an amount not to exceed $50,000. The
Company
may request that the total revolving commitment be increased by an amount
not
exceeding $250,000 during the term of the credit agreement. Voluntary
prepayments and voluntary reductions of the revolving balance are permitted
in
whole or in part, at the Company’s option, in minimum principal amounts as
specified in the new credit facility.
The
interest rates on borrowings under the new revolving credit facility
will be
based, at the Company’s option, on an adjusted LIBOR rate, plus a margin, or an
alternate base rate, plus a margin. After an initial interest period,
the
Company may elect to convert a particular borrowing to a different type.
The
initial margin is 0.75% and 0.0% per annum for the adjusted LIBOR and
alternate
base rate borrowings, respectively. A commitment fee will be charged
on the
unused portion of the revolver, payable in arrears. The initial commitment
fee
rate is 0.150% per annum. Under the terms of the new credit facility,
the
interest rate spread and commitment fee will be based on the Company’s credit
rating. The revolving facility terminates on October 5, 2011.
The
new
credit facility is fully and unconditionally guaranteed by Advance Auto
Parts,
Inc. The facility contains covenants restricting the ability of the Company
and
its subsidiaries to, among other things, (1) create, incur or assume
additional
debt (including hedging arrangements), (2) incur liens or engage in
sale-leaseback transactions,
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial
Statements
For
the Twelve and Forty Week Periods Ended October
7, 2006 and October 8, 2005
(in
thousands, except per share data)
(unaudited)
(3)
make
loans and investments, (4) guarantee obligations, (5) engage in certain
mergers,
acquisitions and asset sales, (6) engage in transactions with affiliates,
(7)
change the nature of the Company’s business and the business conducted by its
subsidiaries and (8) change the holding company status of the Company.
The
Company is required to comply with financial covenants with respect to
a maximum
leverage ratio and a minimum coverage ratio. The new credit facility
also
provides for customary events of default, including non-payment defaults,
covenant defaults and cross-defaults to the Company’s other material
indebtedness.
The
Company was in compliance with the above covenants under the revolving
credit
facility at October 7, 2006.
7. |
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 3,679 shares of common stock
during
the forty weeks ended October 7, 2006 at an aggregate cost of $136,561,
or an
average price of $37.12 per share, excluding related expenses. The Company
did
not repurchase any shares of common stock during the twelve weeks ended
October
7, 2006. At October 7, 2006, the Company has repurchased a total of 5,209
shares
of common stock under this program at an aggregate cost of $196,013,
or an
average price of $37.63 per share, excluding related expenses.
During
the twelve and forty weeks ended October 7, 2006, the Company retired
3,120 and
5,117 shares of common stock which were previously 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 forty
weeks ended
October 7, 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 twelve
and forty
weeks ended October 7, 2006, and October 8, 2005 respectively, are as
follows:
|
|
Twelve
Weeks Ended
|
|
Forty
Weeks Ended
|
|
|
|
|
October
7,
2006
|
|
October
8,
2005
|
|
October
7,
2006
|
|
October
8,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
167
|
|
$
|
185
|
|
$
|
558
|
|
$
|
617
|
|
|
Amortization
of prior service cost
|
|
|
(134
|
)
|
|
(134
|
)
|
|
(447
|
)
|
|
(446
|
)
|
|
Amortization
of unrecognized net losses
|
|
|
49
|
|
|
55
|
|
|
162
|
|
|
183
|
|
|
|
|
$
|
82
|
|
$
|
106
|
|
$
|
273
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
disasters;
· the
availability of suitable real estate locations;
· our
overall credit rating;
· 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 revolving 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 third quarter of fiscal 2006, we recorded earnings per diluted share
of
$0.56 compared to $0.55 for the same quarter of fiscal 2005. These results
were
primarily driven by increased sales and higher gross margins offset by
the loss
of leverage on certain fixed operating expenses as a result of our lower
than
expected sales increase. Additionally, our operating results for the
third
quarter include the recognition of $0.03 of share-based compensation
expense per
diluted share required by the adoption of SFAS No. 123R on January 1,
2006.
We
believe the macroeconomic environment has continued to negatively impact
our
business throughout much of our third quarter and resulted in weakening
trends
in our 2006 results compared to the same periods of last year. We believe
our
customers have been adversely impacted by rising energy prices, higher
insurance
and interest rates, and larger required minimum payments on their credit
card
balances, which limit their current ability to spend.
We
have
established a high priority of examining our operating expenses, including
both
corporate and store-level, in light of our current sales trends. We believe
we
can continue to be more efficient in our corporate-level expenses by
optimizing
a number of job functions, being more selective in areas such as meetings
and
travel and re-evaluating all third party service providers. Second, we
continue
to examine our non-sales activities in our stores and the impact of those
activities on our operating expenses. In addition to rolling out
energy-management systems to a significant number of our stores, we are
evaluating a number of administrative procedures performed by our store
team
members in an effort to better optimize their time.
More
recent economic indicators suggest a more positive outlook including
the
moderation in energy prices, leveling of interest rates and absence of
severe
hurricanes. We
also
believe the factors that favorably impact our industry continue to remain
strong. Customers can only defer necessary maintenance on their automobiles
for
so long, and we continue to educate customers about the value of performing
certain types of maintenance and enhancements. We believe the combination
of
these favorable industry dynamics along with the execution of our business
initiatives discussed in our fiscal 2005 annual report on Form 10-K and our
more recent effort to examine operating expenses will continue to drive
our
earnings growth into the foreseeable future.
The
following table highlights certain operating results and key metrics
for the
twelve and forty weeks ended October 7, 2006, and October 8, 2005.
|
|
|
Twelve
Weeks Ended
|
|
Forty
Weeks Ended
|
|
|
|
|
October
7, 2006
|
|
October
8, 2005
|
|
October
7, 2006
|
|
October
8, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales (in
thousands)
|
|
$
|
1,099,486
|
|
$
|
1,019,736
|
|
$
|
3,600,353
|
|
$
|
3,301,246
|
|
|
Total
commercial net sales (in
thousands)
|
|
$
|
277,894
|
|
$
|
227,081
|
|
$
|
900,483
|
|
$
|
700,790
|
|
|
Comparable
store net sales growth
|
|
|
1.4%
|
|
|
10.0%
|
|
|
2.3%
|
|
|
9.4%
|
|
|
DIY
comparable store net sales growth
|
|
|
(0.6%)
|
|
|
6.1%
|
|
|
(0.3%)
|
|
|
5.3%
|
|
|
DIFM
comparable store net sales growth
|
|
|
8.7%
|
|
|
26.5%
|
|
|
11.7%
|
|
|
27.0%
|
|
|
Average
net sales per store (in
thousands)
|
|
$
|
1,561
|
|
$
|
1,525
|
|
$
|
1,561
|
|
$
|
1,525
|
|
|
Inventory
per store (in
thousands)
|
|
$
|
483
|
|
$
|
486
|
|
$
|
483
|
|
$
|
486
|
|
|
Selling,
general and administrative expenses per store (in
thousands)
|
|
$
|
141
|
|
$
|
133
|
|
$
|
457
|
|
$
|
433
|
|
|
Inventory
turnover
|
|
|
1.69
|
|
|
1.71
|
|
|
1.69
|
|
|
1.71
|
|
|
Gross
margin
|
|
|
48.2%
|
|
|
47.2%
|
|
|
47.8%
|
|
|
47.4%
|
|
|
Operating
margin
|
|
|
9.3%
|
|
|
10.3%
|
|
|
9.4%
|
|
|
10.2%
|
|
|
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.
|
Key
3rd
Quarter Events
The
following key events occurred during our third quarter of 2006:
· We
opened
our 3,000th
store
· We
completed the refinancing of our previous secured credit facility to
an
unsecured revolving credit facility
Refinancing
On
October 5, 2006, we entered into a new $750 million unsecured five-year
revolving credit facility. This new facility replaced the term loans
and
revolver under our previous secured credit facility. Initial proceeds
from this
revolving loan were used to repay $434 million of principal outstanding
on the
term loans and revolver under our previous credit facility. As a result of
the improved borrowing costs under the new facility, we anticipate pre-tax
interest expense savings of more than $2.5 million annually. In conjunction
with
this refinancing, we wrote-off existing deferred financing costs related
to our
previous term loans and revolver. The write-off of these costs of $1.9
million
was combined with a related gain on settlement of interest rate swaps
of $2.9
million for a net gain on extinguishment of debt of $1.0 million.
Store
Count
At
October 7, 2006, we operated 3,029 stores within the United States, Puerto
Rico
and the Virgin Islands. We operated 2,912 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 October 7,
2006, we
also operated 80 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 twelve and forty weeks ended
October 7, 2006. We lease approximately 81% of our stores.
|
|
Twelve
Weeks
Ended October 7,
2006
|
|
Forty
Weeks
Ended October 7,
2006
|
|
|
Number
of stores at beginning of period
|
|
|
2,971
|
|
|
2,872
|
|
|
New
stores
|
|
|
60
|
|
|
162
|
|
|
Closed
stores
|
|
|
(2
|
)
|
|
(5
|
)
|
|
Number
of stores, end of period
|
|
|
3,029
|
|
|
3,029
|
|
|
Relocated
stores
|
|
|
10
|
|
|
31
|
|
|
Stores
with commercial programs (a)
|
|
|
2,478
|
|
|
2,478
|
|
|
(a)
|
As
of October 7, 2006, these commercial programs include the 80
AI stores.
|
We
anticipate that we will add a total of approximately 205 to 215 new stores
during 2006 primarily through new store openings, excluding any
acquisitions.
Commercial
Program
Our
commercial program continued to produce favorable results during the
twelve and
forty weeks ended October 7, 2006 and continued to expand at an expected
rate.
We attribute this performance to the execution of our commercial plan
as
previously detailed in our fiscal 2005 annual report on Form 10-K.
Commercial
sales represented approximately 25% of our total sales for both the twelve
and
forty weeks ended October 7, 2006 compared to approximately 22% and 21%
for the
twelve and forty weeks ended October 8, 2005, respectively. As of October
7,
2006, we operated commercial programs in 81% of our total stores, excluding
the
80 AI stores, an increase from approximately 78% at the end of the prior
year
quarter. We continued to approach our goal of operating commercial programs
in
approximately 85% of our Advance Auto Parts store base. We believe we
have the
potential to grow profitably our share of the commercial business in
each of our
markets.
Although
our comparable store sales growth in commercial business was slightly
lower than
our target for the second and third quarters, we believe we have the
opportunity
to achieve double-digit comparable store sales growth in this business
for the
foreseeable future through the continued execution of our commercial
plan and
growth in our commercial programs. We believe the acquisition of AI supplements
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, share-based compensation
expense
for the twelve and forty weeks ended October 7, 2006 included compensation
expense for all share-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 share-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 share-based compensation expense included in selling,
general and administrative expenses in our statements of operations for
the
twelve and forty weeks ended October 7, 2006 was $4.6 million and $14.5
million,
respectively. The related income tax benefit was $1.7 million and $5.4
million,
respectively. We
did
not have any share-based compensation expense in accordance with APB
No. 25 for
the twelve weeks ended October 8, 2005. We recognized $0.2 million
of share-based compensation expense in accordance with APB No. 25 for
the forty weeks ended October 8, 2005. On a pro forma basis, share-based
compensation was $.02 and $.07 per diluted share for the twelve and forty
weeks
ended October 8, 2005, respectively. 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 twelve weeks ended October 7, 2006,
were
$4.6 million and $2.9 million lower, respectively, than if we had continued
to
account for share-based compensation under APB No. 25. Our earnings before
income tax expense and net earnings for the forty weeks ended October
7, 2006,
were $14.2 million and $8.9 million lower, respectively, than if we had
continued to account for share-based compensation under APB No. 25. The
related
impact in 2006 to basic and diluted earnings per share is $0.03 and $0.08
for
the twelve and forty weeks ended October 7, 2006, respectively.
As
of
October 7, 2006, we have $30.9 million of unrecognized compensation expense
related to non-vested fixed stock options we expect to recognize over
a weighted
average period of 2.0 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,
second and third quarters 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 share-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 share-based compensation
expense reported in our financial statements may not be representative
of the
actual economic cost of the share-based compensation. In addition, significant
changes in these assumptions could materially impact our share-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 open 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 80 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, share-based compensation, 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.
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
Week Periods Ended
(unaudited)
|
|
Forty
Week Periods Ended
(unaudited)
|
|
|
|
October
7, 2006
|
|
October
8, 2005
|
|
October
7, 2006
|
|
October
8, 2005
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales, including purchasing and warehousing costs
|
|
|
51.8
|
|
|
52.8
|
|
|
52.2
|
|
|
52.6
|
|
Gross
profit
|
|
|
48.2
|
|
|
47.2
|
|
|
47.8
|
|
|
47.4
|
|
Selling,
general and administrative expenses
|
|
|
38.9
|
|
|
36.9
|
|
|
38.4
|
|
|
37.2
|
|
Operating
income
|
|
|
9.3
|
|
|
10.3
|
|
|
9.4
|
|
|
10.2
|
|
Interest
expense
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
(0.8
|
)
|
Gain
on extinguishment of debt, net
|
|
|
0.1
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
Other
income, net
|
|
|
0.0
|
|
|
0.1
|
|
|
0.0
|
|
|
0.1
|
|
Provision
for income taxes
|
|
|
3.2
|
|
|
3.6
|
|
|
3.2
|
|
|
3.6
|
|
Net
income
|
|
|
5.4
|
%
|
|
6.0
|
%
|
|
5.4
|
%
|
|
5.9
|
%
|
Twelve
Weeks Ended October 7, 2006 Compared to Twelve Weeks Ended October 8,
2005
Net
sales
for the twelve weeks ended October 7, 2006 were $1,099.5 million, an
increase of $79.8 million, or 7.8%, as compared to net sales for the twelve
weeks ended October 8, 2005. The net sales increase was due to an increase
in
comparable store sales of 1.4%, contributions from new stores opened
within the
last year and sales from operations acquired during our third quarter
of fiscal
2005. The comparable store sales increase resulted from an
increase
in average ticket sales and customer traffic in our do-it-for-me, or
DIFM,
business and an increase in average ticket sales by our do-it-yourself,
or DIY,
customers offset by a decrease in DIY customer count.
Gross
profit for the twelve weeks ended October 7, 2006 was $530.2 million,
or 48.2%
of net sales, as compared to $481.4 million, or 47.2% of net sales, for
the
twelve weeks ended October 8, 2005. Gross profit increased as a percentage
of
net sales for the quarter due to the positive impact of ongoing category
management initiatives, including improved procurement costs and a positive
shift in sales mix, and logistics efficiencies.
Selling,
general and administrative expenses increased to $427.7 million, or 38.9%
of net
sales, for the twelve weeks ended October 7, 2006, from $376.0 million,
or 36.9%
of net sales, for the twelve weeks ended October 8, 2005. Selling, general
and
administrative expenses increased as a percentage of sales as a result
of:
· |
recording
share-based compensation expense of approximately 0.4%
of net sales upon
the implementation of SFAS 123R on January 1,
2006;
|
· |
a
0.7% increase in certain fixed costs as a percentage of
sales during the
quarter, including rent and depreciation, as a result of
low comparative
sales growth; and
|
· |
a
0.6% increase in expenses associated with
higher costs for utilities and insurance
programs.
|
Interest
expense for the twelve weeks ended October 7, 2006 was $9.2 million,
or 0.8% of
net sales, as compared to $8.2 million, or 0.8% of net sales, for the
twelve
weeks ended October 8, 2005. In addition, interest income for the twelve
weeks
ended October 7, 2006 decreased as a result of overall lower cash balances
during the period.
Income
tax expense for the twelve weeks ended October 7, 2006 was $35.5 million,
as
compared to $37.4 million for the twelve weeks ended October 8, 2005.
Our
effective income tax rate was 37.6% for the twelve weeks ended October
7, 2006
compared to 38.1% for the same period ended October 8, 2005.
We
produced net income of $58.9 million, or $0.56 per diluted share, for
the twelve
weeks ended October 7, 2006, as compared to $60.8 million, or $0.55 per
diluted
share, for the twelve weeks ended October 8, 2005. As a percentage of
net sales,
net income for the twelve weeks ended October 7, 2006 was 5.4%, as compared
to
6.0% for the twelve weeks ended October 8, 2005. Our
earnings
per diluted share results reflect the impact on both earnings and the
diluted
share count of implementing SFAS 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.
Forty
Weeks Ended October 7, 2006 Compared to Forty Weeks Ended October 8,
2005
Net
sales
for the forty weeks ended October 7, 2006 were $3,600.4 million, an
increase of $299.1 million, or 9.1%, as compared to net sales for the forty
weeks ended October 8, 2005. The net sales increase was due to an increase
in
comparable store sales of 2.3%, contributions from new stores opened
within the
last year and sales from operations acquired during our third quarter
of fiscal
2005. The comparable store sales increase resulted from an increase in
average
ticket sales and customer traffic in our DIFM business and an increase
in
average ticket sales by our DIY customers offset by a decrease in DIY
customer
count.
Gross
profit for the forty weeks ended October 7, 2006 was $1,722.7 million,
or 47.8%
of net sales, as compared to $1,564.4 million, or 47.4% of net sales,
for the
forty weeks ended October 8, 2005. Gross profit increased as a percentage
of net
sales for the forty weeks ended October 7, 2006 quarter due to the positive
impact of category management.
Selling,
general and administrative expenses increased to $1,383.5 million, or
38.4% of
net sales, for the forty weeks ended October 7, 2006, from $1,226.2 million,
or
37.2% of net sales, for the forty weeks ended October 8, 2005. Selling,
general
and administrative expenses increased as a percentage of sales as a result
of a
0.4% increase in certain fixed costs as a percentage of sales during
the forty
weeks ended October 7, 2006, including rent and depreciation, reflective
of
lower than anticipated comparative sales growth. Additionally, as previously
mentioned, we have recorded share-based compensation expense of approximately
0.4% of net sales upon the implementation of SFAS 123R on January 1,
2006.
Interest
expense for the forty weeks ended October 7, 2006 was $28.1 million,
or 0.8% of
net sales, as compared to $24.7 million, or 0.8% of net sales, for the
forty
weeks ended October 8, 2005. The increase in interest expense reflects
overall
higher interest rates, as compared to the forty weeks ended October 8,
2005. In
addition, interest income for the forty weeks ended October 7, 2006 decreased
as
a result of overall lower cash balances during the period.
Income
tax expense for the forty weeks ended October 7, 2006 was $116.9 million,
as
compared to $120.4 million for the forty weeks ended October 8, 2005.
Our
effective income tax rate was 37.4% for the forty weeks ended October
7, 2006
compared to 38.1% for the same period ended October 8, 2005.
We
produced net income of $196.0 million, or $1.82 per diluted share, for
the forty
weeks ended October 7, 2006, as compared to $195.4 million, or $1.78
per diluted
share, for the forty weeks ended October 8, 2005. As a percentage of
net sales,
net income for the forty weeks ended October 7, 2006 was 5.4%, as compared
to
5.9% for the forty weeks ended October 8, 2005. Our
earnings
per diluted share results reflect the impact on both earnings and the
diluted
share count of implementing SFAS 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.
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
credit facilities as needed.
At
October 7, 2006, our cash balance was $14.0 million, a decrease of $26.8
million
compared to December 31, 2005. Our cash balance decreased primarily due
to the
repurchase of common stock, dividends paid to our shareholders partially
and an
overall net increase in working capital during the forty weeks ended
October 7,
2006. At
October 7, 2006, we had outstanding indebtedness consisting of borrowings
of
$450.9 million under our revolving
credit facility. In addition, we had $66.8
million in letters of credit outstanding, which reduced our total availability
under the revolving credit facility to $232.8 million.
On
August
8, 2006, our Board of Directors declared a quarterly dividend of $0.06
per share
to all common stockholders of record as of September 22, 2006. The dividend
was
paid on October 6, 2006. Subsequent to October 7, 2006, our Board of
Directors
declared a quarterly dividend of $0.06 per share to be paid on January
5, 2007
to all common stockholders of record as of December 22, 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 $200.8 million for the forty weeks ended October
7,
2006. These amounts included costs related to new store openings, the
upgrade of
our information systems, remodels and relocations of existing stores.
In
addition, we also made a $12.5 million payment related to the acquisition
of
Autopart International. In 2006, we anticipate that our capital expenditures
will be approximately $255.0 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 205
to
215 new stores during 2006 primarily through new store openings. As of
October 7, 2006, 162 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 new credit facility does not restrict availability under
this
program. At October 7, 2006, $140.7 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 3.7 million shares of common stock during the
forty
weeks ended October 7, 2006 at an aggregate cost of $136.6 million, or
an
average price of $37.12 per share, excluding related expenses. We did
not
repurchase any shares of common stock during the twelve weeks ended October
7,
2006. At October 7, 2006, we had repurchased a total of 5.2 million shares
of
common stock under this program at an aggregate cost of $196.0 million,
or an
average price of $37.63 per share, excluding related expenses.
During
the twelve and forty weeks ended October 7, 2006, we retired 3.1 million
and 5.1
million shares of common stock, respectively, which were previously
repurchased under the $300 million stock repurchase program.
Analysis
of Cash Flows
An
analysis of our cash flows for the forty week period ended October 7,
2006 as
compared to the forty week period ended October 8, 2005 is included
below.
|
Forty
Week Periods Ended
|
|
|
|
October
7,
2006
|
|
October
8,
2005
|
|
|
|
(in
millions)
|
|
|
Cash
flows from operating activities
|
$
|
297.0
|
|
$
|
327.3
|
|
|
Cash
flows from investing activities
|
|
(204.6
|
)
|
|
(252.9
|
)
|
|
Cash
flows from financing activities
|
|
(119.2
|
)
|
|
(18.0
|
)
|
|
Net
(decrease) increase in cash and
|
|
|
|
|
|
|
|
cash
equivalents
|
$
|
(26.8
|
)
|
$
|
56.4
|
|
|
Operating
Activities
For
the
forty weeks ended October 7, 2006, net cash provided by operating activities
decreased $30.3 million to $297.0 million, as compared to the forty weeks
ended
October 8, 2005. Significant components of this increase consisted of:
· |
$14.8
million increase in earnings exclusive of $14.2 million
of non-cash,
share-based compensation expense compared to the same
period in fiscal
2005;
|
· |
$13.5
million increase in depreciation and
amortization;
|
· |
$19.5
million decrease in cash inflows relating to the timing
of receipts for
normal collections of receivables;
|
· |
$20.4
million reduction in cash outflows, net of accounts payable,
as a result
of reducing inventory growth rates in line with our current
sales
trend;
|
· |
$22.8
million increase in cash flows from other assets
related to the timing of
payments for normal operating expenses, primarily
our monthly
rent;
|
· |
$46.7
million decrease in cash inflows relating to the
timing of accrued
operating expenses; and
|
· |
$28.5
million decrease in cash flows from tax benefits
related to exercise of
stock options.
|
Investing
Activities
For
the
forty weeks ended October 7, 2006, net cash used in investing activities
decreased by $48.3 million to $204.6 million, as compared to the forty
weeks
ended October 8, 2005. Significant
components of this increase consisted of:
· |
increase
in capital expenditures of $41.4 million used primarily
to accelerate our
square footage growth through adding new stores (including
ownership of
selected new stores) and
remodeling existing stores;
and
|
· |
$99.3
million related to acquisitions in prior
year.
|
Financing
Activities
For
the
forty weeks ended October 7, 2006, net cash used in financing activities
increased by $101.2 million to $119.2 million, as compared to the forty
weeks
ended October 8, 2005. Significant components of this increase consisted
of:
· |
a
$39.4 million cash outflow under our vendor financing
program;
|
· |
a
$433.8 million cash outflow used to extinguish debt in
connection with our
3rd
quarter refinancing;
|
· |
a $469.7 million net cash
inflow from
borrowings on credit facilities primarily related to our
refinancing; |
· |
a
$19.2 million reduction in cash used to pay
dividends;
|
· |
$16.1
million less cash received from the issuance of common
stock, primarily
resulting from the exercise of stock options; and
|
· |
a
$75.0 million cash outflow resulting from the additional
repurchase of
common
stock.
|
Contractual
Obligations
Our
future contractual obligations related to long-term debt, operating leases
and
other contractual obligations at October 7, 2006 were as follows:
Contractual
Obligations
|
|
Total
|
|
Fiscal
2006
|
|
Fiscal
2007
|
|
Fiscal
2008
|
|
Fiscal
2009
|
|
Fiscal
2010
|
|
Thereafter
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
450,926
|
|
$
|
11
|
|
$
|
67
|
|
$
|
75
|
|
$
|
71
|
|
$
|
73
|
|
$
|
450,629
|
|
Interest
payments
|
|
$
|
135,949
|
|
$
|
12,897
|
|
$
|
26,061
|
|
$
|
25,510
|
|
$
|
25,752
|
|
$
|
26,015
|
|
$
|
19,714
|
|
Letters
of credit
|
|
$
|
66,768
|
|
$
|
1,859
|
|
$
|
59,909
|
|
$
|
5,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
leases
|
|
$
|
1,970,635
|
|
$
|
41,547
|
|
$
|
240,262
|
|
$
|
215,385
|
|
$
|
197,872
|
|
$
|
178,010
|
|
$
|
1,097,559
|
|
Purchase
obligations (1)
|
|
$
|
740
|
|
$
|
115
|
|
$
|
500
|
|
$
|
125
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other
long-term liabilities(2)
|
|
$
|
66,773
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
(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 obligation
consists of certain
commitments for training and development. This
agreement expires in March
2008.
|
|
(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
On
October 5, 2006, we entered into a new $750 million unsecured five-year
revolving credit facility with our subsidiary, Advance Stores Company,
Incorporated, serving as the borrower. This new facility replaced the
term loans
and revolver under our previous credit facility. Proceeds from this revolving
loan were used to repay $434 million of principal outstanding on the
term loans
and revolver under our previous credit facility. In conjunction with this
refinancing, we wrote-off existing deferred financing costs related to
our
previous term loans and revolver. The $1.9 million write-off of these
costs was
combined with a related gain on settlement of interest rate swaps of
$2.9
million for a net gain on extinguishment of debt of $1.0 million.
Additionally,
the new facility provides for the issuance of letters of credit with
a sub limit
of $300 million and swingline loans in an amount not to exceed $50 million.
We
may request that the total revolving commitment be increased by an amount
not
exceeding $250 million during the term of the credit agreement. Voluntary
prepayments and voluntary reductions of the revolving balance are permitted
in
whole or in part, at our option, in minimum principal amounts as specified
in
the new credit facility.
As
of
October 7,
2006,
we had borrowed $450.5 million under the revolver and had $66.8 million
in
letters of credit outstanding, which reduced availability under the revolver
to
$232.8 million. At October 7, 2006, we also have interest rate swaps
in place
that effectively fix our interest rate exposure on approximately 50%
of our
debt. These interest rate swaps are further discussed in our market risk
analysis.
The
interest rates on the borrowings under the new revolving credit facility
will be
based, at our option, on an adjusted LIBOR rate, plus a margin, or an
alternate
base rate, plus a margin. After an initial interest period, we may elect
to
convert a particular borrowing to a different type. The initial margin
is 0.75%
and 0.0% per annum for the adjusted LIBOR and alternate base rate borrowings,
respectively. A commitment fee will be charged on the unused portion
of the
revolver, payable in arrears. The initial commitment fee rate is 0.150%
per
annum. Under the terms of the new credit facility, the interest rate
spread and
commitment fee will be based on our credit rating. The revolving facility
terminates on October 5, 2011.
The
new
credit facility is fully and unconditionally guaranteed by Advance Auto
Parts,
Inc. The facility contains covenants restricting the ability of us and
our
subsidiaries to, among other things, (1) create, incur or assume additional
debt
(including hedging arrangements), (2) incur liens or engage in sale-leaseback
transactions, (3) make loans and investments, (4) guarantee obligations,
(5)
engage in certain mergers, acquisitions and asset sales, (6) engage in
transactions with affiliates, (7) change the nature of our business and
the
business conducted by its subsidiaries and (8) change our holding company
status. We are required to comply with financial covenants with respect
to a
maximum leverage ratio and a minimum coverage ratio. The new credit facility
also provides for customary events of default, including non-payment
defaults,
covenant defaults and cross-defaults to our other material
indebtedness.
We
are
required to comply with financial covenants in the revolving credit facility
with respect to (a) a maximum leverage ratio and (b) a minimum interest
coverage
ratio. We were in compliance with the above covenants under the revolving
credit
facility at October 7, 2006. For additional information regarding our
revolving
credit facility, refer to our Form 8-K filed on October 12, 2006.
Credit
Ratings
At
October 7, 2006, we had a credit rating 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 revolving credit facility
is
based on such credit ratings. If these credit ratings decline, our interest
expense may increase. Conversely, if these credit ratings improve, 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
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment
of FASB
Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires recognition of
the overfunded or underfunded status of defined benefit postretirement
plans as
an asset or liability in the statement of financial position and to recognize
changes in that funded status in comprehensive income in the year in
which the
changes occur. SFAS No. 158 also requires measurement of the funded status
of a
plan as of the date of the statement of financial position. SFAS No.
158 is
effective for recognition of the funded status of the benefit plans for
fiscal
years ending after December 15, 2006 and is effective for the measurement
date
provisions for fiscal years ending after December 15, 2008. We are currently
evaluating the impact of SFAS No. 158.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 clarifies the definition of fair value, establishes a framework
for
measuring fair value, and expands the disclosures on fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact of SFAS No. 157.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes,” or FIN 48. FIN 48 clarifies the accounting and reporting
for income taxes recognized in accordance with SFAS No. 109, “Accounting for
Income Taxes.” The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected
to be
taken in income tax returns. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We are currently
evaluating the impact of FIN 48.
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. EITF 06-3 is 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
revolving 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 October 7, 2006, $225 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
four new interest rate swap agreements in October 2006 on an aggregate
of $225
million of debt under our revolving credit facility. The
first
swap fixed our LIBOR rate at 4.9675% on $75 million of debt for a term
of 60
months, expiring in October 2011. The second swap fixed our LIBOR rate
at 4.968%
on $50 million of debt for a term of 60 months, expiring in October 2011.
The
third swap fixed our LIBOR rate at 4.98% on $50 million of debt for a
term of 60
months, expiring in October 2011. The fourth swap fixed our LIBOR rate
at 4.965%
on $50 million of debt for a term of 60 months, expiring in October
2011.
The
table
below presents principal cash flows and related weighted average interest
rates
on our long-term debt outstanding at October 7, 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 October 7, 2006. Implied forward rates should
not be
considered a predictor of actual future interest rates.
|
|
Fiscal
2006
|
|
Fiscal
2007
|
|
Fiscal
2008
|
|
Fiscal
2009
|
|
Fiscal
2010
|
|
Thereafter
|
|
Total
|
|
Fair
Market
Value
|
|
Long-term
debt:
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rate
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
450,475
|
|
$
|
450,475
|
|
$
|
450,475
|
|
Weighted
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
rate
|
|
6.1%
|
|
|
5.8%
|
|
|
5.6%
|
|
|
5.7%
|
|
|
5.8%
|
|
|
5.9%
|
|
|
5.8%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to fixed
(1)
|
$
|
225,000
|
|
$
|
225,000
|
|
$
|
225,000
|
|
$
|
225,000
|
|
$
|
225,000
|
|
$
|
225,000
|
|
$
|
-
|
|
$
|
662
|
|
Weighted
average pay rate
|
|
0.0%
|
|
|
0.0%
|
|
|
0.1%
|
|
|
0.0%
|
|
|
0.0%
|
|
|
0.0%
|
|
|
0.0%
|
|
|
-
|
|
Weighted
average receive rate
|
|
0.4%
|
|
|
0.1%
|
|
|
0.0%
|
|
|
0.0%
|
|
|
0.1%
|
|
|
0.1%
|
|
|
1.1%
|
|
|
-
|
|
|
(1) |
Amounts
presented may not be outstanding for the entire
year.
|
Our
management evaluated, with the participation of our principal executive
officer
and principal financial officer, the effectiveness of our disclosure
controls
and procedures as of the end of the period covered by this report. Based
on this
evaluation, our principal 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 Securities Exchange
Act of
1934 is accumulated and communicated to our management, including our
principal
executive officer and principal financial officer, as appropriate to
allow
timely decisions regarding required disclosure.
There
have been no changes in our internal control over financial reporting
that
occurred during the quarter ended October 7, 2006 that have materially
affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.