AAP 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended April 21, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from ________ to ________.
Commission
file number 001-16797
ADVANCE
AUTO PARTS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
54-2049910
(I.R.S.
Employer
Identification No.)
|
5008
Airport Road, Roanoke, Virginia 24012
(Address
of Principal Executive Offices)
(Zip
Code)
(540)
362-4911
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report).
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
accelerated filer x
Accelerated filer p
Non-accelerated filer p
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
p
No
x
As
of May
29,
2007,
the registrant had outstanding 106,457,647
shares
of Common Stock, par value $0.0001 per share (the only class of common stock
of
the registrant outstanding).
ITEM
1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND
SUBSIDIARIES
|
Condensed
Consolidated Balance Sheets
April
21, 2007 and December 30, 2006
(in
thousands, except per share data)
(unaudited)
|
|
April
21,
|
|
December
30,
|
|
Assets
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,983
|
|
$
|
11,128
|
|
Receivables,
net
|
|
|
89,754
|
|
|
97,046
|
|
Inventories,
net
|
|
|
1,556,052
|
|
|
1,463,340
|
|
Other
current assets
|
|
|
29,418
|
|
|
40,459
|
|
Total
current assets
|
|
|
1,692,207
|
|
|
1,611,973
|
|
Property
and equipment, net of accumulated depreciation of
|
|
|
|
|
|
|
|
$706,731
and $670,571
|
|
|
1,016,046
|
|
|
994,977
|
|
Assets
held for sale
|
|
|
1,448
|
|
|
1,548
|
|
Goodwill
|
|
|
33,718
|
|
|
33,718
|
|
Intangible
assets, net
|
|
|
27,596
|
|
|
27,926
|
|
Other
assets, net
|
|
|
10,299
|
|
|
12,539
|
|
|
|
$
|
2,781,314
|
|
$
|
2,682,681
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Bank
overdrafts
|
|
$
|
5,707
|
|
$
|
34,206
|
|
Current
portion of long-term debt
|
|
|
62
|
|
|
67
|
|
Financed
vendor accounts payable
|
|
|
118,246
|
|
|
127,543
|
|
Accounts
payable
|
|
|
768,621
|
|
|
651,587
|
|
Accrued
expenses
|
|
|
254,859
|
|
|
252,975
|
|
Other
current liabilities
|
|
|
47,173
|
|
|
47,042
|
|
Total
current liabilities
|
|
|
1,194,668
|
|
|
1,113,420
|
|
Long-term
debt
|
|
|
404,150
|
|
|
477,173
|
|
Other
long-term liabilities
|
|
|
64,537
|
|
|
61,234
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, nonvoting, $0.0001 par value,
|
|
|
|
|
|
|
|
10,000
shares authorized; no shares issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, voting, $0.0001 par value, 200,000
|
|
|
|
|
|
|
|
shares
authorized; 106,058 shares issued and outstanding
|
|
|
|
|
|
|
|
in
2007 and 105,351 issued and outstanding in 2006
|
|
|
11
|
|
|
11
|
|
Additional
paid-in capital
|
|
|
434,420
|
|
|
414,153
|
|
Accumulated
other comprehensive income
|
|
|
2,846
|
|
|
3,472
|
|
Retained
earnings
|
|
|
680,682
|
|
|
613,218
|
|
Total
stockholders' equity
|
|
|
1,117,959
|
|
|
1,030,854
|
|
|
|
$
|
2,781,314
|
|
$
|
2,682,681
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to the condensed consolidated financial statements
are
an
integral part of these statements.
Condensed
Consolidated Statements of
Operations
For
the Sixteen Week Periods Ended
April
21, 2007 and April 22, 2006
(in
thousands, except per share data)
(unaudited)
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
21,
|
|
April
22,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,468,120
|
|
$
|
1,393,010
|
|
Cost
of sales, including
purchasing and warehousing costs
|
|
|
758,717
|
|
|
727,842
|
|
Gross
profit
|
|
|
709,403
|
|
|
665,168
|
|
Selling,
general and administrative expenses
|
|
|
574,710
|
|
|
538,870
|
|
Operating
income
|
|
|
134,693
|
|
|
126,298
|
|
Other,
net:
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(11,274
|
)
|
|
(10,163
|
)
|
Other
income, net
|
|
|
342
|
|
|
620
|
|
Total
other, net
|
|
|
(10,932
|
)
|
|
(9,543
|
)
|
Income
before provision for income taxes
|
|
|
123,761
|
|
|
116,755
|
|
Provision
for income taxes
|
|
|
47,660
|
|
|
42,674
|
|
Net
income
|
|
$
|
76,101
|
|
$
|
74,081
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.72
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.71
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
105,694
|
|
|
107,879
|
|
Dilutive
effect of share-based compensation
|
|
|
951
|
|
|
1,376
|
|
Average
common shares outstanding - assuming dilution
|
|
|
106,645
|
|
|
109,255
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to the condensed consolidated financial statements
are
an
integral part of these statements.
Condensed
Consolidated Statements of Cash
Flows
For
the Sixteen Week Periods Ended
April
21, 2007 and April 22, 2006
(in
thousands)
(unaudited)
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
21,
|
|
April
22,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
76,101
|
|
$
|
74,081
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
45,426
|
|
|
39,833
|
|
Amortization
of deferred debt issuance costs
|
|
|
69
|
|
|
193
|
|
Share-based
compensation
|
|
|
5,398
|
|
|
5,045
|
|
Loss
on disposal of property and equipment, net
|
|
|
3,370
|
|
|
173
|
|
Benefit
for deferred income taxes
|
|
|
(6,087
|
)
|
|
(1,163
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
(3,607
|
)
|
|
(2,663
|
)
|
Net
decrease (increase) in:
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
4,041
|
|
|
9,716
|
|
Inventories,
net
|
|
|
(92,712
|
)
|
|
(53,790
|
)
|
Other
assets
|
|
|
13,316
|
|
|
15,454
|
|
Net
increase in:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
117,034
|
|
|
67,311
|
|
Accrued
expenses
|
|
|
21,491
|
|
|
10,130
|
|
Other
liabilities
|
|
|
3,035
|
|
|
1,974
|
|
Net
cash provided by operating activities
|
|
|
186,875
|
|
|
166,294
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(75,940
|
)
|
|
(77,954
|
)
|
Insurance
proceeds related to damaged property
|
|
|
3,251
|
|
|
-
|
|
Proceeds
from sales of property and equipment
|
|
|
239
|
|
|
5,111
|
|
Net
cash used in investing activities
|
|
|
(72,450
|
)
|
|
(72,843
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Decrease
in bank overdrafts
|
|
|
(28,499
|
)
|
|
(28,247
|
)
|
(Decrease)
increase in financed vendor accounts payable
|
|
|
(9,297
|
)
|
|
6,082
|
|
Dividends
paid
|
|
|
(12,682
|
)
|
|
(6,479
|
)
|
Borrowings
under credit facilities
|
|
|
136,800
|
|
|
-
|
|
Payments
on credit facilities
|
|
|
(209,800
|
)
|
|
(8,175
|
)
|
Proceeds
from the issuance of common stock, primarily exercise
|
|
|
|
|
|
|
|
of
stock options
|
|
|
11,262
|
|
|
8,576
|
|
Excess
tax benefit from share-based compensation
|
|
|
3,607
|
|
|
2,663
|
|
Repurchase
of common stock
|
|
|
-
|
|
|
(53,327
|
)
|
Other
|
|
|
39
|
|
|
23
|
|
Net
cash used in financing activities
|
|
|
(108,570
|
)
|
|
(78,884
|
)
|
Net
increase in cash and cash equivalents
|
|
|
5,855
|
|
|
14,567
|
|
Cash
and cash equivalents,
beginning of period
|
|
|
11,128
|
|
|
40,783
|
|
Cash
and cash equivalents,
end of period
|
|
$
|
16,983
|
|
$
|
55,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
12,861
|
|
$
|
7,373
|
|
Income
tax payments, net
|
|
|
40,665
|
|
|
20,622
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Accrued
purchases of property and equipment
|
|
|
17,948
|
|
|
36,852
|
|
Repurchases
of common stock not settled
|
|
|
-
|
|
|
13,154
|
|
Retirement
of common stock
|
|
|
-
|
|
|
79,177
|
|
Reclassification
of other comprehensive income
|
|
|
(626
|
)
|
|
1,440
|
|
Adoption
of FIN No. 48, net of tax
|
|
|
2,275
|
|
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to the condensed consolidated financial statements
are
an
integral part of these statements.
Notes
to the Condensed Consolidated Financial
Statements
For
the Sixteen Week Periods Ended April
21, 2007 and April 22, 2006
(in
thousands, except per share data)
(unaudited)
1. |
Basis
of Presentation:
|
The
accompanying condensed consolidated financial statements include the
accounts of
Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company.
All
significant intercompany balances and transactions have been eliminated
in
consolidation.
The
condensed consolidated balance sheets as of April 21, 2007 and December
30,
2006, the condensed consolidated statements of operations for the sixteen
week
periods ended April 21, 2007 and April 22, 2006, and the condensed consolidated
statements of cash flows for the sixteen week periods ended April 21,
2007 and
April 22, 2006, 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 30, 2006.
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.
Cost
of Sales and Selling, General and Administrative Expenses
The
following table illustrates the primary costs classified in each major
expense
category:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
Cost
of Sales
|
|
SG&A
|
|
|
|
|
|
|
●
|
Total
cost of merchandise sold including:
|
|
●
|
Payroll
and benefit costs for retail and corporate team
|
|
–
|
Freight
expenses associated with moving
|
|
|
members,
including share-based compensation;
|
|
|
merchandise
inventories from our vendors to our
|
|
●
|
Occupancy
costs of retail and corporate facilities;
|
|
|
distribution
center; |
|
●
|
Depreciation
related to retail and corporate assets;
|
|
|
|
|
|
|
|
|
Cash
discounts on payments to vendors;
|
|
|
Costs
associated with our commercial delivery
|
●
|
|
|
|
program,
including payroll and benefit costs,
|
●
|
|
|
|
and
transportation expenses associated with
moving
|
|
Costs
associated with operating our distribution
|
|
|
merchandise
inventories from our retail stores to
|
|
network,
including payroll and benefit costs, occupancy |
|
|
our
customer locations;
|
|
costs
and
depreciation; and |
|
●
|
Freight
expenses associated with moving merchandise
|
|
Freight
expenses associated with moving merchandise
|
|
|
inventories
from our Local Area Warehouses, or LAWs,
|
|
inventories
from our distribution center to our retail stores.
|
|
|
and
Parts Delivered Quickly warehouses, or PDQs,
|
|
|
|
|
|
to
our retail stores after the customer has special
|
|
|
|
|
|
ordered
the merchandise;
|
|
|
|
|
●
|
|
|
|
|
|
|
Professional
services; and
|
|
|
|
|
●
|
Other
administrative costs, such as credit card service
|
|
|
|
|
|
fees,
supplies, travel and
lodging.
|
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.
Cooperative advertising allowances and volume rebates are earned based on
inventory purchases and initially recorded as a reduction to inventory. The
deferred amounts are included as a reduction to 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
agreements.
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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
Preopening
Expenses
Preopening
expenses, which consist primarily of payroll and occupancy costs, are expensed
as incurred.
Warranty
Costs
The
Company's vendors are primarily responsible for warranty claims. Warranty
costs
relating to merchandise (primarily batteries) 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 following
table presents changes in the Company’s warranty reserves.
|
|
April
21,
2007
|
|
December
30,
2006
|
|
|
|
(16
weeks ended)
|
|
(52
weeks ended)
|
|
|
|
|
|
|
|
Warranty
reserve, beginning of period
|
|
$
|
13,069
|
|
$
|
11,352
|
|
Reserves
established
|
|
|
6,394
|
|
|
17,352
|
|
Reserves
utilized
|
|
|
(5,408
|
)
|
|
(15,635
|
)
|
|
|
|
|
|
|
|
|
Warranty
reserve, end of period
|
|
$
|
14,055
|
|
$
|
13,069
|
|
|
|
|
|
|
|
|
|
Sales
Returns and Allowances
The
Company’s accounting policy for sales returns and allowances consists of
establishing reserves for estimated 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.
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 and shares of non-vested restricted stock, during the period. Diluted
earnings per share of common stock reflects the increase in the weighted-average
number of shares of common stock outstanding, outstanding deferred stock
units
and the impact of outstanding stock options, stock appreciation rights and
shares of non-vested restricted stock, calculated on the treasury stock
method.
Hedge
Activities
The
Company utilizes interest rate swaps to limit its cash flow risk on its variable
rate debt. 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 April 21, 2007 and December 30, 2006,
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. The
Company uses the adjusted LIBOR interest rate and has the intent and
ability to continue to use the adjusted LIBOR interest rate on its hedged
borrowings. 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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
The
fair
value of the interest rate swaps at April 21, 2007 and December 30, 2006
was a
liability of $595 and an asset of $251, respectively. Any amounts received
or
paid under these hedges will be recorded in the statement of operations as
earned or incurred.
Based
on
the estimated current and future fair values of the hedge arrangements at
April
21, 2007, 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 $579 associated with the interest rate
swaps.
Financed
Vendor Accounts Payable
The
Company is party to a short-term financing program with a bank allowing it
to
extend its payment terms on certain merchandise purchases. The substance
of the
program is for the Company to borrow money from the bank to finance purchases
from vendors. The Company records any discount given by the vendor to the
value
of its inventory and accretes this discount to the resulting short-term payable
to the bank through interest expense over the extended term. At April 21,
2007
and December 30, 2006, $118,246 and $127,543, respectively, was payable to
the
bank by the Company under this program and is included in the accompanying
consolidated balance sheets as Financed Vendor Accounts Payable.
New
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007. The Company is currently evaluating the impact of SFAS No.
159.
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. The Company adopted
the recognition provisions of SFAS No. 158 on December 30, 2006. SFAS No.
158 is
effective for the measurement date provisions for fiscal years ending after
December 15, 2008. The Company is currently evaluating the impact of adopting
the measurement date provisions 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
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. Effective December 31,
2006, the Company adopted SFAS No. 156 with no 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 Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(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. Effective December 31, 2006, the Company adopted SFAS No. 155 with no
material impact on its financial condition, results of operations or cash
flows.
On
December 31, 2006, the Company adopted the provisions of 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.
As
a
result of the adoption of FIN 48 on December 31, 2006, the Company recorded
an
increase of $2,275 to the liability for unrecognized tax benefits and a
corresponding decrease in its balance of retained earnings. As of December
31,
2006, the gross amount of unrecognized tax benefits was $16,453. The entire
amount, if recognized, would affect the effective tax rate.
The
Company previously classified interest associated with tax contingencies in
interest expense. The Company has not previously provided for any penalties
associated with tax contingencies unless
considered probable. With the adoption of FIN 48, the Company will
provide for interest and penalties as a part of income tax expense. As of
December 31, 2006, the gross amount of interest and penalties related to
unrecognized tax benefits was $4,172.
During
the next 12 months, it is possible that the Company could conclude on $3,000
to
$4,000 of the contingencies associated with tax uncertainties (including
unrecognized tax benefits, interest and penalties). The majority of these
resolutions would be achieved through the completion of current income tax
examinations.
The
Company and its subsidiaries file a consolidated U.S. federal income tax return
and state returns, some of which are on a consolidated basis, in the 40 states
which have retail operations, plus Puerto Rico and the Virgin Islands. Numerous
localities require income tax returns. The examination of the Company’s U.S.
federal tax returns for the 3-year period ending 2003 was completed in March
2006. With respect to state and local jurisdictions, the Company and its
subsidiaries are generally not subject to exam for any years prior to 2001.
3. |
Share-Based
Compensation:
|
The
Company accounts for its share-based compensation plans in accordance with
the
provisions of SFAS No. 123R, “Share-Based Payment.” Historically, the Company
has granted fixed stock options and deferred stock units to its employees under
these plans. During the sixteen weeks ended April 21, 2007, the Company granted
stock appreciation rights, or SARs, and shares of restricted stock as allowed
under the Company’s long-term incentive
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
plan. Total share-based compensation expense included in
selling, general and administrative expenses in the accompanying condensed
consolidated statements of operations for the sixteen weeks ended April 21,
2007
and April 22, 2006 was $5,398 and $5,045, respectively.
SARs
During
the sixteen weeks ended April 21, 2007, the Company granted 1,429 SARs to
employees at a conversion price of $38.03. The Company calculated the fair
value
of the granted SARs using the Black-Scholes pricing model and will amortize
the
fair value compensation over the requisite service period using the
straight-line method. The SARs 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. Additionally, the SARs expire on
the seventh anniversary of the grant date.
The
grant-date fair value of each SAR was $11.36. At April 21, 2007, the remaining
compensation expense to be recognized for this grant, net of estimated
forfeitures, is $14,283. The Company used the following Black-Scholes
option-pricing assumptions to determine the fair value of each SAR and stock
option during the sixteen weeks ended April 21, 2007 and April 22, 2006,
respectively:
Black-Scholes
Option Valuation Assumptions (1)
|
|
April
21,
2007
|
|
April
22,
2006
|
|
|
|
|
|
|
|
Risk-free
interest rate (2)
|
|
|
4.8%
|
|
|
4.6%
|
|
Expected
dividend yield (3)
|
|
|
0.6%
|
|
|
0.6%
|
|
Expected
stock price volatility (4)
|
|
|
29.0%
|
|
|
28.0%
|
|
Expected
life of stock options and SARs (in months) (5)
|
|
|
51
|
|
|
44
|
|
|
|
|
|
|
|
|
|
(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) |
The
Company declared its first ever cash dividend beginning in its first
quarter of 2006.
|
(4) |
Expected
volatility is based on the historical volatility of the Company’s common
stock for the period consistent with the expected life of the Company’s
stock options and SARs.
|
(5) |
The
expected life of the Company’s stock options and SARs represents the
estimated period of time until exercise and is based on the Company’s
historical experience of such stock
options.
|
Restricted
Stock
During
the sixteen weeks ended April 21, 2007, the Company granted 142 shares of
restricted stock to employees. These shares vest over a three-year period.
During this period, holders of the restricted stock are entitled to dividend
and
voting rights. Shares of the restricted stock are restricted until they vest
and
cannot be sold by the recipient until the restriction has lapsed at the end
of
the three-year period.
The
grant-date fair value of each share of restricted stock was $38.03, which
was
equal to the market price of the Company’s stock on the date of grant. At April
21, 2007, the remaining compensation expense to be recognized for this grant,
net of estimated forfeitures, is $4,760. As the compensation is amortized
over
the vesting
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
period,
additional paid-in capital is recognized
accordingly. Shares of restricted stock are not included as shares outstanding
in the calculation of basic earnings per share, but are included in the
number
of shares used to calculate diluted earnings per share, if
dilutive.
4. |
Goodwill
and Intangible
Assets:
|
The
carrying amount and accumulated amortization of acquired intangible assets
as of
April 21, 2007 include:
|
|
As
of April 21, 2007
|
|
Acquired
intangible assets
|
|
Gross
Carrying
|
|
Accumulated
|
|
Net
Book
|
|
subject
to amortization:
|
|
Amount
|
|
Amortization
|
|
Value
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
9,600
|
|
$
|
(1,472
|
)
|
$
|
8,128
|
|
Other
|
|
|
885
|
|
|
(217
|
)
|
|
668
|
|
Total
|
|
$
|
10,485
|
|
$
|
(1,689
|
)
|
$
|
8,796
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
intangible assets
|
|
|
|
|
|
|
|
|
|
|
not
subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
and tradenames
|
|
$
|
18,800
|
|
$
|
-
|
|
$
|
18,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
29,285
|
|
$
|
(1,689
|
)
|
$
|
27,596
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded amortization expense of $330 for acquired intangible assets
for
the sixteen weeks ended April 21, 2007. The table below shows expected
amortization expense for the next five years for acquired intangible assets
recorded as of April 21, 2007.
2007
|
757
|
2008
|
1,087
|
2009
|
1,087
|
2010
|
1,059
|
2011
|
967
|
|
|
The
changes in the carrying amount of goodwill for the sixteen weeks ended April
21,
2007 are as follows:
|
|
AAP
Segment
|
|
AI
Segment
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance
at December 30, 2006
|
|
$
|
16,093
|
|
$
|
17,625
|
|
$
|
33,718
|
|
Fiscal
2007 activity
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at April 21, 2007
|
|
$
|
16,093
|
|
$
|
17,625
|
|
$
|
33,718
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
Receivables
consist of the following:
|
|
April
21,
2007
|
|
December
30,
2006
|
|
|
|
|
|
|
|
Trade
|
|
$
|
14,210
|
|
$
|
13,149
|
|
Vendor
|
|
|
70,897
|
|
|
73,724
|
|
Installment
|
|
|
975
|
|
|
2,336
|
|
Insurance
recovery
|
|
|
5,193
|
|
|
9,676
|
|
Other
|
|
|
3,607
|
|
|
2,801
|
|
Total
receivables
|
|
|
94,882
|
|
|
101,686
|
|
Less:
Allowance for doubtful accounts
|
|
|
(5,128
|
)
|
|
(4,640
|
)
|
Receivables,
net
|
|
$
|
89,754
|
|
$
|
97,046
|
|
|
|
|
|
|
|
|
|
Inventories
are stated at the lower of cost or market, cost being determined using the
last-in, first-out ("LIFO") method for approximately 93% of inventories at
both
April 21, 2007 and December 30, 2006. 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 $10,319 and $2,940
for the sixteen weeks ended April 21, 2007 and April 22, 2006,
respectively.
An
actual
valuation of inventory under the LIFO method can be made only at the end
of each
fiscal year based on the inventory levels and costs at that time. Accordingly,
interim LIFO calculations must be based on management’s estimates of expected
fiscal year-end inventory levels and costs.
The
remaining inventories are comprised of product cores, which consist of the
non-consumable portion of certain parts and batteries and are valued under
the
first-in, first-out ("FIFO") method. Core values are included as part of
the
Company’s merchandise costs and are either passed on to the customer or returned
to the vendor. Additionally, these products are not subject to the frequent
cost
changes like the Company’s other merchandise inventory, thus there is no
material difference from applying either the LIFO or FIFO valuation methods.
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at April
21,
2007 and December 30, 2006, were $99,989 and $95,576, respectively. Inventories
consist of the following:
|
|
April
21,
2007
|
|
December
30,
2006
|
|
|
|
|
|
|
|
Inventories
at FIFO
|
|
$
|
1,462,966
|
|
$
|
1,380,573
|
|
Adjustments
to state inventories at LIFO
|
|
|
93,086
|
|
|
82,767
|
|
Inventories
at LIFO
|
|
$
|
1,556,052
|
|
$
|
1,463,340
|
|
|
|
|
|
|
|
|
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
Replacement
cost approximated FIFO cost at April 21, 2007, and December
30, 2006.
Inventory
quantities are tracked through a perpetual inventory system. The Company
uses a
cycle counting program in all distribution centers, PDQs, 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 and the historical analysis of product sales and current
market
conditions. 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 $31,602 and $31,376 at April 21, 2007 and December 30,
2006,
respectively.
Long-term
debt consists of the following:
|
|
April
21,
2007
|
|
December
30,
2006
|
|
Senior
Debt:
|
|
|
|
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
|
(6.17%
and 6.13% at April 21, 2007 and December 30, 2006,
|
|
|
|
|
|
|
|
respectively)
due October 2011
|
|
$
|
403,800
|
|
$
|
476,800
|
|
Other
|
|
|
412
|
|
|
440
|
|
|
|
|
404,212
|
|
|
477,240
|
|
Less:
Current portion of long-term debt
|
|
|
(62
|
)
|
|
(67
|
)
|
Long-term
debt, excluding current portion
|
|
$
|
404,150
|
|
$
|
477,173
|
|
|
|
|
|
|
|
|
|
As
of
April 21, 2007, the Company had outstanding $403,800 under its revolving
credit
facility and had $66,768 in letters of credit outstanding, which reduced
availability under the revolving credit facility to $279,432. In addition
to the
letters of credit, the Company maintains approximately $2,527 in surety bonds
issued by its insurance provider primarily to utility providers and the
departments of revenue for certain states. These letters of credit and surety
bonds generally have a term of one year or less. The Company entered into
its
current $750,000 unsecured five-year revolving credit facility in October
2006
with Advance Stores Company, Incorporated, a subsidiary of the Company, serving
as the borrower. The revolver replaced the Company’s term loans and revolver
under the previous credit facility.
The
interest rates on borrowings under the 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
current 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 current commitment
fee
rate is 0.150% per annum. Under the terms of the new revolving 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
revolving credit facility is fully and
unconditionally guaranteed by Advance Auto Parts, Inc.
The
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
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,
(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 revolving
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 April 21, 2007.
Comprehensive
income includes changes in fair value of the Company’s interest rate swaps.
Beginning in fiscal 2007, comprehensive income also includes the amortization
of
prior service credits related to its postretirement plan as a result of adopting
of 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)” at December 30, 2006.
Comprehensive
income for the sixteen weeks ended April 21, 2007 and April 22, 2006 is as
follows:
|
|
April
21, 2007
|
|
April
22, 2006
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
76,101
|
|
$
|
74,081
|
|
Unrealized
(loss) gain on hedge arrangements,
|
|
|
|
|
|
|
|
net
of tax
|
|
|
(516
|
)
|
|
1,440
|
|
Amortization
of negative prior service cost, net of tax
|
|
|
(110
|
)
|
|
-
|
|
Comprehensive
income
|
|
$
|
75,475
|
|
$
|
75,521
|
|
|
|
|
|
|
|
|
|
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
Company’s postretirement liability is calculated annually by a third-party
actuary. The discount rate utilized at December 30, 2006 was 5.5%, and remained
unchanged through the sixteen weeks ended April 21, 2007. The
Company expects fiscal 2007 plan contributions to completely offset benefits
paid, consistent with fiscal 2006.
The
components of net periodic postretirement benefit cost for the sixteen weeks
ended April 21, 2007, and April 22, 2006 respectively, are as
follows:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April 21, 2007 and April 22,
2006
(in
thousands, except per share data)
(unaudited)
|
|
Sixteen
Weeks Ended
|
|
|
|
April
21,
2007
|
|
April
22,
2006
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
169
|
|
$
|
223
|
|
Amortization
of negative prior service cost
|
|
|
(179
|
)
|
|
(178
|
)
|
Amortization
of unrecognized net losses
|
|
|
-
|
|
|
64
|
|
|
|
$
|
(10
|
)
|
$
|
109
|
|
|
|
|
|
|
|
|
|
10. |
Segment
and Related
Information:
|
The
Company has the following two reportable segments: Advance Auto Parts,
or AAP,
and Autopart International, or AI. The AAP segment is comprised of store
operations within the United States, Puerto Rico and the Virgin Islands
which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and “Western Auto.” These stores offer a broad selection of brand name
and proprietary automotive replacement parts, accessories and maintenance
items
for domestic and imported cars and light trucks, with no significant
concentration in any specific product area.
The
AI
segment consists solely of the operations of Autopart International, which
operates as an independent, wholly-owned subsidiary. AI’s business serves the
growing commercial market in addition to warehouse distributors and jobbers
located throughout the Northeastern region of the United States.
The
Company evaluates each of its segment’s financial performance based on net sales
and operating profit for purposes of making decisions and allocating resources.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in Note
1.
The
following table summarizes financial information for each of the Company's
business segments for the sixteen weeks ended April 21, 2007 and April
22, 2006,
respectively.
April
21, 2007
|
|
AAP
|
|
AI
|
|
Eliminations
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,432,113
|
|
$
|
36,007
|
|
$
|
-
|
|
$
|
1,468,120
|
|
|
|
|
136,363
|
|
|
(1,670
|
)
|
|
-
|
|
|
134,693
|
|
Segment
assets
|
|
|
2,648,576
|
|
|
132,738
|
|
|
-
|
|
|
2,781,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
22, 2006
|
|
|
AAP
|
|
|
AI
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,361,645
|
|
$
|
31,365
|
|
$
|
-
|
|
$
|
1,393,010
|
|
Operating
income
|
|
|
125,640
|
|
|
658
|
|
|
-
|
|
|
126,298
|
|
Segment
assets
|
|
|
2,513,651
|
|
|
102,077
|
|
|
-
|
|
|
2,615,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 30, 2006 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 unfavorable
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 first quarter of fiscal 2007, we recorded earnings per diluted share
of
$0.71 compared to $0.68 for the same quarter of fiscal 2006. These results
were
primarily driven by increased sales and higher gross margin offset by an
increase in certain fixed operating expenses.
Although
we continue to produce positive results, we believe that through our talented
and experienced management team we have many opportunities to continue
our
growth and improve our performance. As previously
announced
during fourth quarter 2006, we are well underway with our comprehensive strategy
review where we are taking an in-depth look at the automotive aftermarket
industry and our customers. In connection with this review, we have already
developed four key goals which we believe will begin our process of improving
our operating and financial performance:
|
1. |
Drive
sales to both “do-it-yourself,” or DIY, and “do-it-for-me,” or DIFM,
customers, including an increased focus on parts;
|
|
2. |
Accelerate
plans to reduce selling, general and administrative expenses, some
of
which are already underway;
|
|
3. |
Re-examine
all capital projects; and
|
|
4. |
Begin
implementation of certain initiatives identified in our comprehensive
strategy review.
|
Consolidated
Operating Results and Key Metrics
The
following table highlights certain consolidated operating results and key
metrics for the sixteen weeks ended April 21, 2007, and April 22, 2006.
|
|
Sixteen
Weeks Ended
|
|
|
|
April
21, 2007
|
|
April
22, 2006
|
|
|
|
|
|
|
|
Total
net sales (in
thousands)
|
|
$
|
1,468,120
|
|
$
|
1,393,010
|
|
Total
commercial net sales (in
thousands)
|
|
$
|
383,293
|
|
$
|
348,850
|
|
Comparable
store net sales growth
|
|
|
1.1%
|
|
|
3.9%
|
|
DIY
comparable store net sales growth
|
|
|
(0.2%)
|
|
|
0.5%
|
|
DIFM
comparable store net sales growth
|
|
|
5.2%
|
|
|
16.3%
|
|
Average
net sales per store (in
thousands)
|
|
$
|
1,547
|
|
$
|
1,567
|
|
Inventory
per store (in
thousands)
|
|
$
|
494
|
|
$
|
485
|
|
Selling,
general and administrative expenses per store (in
thousands)
|
|
$
|
182
|
|
$
|
184
|
|
Inventory
turnover
|
|
|
1.64
|
|
|
1.70
|
|
Gross
margin
|
|
|
48.3%
|
|
|
47.8%
|
|
Operating
margin
|
|
|
9.2%
|
|
|
9.1%
|
|
|
|
|
|
|
|
|
|
Note:
These metrics should be reviewed 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 30, 2006, which was
filed
with the SEC on February 28, 2007. The footnotes contain descriptions regarding
the calculation of these 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.
Operating
Segments
We
conduct our operations in two reportable segments: Advance Auto Parts, or
AAP,
and Autopart International, or AI. The AAP segment is comprised of our store
operations within the United States, Puerto Rico and the Virgin Islands which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and “Western Auto.” The AI segment consists solely of the operations of
Autopart International, which operates as an independent, wholly-owned
subsidiary.
AAP
Segment
At
April
21, 2007, we operated 3,055 stores within the United States, Puerto Rico
and the
Virgin Islands. We operated 3,020 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 a broad selection of brand
name and proprietary automotive replacement parts, accessories and maintenance
items for domestic and imported cars and light trucks, with no significant
concentration in any specific product area. In addition, we operated 35 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.
The
following table sets forth information about our stores, including the number
of
new, closed and relocated stores, during the sixteen weeks ended April 21,
2007.
We lease approximately 80% of our stores.
|
|
Sixteen
Weeks
Ended
April
21, 2007
|
|
Number
of stores at beginning of period
|
|
|
2,995
|
|
New
stores
|
|
|
62
|
|
Closed
stores
|
|
|
(2
|
)
|
Number
of stores, end of period
|
|
|
3,055
|
|
Relocated
stores
|
|
|
8
|
|
Stores
with commercial programs
|
|
|
2,493
|
|
|
|
|
|
|
AI
Segment
At
April
21, 2007, we operated 95 stores throughout New England and New York. These
stores operated under the “Autopart International” trade name. These stores
offer a broad selection of brand name and proprietary automotive replacement
parts, accessories and maintenance items for domestic and imported cars and
light trucks, with a greater focus on imported parts.
The
following table sets forth information about our stores, including the number
of
new, closed and relocated stores, during the sixteen weeks ended April 21,
2007.
|
|
Sixteen
Weeks Ended April 21, 2007
|
|
Number
of stores at beginning of period
|
|
|
87
|
|
New
stores
|
|
|
8
|
|
Closed
stores
|
|
|
-
|
|
Number
of stores, end of period
|
|
|
95
|
|
Stores
with commercial programs
|
|
|
95
|
|
|
|
|
|
|
We
anticipate that we will add a total of approximately 200 to 210 new AAP and
AI
stores during 2007 primarily through new store openings.
Commercial
Program
Commercial
sales represented approximately 26% of our total sales for the sixteen weeks
ended April 21, 2007 compared to approximately 25% for the sixteen weeks
ended
April 22, 2006. At April 21, 2007, we operated commercial programs in 82%
of our
total stores, including 95 AI stores, slightly up from approximately 81%
at the
end of the prior year quarter. We continued to approach our goal of operating
commercial programs in approximately
85%
of
our AAP store base.
We
believe we have the opportunity to significantly grow our commercial business
for the foreseeable future as we near our goal of total programs in addition
to
renewing our focus on higher comparative sales increases from our existing
programs. We also believe that AI continues to supplement our commercial
growth
due to their established delivery programs and knowledge of the commercial
industry, particularly for foreign makes and models of vehicles.
Share-Based
Payments
We
use
the Black-Scholes option-pricing model to value all stock options and stock
appreciation rights, or SARs, 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 sixteen weeks ended April 21, 2007 and
April 22, 2006 was $5.4 million and $5.0 million, respectively. The related
income tax benefit was $2.1 million and $1.8 million, respectively.
As
of
April 21, 2007, we have $38.4 million of unrecognized compensation expense
related to non-vested fixed stock options, SARs and shares of restricted
stock
we expect to recognize over a weighted-average period of 2.2 years.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting policies
generally accepted in the United States of America. Our discussion and analysis
of the financial condition and results of operations are based on these
financial statements. The preparation of these financial statements requires
the
application of accounting policies in addition to certain estimates and
judgments by our management. Our estimates and judgments are based on currently
available information, historical results and other assumptions we believe
are
reasonable. Actual results could differ from these estimates. During the
first
quarter of fiscal 2007, we consistently applied the critical accounting policies
discussed in our annual report on Form 10-K for the year ended December 30,
2006. For a complete discussion regarding these critical accounting policies,
refer to this annual report on Form 10-K.
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 35 Western Auto retail stores as a result of their unique
product
offerings. We also exclude the net sales from the 95 AI stores from our
comparable store sales.
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. Our gross profit may not be
comparable to those of our competitors due to differences in industry practice
regarding the classification
of certain costs. See Note 1 in our condensed consolidated financial statements
for additional discussion of these costs.
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 expense, store
support center administrative office expenses, data processing, professional
expenses and other related expenses.
Results
of Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
|
|
Sixteen
Week Periods Ended
|
|
|
|
(unaudited)
|
|
|
|
April
21,
2007
|
|
April
22,
2006
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of sales, including purchasing and warehousing costs
|
|
|
51.7
|
|
|
52.2
|
|
Gross
profit
|
|
|
48.3
|
|
|
47.8
|
|
Selling,
general and administrative expenses
|
|
|
39.1
|
|
|
38.7
|
|
Operating
income
|
|
|
9.2
|
|
|
9.1
|
|
Interest
expense
|
|
|
(0.8
|
)
|
|
(0.7
|
)
|
Other
income, net
|
|
|
0.0
|
|
|
0.0
|
|
Provision
for income taxes
|
|
|
3.2
|
|
|
3.1
|
|
Net
income
|
|
|
5.2
|
%
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
Sixteen
Weeks Ended April 21, 2007 Compared to Sixteen Weeks Ended April 22,
2006
Net
sales
for the sixteen weeks ended April 21, 2007 were $1,468.1 million, an
increase of $75.1 million, or 5.4%, as compared to net sales for the
sixteen weeks ended April 22, 2006. The net sales increase was due to an
increase in comparable store sales of 1.1% and contributions from our new
AAP
and AI stores opened within the last year. The comparable store sales increase
was driven by 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.
AI
produced sales of $36.0 million, an increase of $4.6 million, or 14.8%. AI’s
sales increase was primarily driven by our acceleration of new-store growth
throughout 2006 and into the first quarter of 2007.
Gross
profit for the sixteen weeks ended April 21, 2007 was $709.4 million, or
48.3%
of net sales, as compared to $665.2 million, or 47.8% of net sales, for the
sixteen weeks ended April 22, 2006. The increase in gross profit as a percentage
of net sales reflects the positive impact of our ongoing category management
initiatives, including improved procurement costs and a positive shift in
sales
mix, and lower logistics expense.
Selling,
general and administrative expenses increased to $574.7 million, or 39.1%
of net
sales, for the sixteen weeks ended April 21, 2007, from $538.9 million, or
38.7%
of net sales, for the sixteen weeks ended April 22, 2006. Selling, general
and
administrative expenses increased as a percentage of net sales as a result
of:
|
· |
an
increase of 70 basis points 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
|
|
· |
an
increase of 35 basis points for incentive compensation as compared
to the
first quarter in 2006.
|
These
increases are partially offset by expenses occurring during the sixteen weeks
ended April 22, 2006, including:
|
· |
30
basis points of expense for our bi-annual store manager
conference;
and
|
|
· |
20
basis points of unplanned expenses related to the resolution
of certain
legal matters and property damage
costs.
|
Operating
income for the sixteen weeks ended April 21, 2007 was $134.7 million,
or 9.2% of
net sales, as compared to $126.3 million, or 9.1% of net sales, for the
sixteen
weeks ended April 22, 2006. AAP produced operating income of $136.4 million,
or
9.5% of net sales, for the sixteen weeks ended April 21, 2007 as compared
to
$125.6 million, or 9.2% of net sales, for the sixteen weeks ended April
22,
2006. This
increase in operating income, as a percentage of net sales, was reflective
of a
more favorable gross profit rate as previously indicated in our overall
discussion of gross profit partially offset by higher fixed expenses
relative to
lower than anticipated sales and an increase in incentive compensation.
AI generated an operating loss of $1.7 million for the sixteen
weeks
ended April 21, 2007 as compared to operating income of $0.7 million
for the
same period last year. This decrease in operating income was primarily
driven by
less than anticipated sales during the first quarter, additional expenses
associated with the transition to AI’s new distribution center and the
reinvestment of resources to accelerate AI’s store growth.
Interest
expense for the sixteen weeks ended April 21, 2007 was $11.3 million, or
0.8% of
net sales, as compared to $10.2 million, or 0.7% of net sales, for the
sixteen
weeks ended April 22, 2006. The increase in interest expense is a result
of
higher average outstanding borrowings offset by slightly lower average
borrowing
rates during the sixteen weeks ended April 21, 2007 compared to the same
period
ended April 22, 2006.
Income
tax expense for the sixteen weeks ended April 21, 2007 was $47.7 million,
as
compared to $42.7 million for the sixteen weeks ended April 22, 2006. Our
effective income tax rate was 38.5% for the sixteen weeks ended April 21,
2007
compared to 36.6% for the same period ended April 22, 2006. The lower effective
tax rate in the first quarter of 2006 was reflective of the favorable resolution
of certain income tax contingencies. We believe our effective tax rate will
slightly increase in future quarters as a result of adopting FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48,
at the beginning of our first quarter in 2007. For a complete discussion
of the
adoption of FIN 48, see Note 2 of our condensed consolidated financial
statements.
We
generated net income of $76.1 million, or $0.71 per diluted share, for the
sixteen weeks ended April 21, 2007, as compared to $74.1 million, or $0.68
per
diluted share, for the sixteen weeks ended April 22, 2006. As a percentage
of
net sales, net income for the sixteen weeks ended April 21, 2007 was 5.2%,
as
compared to 5.3% for the sixteen weeks ended April 22, 2006.
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 and to pay quarterly cash dividends. We
have
funded these requirements primarily through cash generated from operations
supplemented by borrowings under our credit facilities as needed. We believe
funds generated from our expected results of operations, available cash and
cash
equivalents and available borrowings under our revolving credit facility
will be
sufficient to fund our primary obligations for the next year.
At
April
21, 2007, our cash and cash equivalents balance was $17.0 million, an increase
of $5.9 million compared to December 30, 2006. This slight increase resulted
primarily from using a significant portion of our cash generated from operations
to invest in property and equipment, pay down the outstanding balance on
our
revolving credit facility and pay dividends to our shareholders during the
sixteen weeks ended April 21, 2007. At
April
21, 2007, we had outstanding indebtedness primarily
consisting of borrowings of $403.8 million under our revolving
credit facility. Additionally, we had $66.8
million in letters of credit outstanding, which reduced our total availability
under the revolving credit facility to $279.4 million.
During
the sixteen weeks ended April 21, 2007, we paid $12.7 million in dividends
declared in the fourth quarter 2006 and first quarter 2007. Subsequent to
April
21, 2007, our Board of Directors declared a quarterly dividend of $0.06 per
share to be paid on July 6, 2007 to all common stockholders of record as
of June
22, 2007.
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 $75.9 million for the sixteen weeks ended April
21,
2007. These amounts included costs related to new store openings, the upgrade
of
our information systems, and remodels and relocations of existing stores.
During
the sixteen weeks ended April 21, 2007, we opened an aggregate of 70 AAP
and AI
stores, remodeled 34 AAP stores and relocated eight AAP stores. In 2007,
we
anticipate that our capital expenditures will be approximately $250 to
$270
million, including an estimated $30 million for our ninth distribution
center we
expect to open in 2008.
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 an aggregate of
approximately 200 to 210 new AAP and AI stores and relocating 35 AAP stores
during 2007. As previously mentioned in our 2006 Form 10-K, we have reviewed
our
remodel program scope and identified opportunities to reduce the investment.
Accordingly, our capital expenditures for 2007 remodels have been reduced
by
more than $0.06 million per store. Further, we will be measuring the sales
increase produced by our new remodel program and will determine the total
number
of 2007 remodels based on the sales results we achieve.
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.
In
substance, the program allows us to borrow money from the bank to finance
purchases from our vendors. This program allows us to reduce further our
working
capital invested in current inventory levels and finance future inventory
growth. Our revolving credit facility does not restrict availability under
this program. At April 21, 2007, $118.2 million was payable to the bank by
us
under this program.
Analysis
of Cash Flows
An
analysis of our cash flows for the sixteen week period ended April 21, 2007
as
compared to the sixteen week period ended April 22, 2006 is included
below.
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
21,
2007
|
|
April
22,
2006
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
$
|
186.9
|
|
$
|
166.3
|
|
Cash
flows from investing activities
|
|
|
(72.4
|
)
|
|
(72.8
|
)
|
Cash
flows from financing activities
|
|
|
(108.6
|
)
|
|
(78.9
|
)
|
Net
increase in cash and
|
|
|
|
|
|
|
|
cash
equivalents
|
|
$
|
5.9
|
|
$
|
14.6
|
|
|
|
|
|
|
|
|
|
Operating
Activities
For
the
sixteen weeks ended April 21, 2007, net cash provided by operating activities
increased $20.6 million to $186.9 million, as compared to the sixteen weeks
ended April 22, 2006. Significant components of this increase consisted of:
|
· |
a
$5.6 million increase in depreciation and
amortization;
|
|
· |
a
$3.2 million increase in loss on disposal of property
and equipment,
net;
|
|
· |
a
$4.9 million decrease in cash flows from benefit for
deferred income
taxes;
|
|
· |
a
$10.8 million increase in cash flows from inventory,
net of accounts
payable;
|
|
· |
a
$5.7 million decrease in cash inflows primarily related
to the timing in
collections of vendor receivables; and
|
|
· |
an
$11.4 million increase in cash flows relating to the
timing of accrued
operating
expenses.
|
Investing
Activities
For
the
sixteen weeks ended April 21, 2007, net cash used in investing activities
decreased by $0.4 million to $72.4 million, as compared to the sixteen
weeks
ended April 22, 2006. Significant
components of this decrease consisted of:
|
· |
a
decrease in capital expenditures of $2.0 million resulting
primarily from
less spending on capital assets in our store locations,
including the
impact of fewer remodels and relocations as compared
to our first quarter
in prior year;
|
|
· |
receipt
of $3.3 million in insurance proceeds for the reimbursement
of damaged
property; and
|
|
· |
a
$4.9 million decrease in proceeds from sales of property
and equipment and
assets held for
sale.
|
Financing
Activities
For
the
sixteen weeks ended April 21, 2007, net cash used in financing activities
increased by $29.7 million to $108.6 million, as compared to the sixteen
weeks
ended April 22, 2006. Significant components of this increase consisted of:
|
· |
a
$15.4 million cash outflow under our vendor financing
program;
|
|
· |
a
$64.8 million net cash outflow from an increase in
net payments on credit
facilities;
|
|
· |
a
$6.2 million additional outflow of cash used to pay
dividends;
|
|
· |
$2.7
million more cash received from the issuance of common
stock, primarily
resulting from the exercise of stock options; and
|
|
· |
a
$53.3 million cash outflow in fiscal 2006 resulting from
the repurchase of
common
stock.
|
Off-Balance-Sheet
Arrangements and Contractual Obligations
In
addition to our revolving credit facility, we also utilize operating leases
as
another source of financing. The amounts payable under these operating leases,
which are considered to be off-balance-sheet arrangements, are included in
our
schedule of contractual obligations below.
Our
future contractual obligations related to long-term debt, operating leases
and
other contractual obligations at April 21, 2007 were as
follows:
Contractual
Obligations
|
|
Total
|
|
Fiscal
2007
|
|
Fiscal
2008
|
|
Fiscal
2009
|
|
Fiscal
2010
|
|
Fiscal
2011
|
|
Thereafter
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
404,212
|
|
$
|
40
|
|
$
|
75
|
|
$
|
71
|
|
$
|
73
|
|
$
|
403,869
|
|
$
|
84
|
|
Interest
payments
|
|
$
|
96,078
|
|
$
|
16,162
|
|
$
|
22,721
|
|
$
|
22,656
|
|
$
|
22,978
|
|
$
|
11,547
|
|
$
|
14
|
|
Letters
of credit
|
|
$
|
66,768
|
|
$
|
15,562
|
|
$
|
51,206
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
leases (1)
|
|
$
|
2,096,204
|
|
$
|
171,921
|
|
$
|
237,869
|
|
$
|
214,415
|
|
$
|
194,486
|
|
$
|
210,371
|
|
$
|
1,067,142
|
|
Purchase
obligations (2)
|
|
$
|
471
|
|
$
|
346
|
|
$
|
125
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other
long-term liabilities(3)
|
|
$
|
64,537
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We
lease certain store locations, distribution centers, office space,
equipment and vehicles. Our property leases generally contain renewal
and
escalation clauses and other lease concessions. These provisions
are
|
|
|
considered
in our calculation of our minimum lease payments which are recognized
as
expense on a straight-line basis over the applicable lease term.
In
accordance with SFAS No. 13. “Accounting for Leases,” as amended by SFAS
No. 29, “Determine Contingent Rental,” any lease payments that are based
upon an existing index or rate are included in our minimum lease
payment
calculations.
|
|
(2) |
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. |
|
(3) |
Primarily includes employee benefit
accruals,
restructuring and closed store liabilities and deferred income taxes
for
which no contractual payment schedule exists and
we expect the payments to occur beyond twelve months
from April 21, 2007. Additionally, other long-term liabilities include
$16.5 million of unrecognized income tax benefits as a result of
our
adoption of FIN 48 as of December 31, 2006. During the next 12 months,
it
is possible that we could conclude on $3 to $4 million of the
contingencies associated with these tax uncertainties, a portion
of which
may be settled in cash. We do not anticipate any significant impact
on our
liquidity and capital resources due to the conclusion of these tax
matters. |
Long
Term Debt
Our
primary source of financing is a $750 million unsecured five-year revolving
credit facility with our subsidiary, Advance Stores Company, Incorporated,
serving as the borrower. This facility replaced the term loans and revolver
under our previous credit facility. Additionally, the 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 revolving credit
facility.
As
of
April 21,
2007,
we had outstanding $403.8 million under the revolver and had $66.8 million
in
letters of credit outstanding, which reduced availability under the revolver
to
$279.4 million. At April 21, 2007, we also have interest rate swaps in place
that effectively fix our interest rate exposure on approximately 55% of our
debt.
The
interest rates on the borrowings under the 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 current 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 current commitment fee rate is 0.150% per
annum. Under the terms of the revolving 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
revolving 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 revolving 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 April 21, 2007.
Credit
Ratings
At
April
21, 2007, 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
Effective
December 31, 2006, the Company adopted the provisions of 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. As a result
of
the adoption of FIN 48 on December 31, 2006, we recorded an increase of $2.3
million to the liability for unrecognized tax benefits and a corresponding
decrease in our balance of retained earnings. For
a
complete discussion of the adoption of FIN 48, see Note 2 of our condensed
consolidated financial statements.
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. Effective December
31,
2006, we adopted SFAS No. 156 with no 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.” 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 our fiscal year 2007.
Effective December 31, 2006, we adopted SFAS No. 155 with no material impact
on
our financial condition, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years beginning after November
15,
2007. We are currently evaluating the impact of SFAS No. 159.
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. We adopted the recognition provisions of SFAS No. 158 on December
30,
2006. SFAS No. 158 is effective for the measurement date provisions for
fiscal
years ending after December 15, 2008. We are currently evaluating the impact
of
adopting the measurement date provisions 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.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
For
information regarding market risk see “Item 7A. Quantitative and Qualitative
Disclosures About Market Risks” in the Company’s Annual Report on Form 10-K for
the year ended December 30, 2006. At April 21, 2007, there had not been a
material change to the information regarding market risk disclosed in the
Company’s Annual Report on Form 10-K for the year ended December 30,
2006.
Disclosure
controls and procedures are 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. 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.
There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended April 21, 2007 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
|
3.1
|
(1)
|
Restated
Certificate of Incorporation of Advance Auto Parts, Inc. ("Advance
Auto")(as amended on May 19, 2004).
|
|
|
|
|
|
3.2
|
(2)
|
Bylaws
of Advance Auto (as amended on November 15, 2006).
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
(1)
Filed on May 20, 2004 as an exhibit to Current Report on Form
8-K of
Advance Auto.
|
|
(2)
Filed on February 28, 2007 as an exhibit to the Annual Report
on Form 10-K
of Advance Auto.
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
ADVANCE
AUTO PARTS, INC. |
|
|
|
May
31, 2007 |
By: |
/s/ Michael O. Moore |
|
Michael
O. Moore
Executive
Vice President, Chief Financial
Officer
|
Exhibit
Number
|
|
Exhibit
Description
|
|
|
|
3.1
|
(1)
|
Restated
Certificate of Incorporation of Advance Auto (as amended on May
19,
2004).
|
|
|
|
3.2
|
(2)
|
Bylaws
of Advance Auto (as amended on November 15, 2006).
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1)
Filed on May 20, 2004 as an exhibit to Current Report on Form 8-K
of
Advance Auto.
|
(2)
Filed on February 28, 2007 as an exhibit to the Annual Report on
Form 10-K
of Advance Auto.
|
|
|
|