Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(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 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.
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.
|
|
July
12,
2008
|
|
|
December
29,
2007
|
|
|
|
(28
weeks ended)
|
|
|
(52
weeks ended)
|
|
|
|
|
|
|
|
|
Warranty
reserve, beginning of period
|
|
$ |
17,757 |
|
|
$ |
13,069 |
|
Reserves
established
|
|
|
24,958 |
|
|
|
24,722 |
|
Reserves
utilized and other adjustments, net
|
|
|
(18,111 |
) |
|
|
(20,034 |
) |
|
|
|
|
|
|
|
|
|
Warranty
reserve, end of period
|
|
$ |
24,604 |
|
|
$ |
17,757 |
|
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. The Company’s reserve for sales
returns and allowances was not significant at July 12, 2008 and December 29,
2007.
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 unvested restricted stock (collectively
“share-based awards”), calculated on the treasury stock method as modified by
the adoption of Statement of Financial Accounting Standards, or SFAS, No. 123R,
“Share-Based Payment.”
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
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 July 12, 2008 and December 29, 2007,
respectively. The Company uses the 90-day, adjusted LIBOR interest rate and has
the intent and ability to continue to use this rate on its hedged borrowings.
Accordingly, the Company does not recognize any ineffectiveness on the swaps as
allowed under Derivative Implementation Group Issue No. G7, “Cash Flow Hedges:
Measuring the Ineffectiveness of a Cash Flow Hedge under Paragraph 30(b) When
the Shortcut Method Is Not Applied” and 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 arrangements.
The fair
value at July 12, 2008 and December 29, 2007 was an unrecognized loss of $8,533
and $7,645, respectively. Any amounts received or paid under these hedges will
be recorded in the statement of operations as the forecasted transaction
occurs.
Based on
the estimated current and future fair values of the hedge arrangements at July
12, 2008, 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 loss of $4,764 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 July 12, 2008
and December 29, 2007, $153,342 and $153,549, respectively, was payable to the
bank by the Company under this program and is included in the accompanying
condensed consolidated balance sheets as Financed vendor accounts
payable.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
Cost
of Sales and Selling, General and Administrative Expenses
The
following table illustrates the primary costs classified in each major expense
category:
Cost of
Sales
|
|
SG&A
|
|
|
|
|
|
|
|
|
●
|
Total
cost of merchandise sold including:
|
|
●
|
Payroll
and benefit costs for retail and corporate
|
|
–
|
Freight
expenses associated with moving
|
|
|
team
members;
|
|
|
merchandise
inventories from our vendors to
|
|
●
|
Occupancy
costs of retail and corporate facilities;
|
|
|
our
distribution center,
|
|
●
|
Depreciation
related to retail and corporate assets;
|
|
–
|
Vendor
incentives, and
|
|
●
|
Advertising;
|
|
–
|
Cash
discounts on payments to vendors;
|
|
●
|
Costs
associated with our commercial delivery
|
●
|
Inventory
shrinkage;
|
|
|
program,
including payroll and benefit costs,
|
●
|
Defective
and warranty 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,
|
|
|
our
customer locations;
|
|
occupancy
costs and depreciation; and
|
|
●
|
Freight
expenses associated with moving
|
●
|
Freight
expenses associated with moving
|
|
|
merchandise
inventories from our Local Area
|
|
merchandise
inventories from our distribution
|
|
Warehouses,
or LAWs, and Parts Delivered Quickly
|
|
center
to our retail stores. |
|
|
warehouses,
or PDQs, to our retail stores after the
|
|
|
|
|
|
|
customer
has special-ordered the merchandise;
|
|
|
|
|
|
●
|
Self-insurance
costs;
|
|
|
|
|
|
●
|
Professional
services; and
|
|
|
|
|
|
●
|
Other
administrative costs, such as credit card
|
|
|
|
|
|
|
service
fees, supplies, travel and
lodging.
|
New
Accounting Pronouncements
In
June 2008, the Financial Accounting Standards Board, or FASB, issued FASB
Staff Position, or FSP, EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
“Earnings per Share.” Under the guidance of FSP EITF 03-6-1,
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. FSP EITF
03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008
and all prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The
Company is currently evaluating the impact, if any, of adopting FSP
EITF 03-6-1.
In June
2008 the FASB Issued EITF No. 08-3, “Accounting by Lessees for
Nonrefundable Maintenance Deposits.” EITF 08-3 requires that nonrefundable
maintenance deposits paid by a lessee under an arrangement accounted for as a
lease be accounted for as a deposit asset until the underlying maintenance is
performed. When the underlying maintenance is performed, the deposit may be
expensed or capitalized in accordance with the lessee’s maintenance accounting
policy. Upon adoption entities must recognize the effect of the change as a
change in accounting principle. EITF 08-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company does not
expect the adoption of EITF 08-3 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 Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets,” which amends the
factors that must be considered in developing renewal or extension assumptions
used to determine the useful life over which to amortize the cost of a
recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets.” The FSP requires an entity to consider its own assumptions about
renewal or extension of the term of the arrangement, consistent with its
expected use of the asset, and is an attempt to improve consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS 141,
“Business Combinations.” The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a
recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. The FSP is not expected to have a material
impact on the Company’s financial condition, results of operations or cash
flow.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS No. 133.” SFAS
No. 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance and cash flows. Entities are required to provide enhanced
disclosures about: how and why an entity uses derivative instruments; how
derivative instruments and related hedged items are accounted for under SFAS
No. 133 and its related interpretations; and how derivative instruments and
related hedged items affect an entity's financial position, financial
performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company does not expect the adoption of SFAS No. 161
to have a material impact on its financial condition, results of operations or
cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160,
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company’s noncontrolling interest in a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. The Company does not expect the adoption of SFAS No.
160 to have a material impact on its financial condition, results of operations
or cash flows.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which
replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any controlling interests in the acquired
entity; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Costs of the acquisition
will be recognized separately from the business combination. SFAS No. 141R
applies to business combinations for fiscal years beginning after December 15,
2008.
Effective
December 30, 2007, the Company adopted FASB Staff Position (“FSP”)
No. FIN 39-1, “Amendment of FASB Interpretation No. 39,” or
FSP 39-1. FSP 39-1 amends FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts (“FIN 39”), to permit a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement that have been offset in accordance with FIN 39. FSP 39-1
also amends FIN 39 for certain terminology modifications. Upon adoption of
FSP 39-1, the Company did not change its accounting policy of not
offsetting fair value amounts recognized for derivative instruments under master
netting arrangements. The adoption of FSP 39-1 did not have an impact on
the Company’s financial position, results of operations or cash
flows.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
Effective
December 30, 2007, the Company adopted the provisions of SFAS No. 157, “Fair
Value Measurements” on its financial assets and liabilities. SFAS No. 157
clarifies the definition of fair value, establishes a framework for defining
fair value as it relates to other accounting pronouncements that require or
permit fair value measurements, and expands the disclosures of fair value
measurements. The adoption of SFAS 157 did not have any impact on the Company’s
financial condition, results of operations or cash flows. The Company did not
apply the provisions of SFAS No. 157 for its nonfinancial assets and liabilities
except for those recognized or disclosed on a recurring basis (at least
annually) as allowed by the issuance of FSP 157-2. The Company will fully adopt
the provisions of SFAS 157 effective during its first quarter of fiscal
2009.
Effective
December 30, 2007, the Company adopted the provisions of 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. The Company elected not to apply fair value on its
existing financial assets and liabilities upon adoption. Therefore, this
adoption did not have a material effect on the Company’s financial position,
results of operations or cash flows.
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. The Company
adopted the measurement date provisions of SFAS No. 158 on December 30, 2007.
The Company has elected to apply the alternate transition method under which a
14-month measurement will cover the period from November 1, 2007 through January
3, 2009. The change in the measurement date will not have a material impact on
the Company’s financial condition, results of operations or cash
flows.
2. |
Goodwill
and Intangible Assets:
|
The
carrying amount and accumulated amortization of acquired intangible assets as of
July 12, 2008 and December 29, 2007 include:
|
|
Acquired
intangible assets
|
|
|
|
|
|
|
Subject
to Amortization
|
|
|
Not
Subject
to
Amortization
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
Trademark
and
|
|
|
Intangible
|
|
|
|
Relationships
|
|
|
Other
|
|
|
Tradenames
|
|
|
Assets,
net
|
|
Gross
carrying amount
|
|
$ |
9,800 |
|
|
$ |
885 |
|
|
$ |
20,550 |
|
|
$ |
31,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value at December 29, 2007
|
|
$ |
7,464 |
|
|
$ |
580 |
|
|
$ |
18,800 |
|
|
$ |
26,844 |
|
Addition
|
|
|
200 |
|
|
|
- |
|
|
|
1,750 |
|
|
|
1,950 |
|
2008
amortization
|
|
|
(541 |
) |
|
|
(68 |
) |
|
|
- |
|
|
|
(609 |
) |
Net
book value at July 12, 2008
|
|
$ |
7,123 |
|
|
$ |
512 |
|
|
$ |
20,550 |
|
|
$ |
28,185 |
|
During
the second quarter of fiscal 2008, the Company acquired certain customer
relationships in connection with an acquisition of a small retail
chain.
During
the first quarter of fiscal 2008, the Company acquired from a Kentucky entity
for $1,750 the limited territorial rights the Kentucky entity had in the
“Advance Auto Parts” trademark, ownership of certain websites and access to the
Louisville, KY market. This improves the Company’s trademark rights, opens a new
metropolitan
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
market
for the Company and is expected to increase traffic to the Company’s
website.
The table
below shows the expected amortization expense for the next five years for
acquired intangible assets recorded as of July 12, 2008:
2008
|
|
$ 592
|
2009
|
|
1,173
|
2010
|
|
1,059
|
2011
|
|
967
|
2012
|
|
967
|
The
changes in the carrying amount of goodwill for the twenty-eight weeks ended July
12, 2008 are as follows:
|
|
AAP
Segment
|
|
|
AI
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 29, 2007
|
|
$ |
16,093 |
|
|
$ |
17,625 |
|
|
$ |
33,718 |
|
Fiscal
2008 activity
|
|
|
- |
|
|
|
885 |
|
|
|
885 |
|
Balance
at July 12, 2008
|
|
$ |
16,093 |
|
|
$ |
18,510 |
|
|
$ |
34,603 |
|
During
the second quarter of fiscal 2008, the Company recorded goodwill in connection
with an acquisition of a small retail chain.
Receivables
consist of the following:
|
|
July
12,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
Trade
|
$ |
17,741
|
|
$ |
14,782
|
|
Vendor
|
|
75,257
|
|
|
71,403
|
|
Other
|
|
2,276
|
|
|
2,785
|
|
Total
receivables
|
|
95,274
|
|
|
88,970
|
|
Less:
Allowance for doubtful accounts
|
|
(5,128
|
)
|
|
(3,987
|
) |
Receivables,
net
|
$ |
90,146
|
|
$ |
84,983
|
|
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
July 12, 2008 and December 29, 2007. 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 the Company’s significant growth.
Accordingly, the cost to replace inventory is less than the LIFO balances
carried for similar products. As a result of the LIFO method and the ability to
obtain lower product costs, the Company recorded reductions to cost of sales of
$10,894 and $13,613 for the twenty-eight weeks ended July 12, 2008 and July 14,
2007, 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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
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 July 12,
2008 and December 29, 2007, were $104,841 and $107,068, respectively.
Inventories consist of the following:
|
July
12,
|
|
December
29,
|
|
|
2008
|
|
2007
|
|
Inventories
at FIFO, net
|
$ |
1,581,776 |
|
$ |
1,435,697 |
|
Adjustments
to state inventories at LIFO
|
|
104,667 |
|
|
93,772 |
|
Inventories
at LIFO, net
|
$ |
1,686,443 |
|
$ |
1,529,469 |
|
Replacement
cost approximated FIFO cost at July 12, 2008, and December 29,
2007.
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 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
$41,067 and $35,565 at July 12, 2008 and December 29, 2007,
respectively.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
Long-term
debt consists of the following:
|
|
July
12,
2008
|
|
|
December
29,
2007
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
(3.71%
and 5.93% at July 12, 2008 and December 29,
|
|
|
|
|
|
|
2007,
respectively) due October 2011
|
|
$ |
248,600 |
|
|
$ |
451,000 |
|
Term
loan at variable interest rates
|
|
|
|
|
|
|
|
|
(3.67%
and 6.19% at July 12, 2008 and December 29,
|
|
|
|
|
|
|
|
|
2007,
respectively) due October 2011
|
|
|
200,000 |
|
|
|
50,000 |
|
Other
|
|
|
4,341 |
|
|
|
4,672 |
|
|
|
|
452,941 |
|
|
|
505,672 |
|
Less:
Current portion of long-term debt
|
|
|
(675 |
) |
|
|
(610 |
) |
Long-term
debt, excluding current portion
|
|
$ |
452,266 |
|
|
$ |
505,062 |
|
On
December 4, 2007, the Company entered into a new $200,000
unsecured four-year term loan with the Company’s subsidiary, Advance Stores
Company, Incorporated, or Stores, serving as borrower. Proceeds from this
term loan were used to repurchase shares of the Company's common stock
under its stock repurchase program. As of December 29, 2007, the
Company had borrowed $50,000 under the term loan. As of July 12, 2008, the
Company had borrowed the remaining availability under the term
loan.
In
addition to the term loan, the Company has a $750,000 unsecured five-year
revolving credit facility with Stores serving as the borrower. The
revolving credit facility also 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, subject to agreement by one or more lenders,
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
revolving credit facility.
As of
July 12, 2008, the Company had $248,600 outstanding under its revolving credit
facility and letters of credit outstanding of $73,630, which reduced the
availability under the revolving credit facility to $427,770. Additionally, the
Company had outstanding $200,000 on a term loan and $4,341 under an economic
development note. In addition to the letters of credit, the Company maintains
approximately $2,870 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
interest rate on the term loan is based, at the Company’s option, on
an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a
margin. The current margin is 1.00% and 0.0% per annum for the adjusted
LIBOR and alternate base rate borrowings, respectively. The Company has elected
to use the 90-day adjusted LIBOR rate and has the ability and intent to continue
to use this rate on its hedged borrowings. Under the terms of the term
loan, the interest rate spread is based on the Company’s credit rating. The term
loan terminates on October 5, 2011.
The
interest rate on borrowings under the revolving credit facility is based, at the
Company’s option, on an adjusted LIBOR rate, plus a margin, or an alternate base
rate, plus a margin. The current margin is 0.75% and 0.0%
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
per annum
for the adjusted LIBOR and alternate base rate borrowings, respectively. The
Company has elected to use the 90-day adjusted LIBOR rate and has the ability
and intent to continue to use this rate on its hedged borrowings. 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 are based
on the Company’s credit rating. The revolving facility terminates on October 5,
2011.
The term
loan and revolving credit facility are fully and unconditionally guaranteed
by Advance Auto Parts, Inc. The Company’s debt agreements collectively
contain 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) change the nature of the Company’s
business and the business conducted by its subsidiaries and (7) 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
consolidated coverage ratio. The 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 these covenants at July 12, 2008.
6. |
Stock
Repurchase
Program:
|
On May
15, 2008, the Company’s Board of Directors authorized a new $250,000 stock
repurchase program. The new program cancelled and replaced the remaining portion
of the Company’s previous $500,000 stock repurchase program. 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.
During
the twelve weeks ended July 12, 2008, the Company repurchased 201 shares of
common stock at an aggregate cost of $7,498, or an average price of $37.22 per
share. As of July 12, 2008, 92 shares remained unsettled at an aggregate cost of
$3,377. These shares were repurchased in accordance with the Company’s $250,000
stock repurchase program authorized by its Board of Directors in the second
quarter of fiscal 2008. During the twenty-eight weeks ended July 12, 2008, the
Company repurchased 4,765 shares of common stock at an aggregate cost of
$162,847, or an average price of $34.18 per share, of which 4,564 shares of
common stock were repurchased under the previous $500,000 stock repurchase
program. Additionally, the Company settled $2,959 on shares repurchased prior to
the end of fiscal 2007. As of July 12, 2008, the Company had $242,506 remaining
under the current stock repurchase program, excluding related
expenses.
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 29, 2007 was 6.0%, and remained unchanged
through the twenty-eight weeks ended July 12, 2008. The Company expects fiscal
2008 plan contributions to completely offset benefits paid, consistent with
fiscal 2007.
The
components of net periodic postretirement benefit cost for the twelve and
twenty-eight weeks ended July 12, 2008, and July 14, 2007 respectively, are as
follows:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
|
|
Twelve
Weeks Ended
|
|
|
Twenty-Eight
Weeks Ended
|
|
|
|
July
12,
|
|
|
July
14,
|
|
|
July
12,
|
|
|
July
14,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
115 |
|
|
$ |
127 |
|
|
$ |
268 |
|
|
$ |
296 |
|
Amortization
of negative prior service cost
|
|
|
(134 |
) |
|
|
(134 |
) |
|
|
(313 |
) |
|
|
(313 |
) |
Amortization
of unrecognized net gain
|
|
|
(3 |
) |
|
|
- |
|
|
|
(7 |
) |
|
|
- |
|
Net
periodic postretirement benefit cost
|
|
$ |
(22 |
) |
|
$ |
(7 |
) |
|
$ |
(52 |
) |
|
$ |
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
Share-Based
Compensation
Plans:
|
During
the twenty-eight weeks ended July 12, 2008, the Company made a series of
share-based award grants to employees, including recently hired executives and
its annual grant to employees eligible to receive share-based awards under the
Company’s long-term incentive plan. Accordingly, the Company granted 1,438 stock
appreciation rights, or SARS, to be settled in the Company’s common stock at a
weighted average conversion price of $34.61 per share. Based on the
Black-Scholes option pricing model, the weighted average fair value for the SARS
awarded was $9.12 per share. Additionally, the Company granted 290 shares of
restricted stock, or unvested shares, which had a weighted average fair value
grant price of $35.17 per share. This value was determined based on the ending
market price of the Company’s common stock on the date of the
grant.
The SARS
vest over a three-year period in equal installments beginning on the first
anniversary of the grant date, with the exception of certain SARS awards granted
to newly hired executives. Those grants provide for 25% of the SARS award
granted to vest immediately with exercise restrictions during the first year,
and the remainder of the award to vest in equal installments over the three-year
period consistent with all other SARS granted. The unvested shares are
restricted until they vest and cannot be sold until the restriction has
lapsed.
Beginning
in 2008, all new unvested restricted stock awards granted vest over a three-year
period in equal annual installments beginning on the first anniversary of the
grant date. Prior grants vested at the end of the three-year period following
the grant date. During this period, holders of the unvested shares are entitled
to dividend and voting rights.
As of
July 12, 2008, there was $25,308 of unrecognized compensation expense related to
all share-based awards that is expected to be recognized over a weighted average
of 2.0 years. Unrecognized compensation expense includes adjustments made for
award forfeitures from departing executives and other employees. The Company
recognized $10,007 and $10,412 of share-based compensation expense for the
twenty-eight weeks ended July 12, 2008 and July 14, 2007,
respectively.
Our
financial assets and liabilities measured at fair value are grouped in three
levels. The levels prioritize the inputs used to measure the fair value of the
assets or liabilities. These levels are:
·
|
Level
1 – Quoted prices (unadjusted) in active markets for identical assets or
liabilities.
|
·
|
Level
2 – Inputs other than quoted prices that are observable for assets and
liabilities, either directly or indirectly. These inputs include quoted
prices for similar assets or liabilities in active markets and quoted
prices for identical or similar assets or liabilities in markets that are
less active.
|
·
|
Level
3 – Unobservable inputs for assets or liabilities reflecting the reporting
entity’s own assumptions.
|
The
following financial liabilities were measured at fair value on a recurring basis
during the twenty-eight
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
weeks
ended July 12, 2008:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
July
12, 2008
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
Interest
rate swaps
|
|
$ |
8,533 |
|
|
$ |
- |
|
|
$ |
8,533 |
|
|
$ |
- |
|
The fair
value of the Company’s interest rate swaps is mainly based on observable
interest rate yield curves for similar instruments.
As of
July 12, 2008 and December 29, 2007, the Company also reported additional
financial assets and liabilities at their respective carrying amounts which
included cash and cash equivalents, receivables, bank overdrafts, accounts
payable, financed vendor accounts payable and current portion of long-term debt.
The carrying amount approximates fair value because of the short maturity of
those instruments. As of July 12, 2008 and December 29, 2007, the fair value of
the Company’s long-term debt with a carrying value of $452,266 and $505,062,
respectively, was approximately $432,000 and $502,000, respectively, and was
based on similar issues available to the Company as of that date.
The
Company includes in comprehensive income the changes in fair value of the
Company’s interest rate swaps and changes in net unrecognized other
postretirement benefit costs.
Comprehensive
income for the twelve and twenty-eight weeks ended July 12, 2008 and July 14,
2007 is as follows:
|
|
Twelve
Weeks Ended
|
|
|
Twenty-Eight
Weeks Ended
|
|
|
|
July
12,
2008
|
|
|
July
14,
2007
|
|
|
July
12,
2008
|
|
|
July
14,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
75,386 |
|
|
$ |
68,424 |
|
|
$ |
157,472 |
|
|
$ |
144,525 |
|
Unrealized
gain (loss) on hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
arrangements,
net of tax
|
|
|
2,430 |
|
|
|
2,671 |
|
|
|
(541 |
) |
|
|
2,155 |
|
Changes
in net unrecognized other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
postretirement
benefit cost, net of tax
|
|
|
(84 |
) |
|
|
(82 |
) |
|
|
(195 |
) |
|
|
(192 |
) |
Comprehensive
income
|
|
$ |
77,732 |
|
|
$ |
71,013 |
|
|
$ |
156,736 |
|
|
$ |
146,488 |
|
11. |
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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Twenty-Eight Week Periods Ended July
12, 2008 and July 14, 2007
(in
thousands, except per share data)
(unaudited)
independent,
wholly-owned subsidiary. AI’s business serves the 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 twelve and twenty-eight weeks ended July 12, 2008 and
July 14, 2007, respectively.
|
|
Twelve
Week Periods Ended
|
|
|
Twenty-Eight
Week Periods Ended
|
|
|
|
July
12,
|
|
|
July
14,
|
|
|
July
12,
|
|
|
July
14,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
1,195,016 |
|
|
$ |
1,135,986 |
|
|
$ |
2,676,068 |
|
|
$ |
2,568,099 |
|
AI
|
|
|
40,767 |
|
|
|
33,873 |
|
|
|
85,847 |
|
|
|
69,880 |
|
Total
net sales
|
|
$ |
1,235,783 |
|
|
$ |
1,169,859 |
|
|
$ |
2,761,915 |
|
|
$ |
2,637,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for
income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
118,278 |
|
|
$ |
109,858 |
|
|
$ |
250,524 |
|
|
$ |
235,289 |
|
AI
|
|
|
2,339 |
|
|
|
1,068 |
|
|
|
2,074 |
|
|
|
(602 |
) |
Total
income (loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
$ |
120,617 |
|
|
$ |
110,926 |
|
|
$ |
252,598 |
|
|
$ |
234,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
44,270 |
|
|
$ |
41,803 |
|
|
$ |
94,278 |
|
|
$ |
90,414 |
|
AI
|
|
|
961 |
|
|
|
699 |
|
|
|
848 |
|
|
|
(252 |
) |
Total
provision (benefit) for income taxes
|
|
$ |
45,231 |
|
|
$ |
42,502 |
|
|
$ |
95,126 |
|
|
$ |
90,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
2,816,317 |
|
|
$ |
2,735,565 |
|
|
$ |
2,816,317 |
|
|
$ |
2,735,565 |
|
AI
|
|
|
157,663 |
|
|
|
139,824 |
|
|
|
157,663 |
|
|
|
139,824 |
|
Total
segment assets
|
|
$ |
2,973,980 |
|
|
$ |
2,875,389 |
|
|
$ |
2,973,980 |
|
|
$ |
2,875,389 |
|
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, with the exception of the fourth quarter which will
contain 13 weeks due to our 53 week fiscal year in 2008.
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 29, 2007 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 which impacts our debt interest rate and ability to obtain
additional debt;
· increase
in fuel costs as it impacts our cost to operate and the consumer’s ability to
shop in our stores;
· deterioration
in general economic conditions;
· our
ability to attract and retain qualified team members;
· 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 and term loan
facilities; 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
We
primarily operate within the United States automotive aftermarket industry,
which includes replacement parts (excluding tires), accessories, maintenance
items, batteries and automotive chemicals for cars and light trucks (pickup
trucks, vans, minivans and sport utility vehicles). We operate 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 Virgin Islands which operate under the trade
names “Advance Auto Parts,” “Advance
Discount
Auto Parts” and “Western Auto.” For additional information regarding our
segments, see Note 11, Segments and Related
Information, of the Notes to Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q. The AI segment consists
solely of Autopart International, Inc., which operates as independent,
wholly-owned subsidiary. As of July 12, 2008, we operated a total of
3,325 stores.
Second Quarter
Highlights
Highlights
from our second quarter include:
·
|
We
recorded earnings per diluted share of $0.79 compared to $0.64 for the
same quarter of fiscal 2007. This 23% increase was primarily driven by an
8.6% increase in operating income and approximately 13 million shares
repurchased over the past four fiscal
quarters.
|
·
|
We
generated sales growth of 5.6% through a combination of new stores opened
over the last year and a 2.9% comparable store sales increase. This
comparable sales increase was driven by a 13.5% comparable sales increase
in our commercial business which was partially offset by a 0.8% decline in
the DIY, or do-it-yourself,
business.
|
·
|
Our
operating cash flow increased to $350.0 million for the twenty-eight weeks
ended July 12, 2008, an increase of $70.0 million over the comparable
period last year.
|
·
|
We
repurchased 0.2 million shares of common stock for $7.5 million under our
$250 million stock repurchase program. During the twenty-eight weeks ended
July 12, 2008, we repurchased 4.8 million shares of common stock for
$162.8 million, of which 4.6 million shares of common stock were
repurchased under our previous $500 million stock repurchase
program.
|
Update on Turnaround
Strategies
Our
favorable results experienced during the second quarter are in part being driven
by progress on our key turnaround strategies and
benefits from the economic stimulus checks. We believe our focus on these
strategies will enable us to achieve our recently announced goal of $10 billion
in sales in the next five years. As disclosed last quarter, our key turnaround
strategies are:
Ø
|
Commercial
Acceleration
|
Ø
|
Availability
Excellence
|
Each of
the four strategies is at a different stage of progression.
The
Commercial Acceleration strategy is the furthest along as evidenced by the 13.5%
comparable store sales increase and a total commercial sales increase of 17.2%
over our prior year second quarter. We continue to add parts to our stores with
commercial programs, including key brands which are highly respected and
preferred by our commercial customers. Additional areas of progression include
the heightened focus on parts knowledge by our store team members, improved
customer relationships and the development of more analytical support of the
commercial business. We are also testing other initiatives which will be rolled
out on a larger scale that meet the needs of our commercial customers while
driving shareholding value.
The DIY
Transformation is at an earlier stage of progression. The initial focus of the
DIY Transformation strategy is to turnaround our current DIY sales trends and to
transform our DIY business over the long-run. Our second quarter DIY comparable
sales decrease of 0.8% was a measurable improvement from the previous trend of a
3% decrease for each of the last two fiscal quarters. We believe our DIY results
are beginning to benefit from the parts availability initiatives and initial
rollout of attachment selling combined with the benefits of the economic
stimulus checks. In addition to these initiatives, we are commencing other
initiatives, including efforts to identify
opportunities
to improve scheduling during peak selling hours and to improve bi-lingual
staffing.
The
Availability Excellence and Superior Experience strategies are intended to
provide the capabilities to drive shareholder value through the Commercial
Acceleration and DIY Transformation strategies. The Availability Excellence
strategy represents our commitment to enhance the availability of parts in our
stores to better serve our commercial and DIY customers. This strategy
incorporates our supply chain and logistics network capabilities, space
management and increased leverage of our e-commerce platform. We are making
progress on the parts availability initiative as the merchandising and inventory
management teams partner with the commercial and DIY teams to accelerate sales
growth. We will continue to measure progress in this strategy, using
productivity metrics such as sales per square foot and gross margin return on
inventory. Superior Experience is centered around our store operations and
customer service. The leaders of this area will be re-engineering the store
experience and store operations as well as better understanding what the
customer ultimately wants through the measurement of team member engagement and
customer satisfaction, which we believe will drive improvement in our results in
future quarters.
Although
we have experienced favorable financial results for the first and second
quarters, we remain cautiously optimistic for the remainder of 2008 given the
current economic environment, positive impact of economic stimulus checks during
the second quarter and continued high fuel prices. Furthermore, we are still in
the early stages of implementing certain strategies as previously discussed and
are committed to making the necessary investments for the long-term success of
the Company.
Consolidated
Operating Results and Key Statistics and Metrics
The
following table highlights certain consolidated operating results and key
statistics and metrics for the twelve and twenty-eight weeks ended July 12, 2008
and July 14, 2007, respectively, and fiscal years ended December 29, 2007 and
December 30, 2006. We will use these key statistics and metrics to
measure the financial progress of our turnaround strategies.
|
|
Twelve
Weeks Ended
|
|
|
Twenty-Eight
Weeks Ended
|
|
|
Fiscal
Years Ended
|
|
|
|
July
12,
|
|
|
July
14,
|
|
|
July
12,
|
|
|
July
14,
|
|
|
December
29,
|
|
|
December
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales (in
000s)
|
|
$ |
1,235,783 |
|
|
$ |
1,169,859 |
|
|
$ |
2,761,915 |
|
|
$ |
2,637,979 |
|
|
$ |
4,844,404 |
|
|
$ |
4,616,503 |
|
Total
commercial net sales (in
000s)
|
|
$ |
357,495 |
|
|
$ |
305,153 |
|
|
$ |
796,167 |
|
|
$ |
688,446 |
|
|
$ |
1,290,602 |
|
|
$ |
1,155,953 |
|
Comparable
store net sales growth (1)
|
|
|
2.9% |
|
|
|
1.2% |
|
|
|
1.6% |
|
|
|
0.9% |
|
|
|
0.7% |
|
|
|
1.6% |
|
DIY
comparable store net sales growth (1)
|
|
|
(0.8%) |
|
|
|
(0.2%) |
|
|
|
(2.0%) |
|
|
|
(0.3%) |
|
|
|
(1.1%) |
|
|
|
(0.8%) |
|
Commercial
comparable store net sales growth (1)
|
|
|
13.5% |
|
|
|
5.4% |
|
|
|
11.9% |
|
|
|
4.8% |
|
|
|
6.2% |
|
|
|
10.7% |
|
Gross
profit
|
|
|
48.6% |
|
|
|
48.1% |
|
|
|
48.7% |
|
|
|
48.2% |
|
|
|
47.9% |
|
|
|
47.7% |
|
Selling,
general & administrative expenses (SG&A)
|
|
|
38.3% |
|
|
|
38.0% |
|
|
|
38.8% |
|
|
|
38.7% |
|
|
|
39.3% |
|
|
|
39.0% |
|
Operating
margin
|
|
|
10.4% |
|
|
|
10.1% |
|
|
|
9.9% |
|
|
|
9.6% |
|
|
|
8.6% |
|
|
|
8.7% |
|
Diluted
earnings per share
|
|
$ |
0.79 |
|
|
$ |
0.64 |
|
|
$ |
1.65 |
|
|
$ |
1.35 |
|
|
$ |
2.28 |
|
|
$ |
2.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Statistics and Metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores, end of period
|
|
|
3,325 |
|
|
|
3,187 |
|
|
|
3,325 |
|
|
|
3,187 |
|
|
|
3,261 |
|
|
|
3,082 |
|
Total
store square footage, end of period (in
000s)
|
|
|
24,431 |
|
|
|
23,480 |
|
|
|
24,431 |
|
|
|
23,480 |
|
|
|
23,982 |
|
|
|
22,753 |
|
Total
team members, end of period
|
|
|
47,050 |
|
|
|
45,505 |
|
|
|
47,050 |
|
|
|
45,505 |
|
|
|
44,141 |
|
|
|
44,421 |
|
Average
net sales per store (in
000s)(2)
|
|
$ |
1,526 |
|
|
$ |
1,544 |
|
|
$ |
1,526 |
|
|
$ |
1,544 |
|
|
$ |
1,527 |
|
|
$ |
1,551 |
|
Average
net sales per square foot (2)
|
|
$ |
207 |
|
|
$ |
209 |
|
|
$ |
207 |
|
|
$ |
209 |
|
|
$ |
207 |
|
|
$ |
210 |
|
Operating
income per team member (in 000s)(2)(3)
|
|
$ |
9.42 |
|
|
$ |
9.35 |
|
|
$ |
9.42 |
|
|
$ |
9.35 |
|
|
$ |
9.40 |
|
|
$ |
9.29 |
|
SG&A
expenses per store (in
000s)
(2)
|
|
$ |
601 |
|
|
$ |
605 |
|
|
$ |
601 |
|
|
$ |
605 |
|
|
$ |
601 |
|
|
$ |
604 |
|
Gross
margin return on inventory (2)(4)
|
|
$ |
3.63 |
|
|
$ |
3.55 |
|
|
$ |
3.63 |
|
|
$ |
3.55 |
|
|
$ |
3.39 |
|
|
$ |
3.38 |
|
Note: These
metrics should be reviewed along with the footnotes to the table setting forth
our selected store data in Item 6. "Selected Consolidated Financial Data" in our
annual report on Form 10-K for the fiscal year ended December 29, 2007, which
was filed with the SEC on February 27, 2008, except for additional footnotes
below. The footnotes
contain
descriptions regarding the calculation of these metrics.
(1)
|
Beginning
in fiscal 2008, the Company includes in its comparable store sales the net
sales from stores operated in Puerto Rico and Virgin Islands, or Offshore,
and AI stores. The comparable periods have been adjusted
accordingly.
|
(2)
|
These
financial metrics presented for each quarter and year-to-date period are
calculated on an annual basis and accordingly reflect the last four fiscal
quarters completed.
|
(3)
|
Operating
income per team member is calculated as operating income divided by an
average of beginning and ending number of team
members.
|
(4)
|
Gross
margin return on inventory is calculated as gross profit divided by an
average of beginning and ending inventory, net of accounts payable and
financed vendor accounts payable.
|
Store
Development by Segment
AAP
Segment
At July
12, 2008, we operated 3,203 stores within the United States, Puerto Rico and the
Virgin Islands. We operated 3,173 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. In addition, we operated 30 stores
under the “Western Auto” and “Advance Auto Parts” trade names, located
Offshore.
The
following table sets forth information about our AAP stores during the twelve
and twenty-eight weeks ended July 12, 2008, including the number of new, closed
and relocated stores and stores with commercial programs that deliver products
to our commercial customers’ place of business. We lease approximately 80% of
our stores.
|
|
Twelve
Weeks
Ended
July
12, 2008
|
|
|
Twenty-Eight
Weeks
Ended
July
12, 2008
|
|
Number
of stores at beginning of period
|
|
|
3,179 |
|
|
|
3,153 |
|
New
stores
|
|
|
26 |
|
|
|
56 |
|
Closed
stores
|
|
|
(2) |
|
|
|
(6) |
|
Number
of stores, end of period
|
|
|
3,203 |
|
|
|
3,203 |
|
Relocated
stores
|
|
|
4 |
|
|
|
7 |
|
Stores
with commercial programs
|
|
|
2,659 |
|
|
|
2,659 |
|
AI
Segment
At July
12, 2008, we operated 122 stores in the Northeastern region of the United States
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. AI primarily serves the
commercial market from its retail locations and additionally through a wholesale
distribution network.
The
following table sets forth information about our AI stores, including the number
of new and closed stores, during the twelve and twenty-eight weeks ended July
12, 2008.
|
|
Twelve
Weeks
Ended
July
12, 2008
|
|
|
Twenty-Eight
Weeks
Ended
July
12, 2008
|
|
Number
of stores at beginning of period
|
|
|
112 |
|
|
|
108 |
|
New
stores
|
|
|
10 |
|
|
|
14 |
|
Closed
stores
|
|
|
- |
|
|
|
- |
|
Number
of stores, end of period
|
|
|
122 |
|
|
|
122 |
|
Stores
with commercial programs
|
|
|
122 |
|
|
|
122 |
|
As
previously disclosed in our Form 10-K, we anticipate that we will add a total of
approximately 115 new AAP and AI stores during 2008 primarily through new store
openings.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with accounting principles
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 twelve
and twenty-eight weeks ended July 12, 2008, we consistently applied the critical
accounting policies discussed in our annual report on Form 10-K for the year
ended December 29, 2007. 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. Beginning in 2008,
we also include in comparable store sales the net sales from the Offshore and AI
stores. The comparable periods have been adjusted accordingly.
Cost
of Sales
Our cost
of sales consists of merchandise costs, net of incentives under vendor programs,
inventory shrinkage, defective and warranty costs, 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, vendor programs, inventory
shrinkage, defective and warranty costs and warehouse and distribution costs. We
seek to avoid fluctuation in merchandise costs and instability of supply by
entering into long-term purchase agreements, without minimum purchase volume
requirements, 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 and depreciation), advertising expenses, commercial delivery
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 services, self-insurance costs 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
|
|
|
Twenty-Eight
Week Periods Ended
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
July
12,
|
|
|
July
14,
|
|
|
July
12,
|
|
|
July
14,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
Cost
of sales, including purchasing and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warehousing
costs
|
|
|
51.4 |
|
|
|
51.9 |
|
|
|
51.3 |
|
|
|
51.8 |
|
Gross
profit
|
|
|
48.6 |
|
|
|
48.1 |
|
|
|
48.7 |
|
|
|
48.2 |
|
Selling,
general and administrative expenses
|
|
|
38.3 |
|
|
|
38.0 |
|
|
|
38.8 |
|
|
|
38.7 |
|
Operating
income
|
|
|
10.4 |
|
|
|
10.1 |
|
|
|
9.9 |
|
|
|
9.6 |
|
Interest
expense
|
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
(0.7 |
) |
Other
income, net
|
|
|
(0.0 |
) |
|
|
0.0 |
|
|
|
(0.0 |
) |
|
|
0.0 |
|
Provision
for income taxes
|
|
|
3.7 |
|
|
|
3.6 |
|
|
|
3.4 |
|
|
|
3.4 |
|
Net
income
|
|
|
6.1
|
% |
|
|
5.8
|
% |
|
|
5.7
|
% |
|
|
5.5
|
% |
Twelve
Weeks Ended July 12, 2008 Compared to Twelve Weeks Ended July 14,
2007
Net sales
for the twelve weeks ended July 12, 2008 were $1,235.8 million, an increase
of $65.9 million, or 5.6%, as compared to net sales for the twelve weeks
ended July 14, 2007. The net sales increase was due to an increase in comparable
store sales of 2.9% and contributions from the 138 net new AAP and AI stores
opened within the last year. AAP produced sales of $1,195.0 million, an increase
of $59.0 million, or 5.2%. AAP’s sales increase was primarily driven by a 2.8%
comparable store sales increase and sales from the 116 net new stores opened
within the last year. The AAP comparable store sales increase was driven by (i)
an increase in average ticket sales and customer traffic in our commercial
business and (ii) an increase in average ticket sales by our DIY customers
offset by a decrease in DIY customer count. AI produced sales of $40.8 million,
an increase of $6.9 million, or 20.4%. AI’s sales increase was primarily driven
by a 7.2% comparable store sales increase and sales from 22 stores opened within
the last year.
Gross
profit for the twelve weeks ended July 12, 2008 was $600.8 million, or 48.6% of
net sales, as compared to $562.9 million, or 48.1% of net sales, for the twelve
weeks ended July 14, 2007, or an increase of 51 basis points. The increase in
gross profit as a percentage of net sales was driven by lower supply chain and
logistics costs gained primarily through the efficiencies of handling more
inventory in our distribution centers, and more effective pricing.
Selling,
general and administrative expenses increased to $472.9 million, or 38.3% of net
sales, for the twelve weeks ended July 12, 2008, from $445.1 million, or 38.0%
of net sales, for the twelve weeks ended July 14, 2007, or an increase of 23
basis points. The increase in selling, general and administrative expenses as a
percentage of sales was driven by increased incentive compensation, increased
spending on strategic initiatives and higher gasoline costs. Partially
offsetting these items were cost savings realized from the cost reduction
initiatives we completed in fiscal 2007 combined with leveraging fixed expense
as a result of our favorable comparable sales increase during the second
quarter.
Operating
income for the twelve weeks ended July 12, 2008 was $128.0 million, or 10.4% of
net sales, as compared to $117.8 million, or 10.1% of net sales, for the twelve
weeks ended July 14, 2007, an increase of 8.6%. This increase in operating
income, as a percentage of net sales, was reflective of an increase in gross
profit partially offset by slightly higher selling, general and administrative
expenses as previously discussed. AAP produced operating income of $125.7
million, or 10.5% of net sales, for the twelve weeks ended July 12, 2008 as
compared to $116.7 million, or 10.3% of net sales, for the twelve weeks ended
July 14, 2007. AI generated operating income of $2.3 million for the twelve
weeks ended July 12, 2008 as compared to $1.1 million for the same period last
year.
AI’s
operating income increased primarily due to the positive sales results during
the quarter and decrease in payroll expense as a percentage of
sales.
Interest
expense for the twelve weeks ended July 12, 2008 was $7.3 million, or 0.6% of
net sales, as compared to $7.4 million, or 0.7% of net sales, for the twelve
weeks ended July 14, 2007. The decrease in interest expense is a result of lower
average borrowing rates offset by higher average outstanding borrowings during
the twelve weeks ended July 12, 2008 compared to the same period ended July 14,
2007.
Income
tax expense for the twelve weeks ended July 12, 2008 was $45.2 million, as
compared to $42.5 million for the twelve weeks ended July 14, 2007. Our
effective income tax rate was 37.5% for the twelve weeks ended July 12, 2008
compared to 38.3% for the same period ended July 14, 2007.
We
generated net income of $75.4 million, or $0.79 per diluted share, for the
twelve weeks ended July 12, 2008, as compared to $68.4 million, or $0.64 per
diluted share, for the twelve weeks ended July 14, 2007. As a percentage of net
sales, net income for the twelve weeks ended July 12, 2008 was 6.1%, as compared
to 5.8% for the twelve weeks ended July 14, 2007.
Twenty-Eight
Weeks Ended July 12, 2008 Compared to Twenty-Eight Weeks Ended July 14,
2007
Net sales
for the twenty-eight weeks ended July 12, 2008 were $2,761.9 million, an
increase of $123.9 million, or 4.7%, as compared to net sales for the
twenty-eight weeks ended July 14, 2007. The net sales increase was due to an
increase in comparable store sales of 1.6% and contributions from the 138 net
new AAP and AI stores opened within the last year. AAP produced sales of
$2,676.1 million, an increase of $107.9 million, or 4.2%. AAP’s sales increase
was primarily driven by a 1.5% comparable store sales increase and sales from
the 116 net new stores opened within the last four fiscal quarters. The AAP
comparable store sales increase was driven by (i) an increase in average ticket
sales and customer traffic in our commercial business and (ii) an increase in
average ticket sales by our DIY customers offset by a decrease in DIY customer
count. AI produced sales of $85.8 million, an increase of $16.0 million, or
22.8%. AI’s sales increase was primarily driven by a 10.8% comparable store
sales increase and sales from 22 stores opened within the last
year.
Gross
profit for the twenty-eight weeks ended July 12, 2008 was $1,344.3 million, or
48.7% of net sales, as compared to $1,272.3 million, or 48.2% of net sales, for
the twenty-eight weeks ended July 14, 2007, or an increase of 44 basis points.
The increase in gross profit as a percentage of net sales was driven by lower
supply chain and logistics costs gained primarily through the efficiencies of
handling more inventory in our distribution centers, and more effective
pricing.
Selling,
general and administrative expenses increased to $1,072.1 million, or 38.8% of
net sales, for the twenty-eight weeks ended July 12, 2008, from $1,019.8
million, or 38.7% of net sales, for the twenty-eight weeks ended July 14, 2007,
or an increase of 16 basis points. The increase in selling, general and
administrative expenses as a percentage of sales was driven by increased
incentive compensation, increased spending on strategic initiatives and higher
gasoline costs. Partially offsetting these items were costs savings realized
from the cost reduction initiatives we completed in fiscal 2007.
Operating
income for the twenty-eight weeks ended July 12, 2008 was $272.2 million, or
9.9% of net sales, as compared to $252.5 million, or 9.6% of net sales, for the
twenty-eight weeks ended July 14, 2007, an increase of 7.8%. This increase in
operating income, as a percentage of net sales, was reflective of an increase in
gross profit partially offset by slightly higher selling, general and
administrative expenses as previously discussed. AAP produced operating income
of $270.1 million, or 10.1% of net sales, for the twenty-eight weeks ended July
12, 2008 as compared to $253.1 million, or 9.9% of net sales, for the
twenty-eight weeks ended July 14, 2007. AI generated operating income of $2.1
million for the twenty-eight weeks ended July 12, 2008 as compared to an
operating loss of $0.6 million for the same period last year. Operating income
increased primarily due to AI’s positive sales results during the quarter and
decrease in payroll expense as a percentage of sales.
Interest
expense for the twenty-eight weeks ended July 12, 2008 was $19.6 million, or
0.7% of net sales, as
compared
to $18.7 million, or 0.7% of net sales, for the twenty-eight weeks ended July
14, 2007. The increase in interest expense is a result of higher average
outstanding borrowings offset by lower average borrowing rates during the
twenty-eight weeks ended July 12, 2008 compared to the same period ended July
14, 2007.
Income
tax expense for the twenty-eight weeks ended July 12, 2008 was $95.1 million, as
compared to $90.2 million for the twenty-eight weeks ended July 14, 2007. Our
effective income tax rate was 37.7% for the twenty-eight weeks ended July 12,
2008 compared to 38.4% for the same period ended July 14, 2007.
We
generated net income of $157.5 million, or $1.65 per diluted share, for the
twenty-eight weeks ended July 12, 2008, as compared to $144.5 million, or $1.35
per diluted share, for the twenty-eight weeks ended July 14, 2007. As a
percentage of net sales, net income for the twenty-eight weeks ended July 12,
2008 was 5.7%, as compared to 5.5% for the twenty-eight weeks ended July 14,
2007.
Liquidity
and Capital Resources
Our
primary cash requirements include the purchase of inventory, capital
expenditures, payment of quarterly 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 repay borrowings under our credit
facility. 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 July
12, 2008, our cash and cash equivalents balance was $19.5 million, an increase
of $4.8 million compared to December 29, 2007. This increase resulted from
additional cash flow from operations and slightly lower capital expenditures,
partially offset by the return of capital to our shareholders through the
repurchase of common stock during the twenty-eight weeks ended July 12, 2008.
Additional discussion of our cash flow results is set forth in the Analysis of Cash Flows
section.
At July
12, 2008, our outstanding indebtedness was $52.7 million lower when compared to
December 29, 2007 and consisted of borrowings of $248.6 million under our
revolving credit facility, $200.0 million under our term loan, and $4.3 million
outstanding on an economic development note. Additionally, we had $73.6 million
in letters of credit outstanding, which reduced our total availability under the
revolving credit facility to $427.8 million.
During
the twenty-eight weeks ended July 12, 2008, we paid $17.4 million in quarterly
cash dividends. Subsequent to July 12, 2008, our Board of Directors declared a
quarterly dividend of $0.06 per share to be paid on October 3, 2008 to all
common stockholders of record as of September 19, 2008.
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, store remodels prior to 2008, maintenance of existing stores,
the construction and upgrading of distribution centers, the development of
proprietary information systems and purchased information systems. Our capital
expenditures were $106.0 million for the twenty-eight weeks ended July 12, 2008.
During the twenty-eight weeks ended July 12, 2008, we opened 56 AAP and 14 AI
stores and relocated seven AAP stores.
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 remodel. As previously disclosed in our Form 10-K, we anticipate
adding 100 new AAP and 15 AI stores, relocating 10 to 20 AAP stores and spending
$170 million to $190 million on capital expenditures in fiscal 2008. We do not
plan to remodel any stores under the 2010 remodel program in fiscal 2008. We
also plan to make continued investments in the maintenance of our existing
stores and logistics
network as well as investing in new information systems to support our
turnaround strategies, including our parts availability initiative.
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 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 July 12, 2008, $153.3 million was payable to the bank by us under
this program.
Stock
Repurchase Program
On May
15, 2008, our Board of Directors authorized a new $250 million stock repurchase
program. The new program cancelled and replaced the remaining portion of our
previous $500 million stock repurchase program. 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.
During
the twelve weeks ended July 12, 2008, we repurchased 0.2 million shares of
common stock at an aggregate cost of $7.5 million, or an average price of $37.22
per share. As of July 12, 2008, 0.1 million shares remained unsettled at an
aggregate cost of $3.4 million. These shares were repurchased in accordance with
our $250 million stock repurchase program authorized by our Board of Directors
in the second quarter of fiscal 2008. During the twenty-eight weeks ended July
12, 2008, we repurchased 4.8 million shares of common stock at an aggregate cost
of $162.8 million, or an average price of $34.18 per share, of which 4.6 million
shares of common stock were repurchased under the previous $500 million stock
repurchase program. Additionally, we settled $3.0 million on shares repurchased
prior to the end of fiscal 2007. As of July 12, 2008, we had $242.5
million remaining under the current stock repurchase program, excluding
related expenses.
Analysis
of Cash Flows
An
analysis of our cash flows for the twenty-eight-week period ended July 12, 2008
as compared to the twenty-eight-week period ended July 14, 2007 is included
below.
|
|
Twenty-Eight
Week Periods Ended
|
|
|
|
July
12, 2008
|
|
|
July
14, 2007
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
$ |
350.0 |
|
|
$ |
280.0 |
|
Cash
flows from investing activities
|
|
|
(105.2 |
) |
|
|
(111.3 |
) |
Cash
flows from financing activities
|
|
|
(240.0 |
) |
|
|
(97.2 |
) |
Net
increase in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
$ |
4.8 |
|
|
$ |
71.5 |
|
Operating
Activities
For the
twenty-eight weeks ended July 12, 2008, net cash provided by operating
activities increased $70.0 million to $350.0 million, as compared to the
twenty-eight weeks ended July 14, 2007. This increase in operating cash was
driven primarily by:
·
|
an
increase in net income of $12.9 million during the twenty-eight weeks
ended July 12, 2008 as compared to the comparable period in 2007;
and
|
·
|
a
$51.6 million increase in cash flows from less owned inventory reflective
of the increase in our accounts payable ratio. Because
inventory has increased due to our parts availability initiative and
initial build-up in certain premium branded product, our accounts payable
has increased at a slightly higher pace as a result of this initial
build-up.
|
Investing
Activities
For the
twenty-eight weeks ended July 12, 2008, net cash used in investing activities
decreased by $6.0 million to $105.2 million, as compared to the twenty-eight
weeks ended July 14, 2007. The decrease in cash used was primarily from a
reduction in store development.
Financing
Activities
For the
twenty-eight weeks ended July 12, 2008, net cash used in financing activities
increased by $142.8 million to $240.0 million, as compared to the twenty-eight
weeks ended July 14, 2007.
Cash
flows from financing activities increased as result of:
·
|
a
decrease in net borrowings under our term loan and revolving credit
facility of $74.4 million.
|
Cash
flows from financing activities decreased as result of:
·
|
an
additional $159.0 million of common stock repurchases under our stock
repurchase program;
|
·
|
a
decrease of $27.4 million in the financed vendor accounts
payable;
|
·
|
a
decrease of $14.4 million from the issuance of common stock, primarily
resulting from the decrease in exercise of stock options;
and
|
·
|
an
$11.6 million cash outflow resulting from the timing of bank
overdrafts.
|
Off-Balance-Sheet
Arrangements
As of July 12, 2008, we had no
off-balance-sheet arrangements as defined in Regulation S-K Item 303 of the SEC
regulations. We include other off-balance-sheet arrangements in our contractual
obligation table including operating lease payments, interest payments on our
credit facility and letters of credit outstanding.
Contractual
Obligations
As of
July 12, 2008, our outstanding contractual obligations remained consistent with
those as of December 29, 2007. For information regarding our contractual
obligations see “Contractual Obligations” in the Company’s Annual Report on Form
10-K for the year ended December 29, 2007.
Long
Term Debt
On
December 4, 2007, we entered into a new $200 million unsecured four-year
term loan with our subsidiary, Advance Stores Company, Incorporated, or Stores,
serving as borrower. Proceeds from this term loan were used to repurchase
shares of common stock under our stock repurchase program. As of
December 29, 2007, we had borrowed $50.0 million under the term loan. As of July
12, 2008, we had borrowed the remaining availability under the term
loan.
In
addition to the term loan, we have a $750 million unsecured five-year revolving
credit facility with Stores serving as the borrower. The revolving credit
facility also 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
also request, subject to agreement by one or more lenders, 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
July 12, 2008, we had $248.6 million outstanding under our revolving credit
facility and letters of credit outstanding of $73.6 million, which reduced
availability under the revolving credit facility to $427.8 million.
Additionally, we had outstanding $200.0 million on a term loan and $4.3 million
under an economic development note. At July 12, 2008, we also have interest rate
swaps in place that effectively fix our interest rate exposure on 61% of
our bank debt.
The
interest rate on the term loan is based, at our option, on an adjusted
LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The
current margin is 1.00% and 0.0% per annum for the adjusted LIBOR and alternate
base rate borrowings, respectively. We have elected to use the 90-day adjusted
LIBOR rate and have the ability and intent to continue to use this rate on our
hedged borrowings. Under the terms of the term loan, the interest rate
spread is based on our credit rating. The term loan terminates on October
5, 2011.
The
interest rate on borrowings under the revolving credit facility is based, at our
option, on an adjusted LIBOR rate, plus a margin, or an alternate base rate,
plus a margin. The current margin is 0.75% and 0.0% per annum for the adjusted
LIBOR and alternate base rate borrowings, respectively. We have elected to use
the 90-day adjusted LIBOR rate and have the ability and intent to continue to
use this rate on our hedged borrowings. 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 are based on our credit rating. The
revolving facility terminates on October 5, 2011.
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. The debt agreements collectively contain 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) change the nature of our business and the
business conducted by our subsidiaries and (7) change our holding company
status. We are required to comply with financial covenants with respect to a
maximum leverage ratio and a minimum consolidated 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 were in compliance with these covenants at July 12,
2008.
Credit
Ratings
At July
12, 2008, 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
June 2008, the Financial Accounting Standards Board, or FASB, issued FASB
Staff Position, or FSP, EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.” FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting, and therefore need
to be included in the earnings allocation in computing earnings per share under
the two-class method as described in Statement of Financial Accounting
Standards, or SFAS, No. 128, “Earnings per Share.” Under the guidance of FSP
EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of
earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1
is effective for financial statements issued for fiscal years beginning after
December 15, 2008
and all prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. We are
currently evaluating the impact, if any, of adopting FSP EITF
03-6-1.
In June
2008, the FASB Issued EITF No. 08-3, “Accounting by Lessees for
Nonrefundable Maintenance Deposits.” EITF 08-3 requires that nonrefundable
maintenance deposits paid by a lessee under an arrangement accounted for as a
lease be accounted for as a deposit asset until the underlying maintenance is
performed. When the underlying maintenance is performed, the deposit may be
expensed or capitalized in accordance with the lessee’s maintenance accounting
policy. Upon adoption entities must recognize the effect of the change as a
change in accounting principle. EITF 08-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. We do not expect the
adoption of EITF 08-3 to have a material impact on our financial condition,
results of operations or cash flows.
In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets”, which amends the
factors that must be considered in developing renewal or extension assumptions
used to determine the useful life over which to amortize the cost of a
recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets.” The FSP requires an entity to consider its own assumptions about
renewal or extension of the term of the arrangement, consistent with its
expected use of the asset, and is an attempt to improve consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS 141,
“Business Combinations.” The FSP is effective for fiscal years beginning after
December 15, 2008, and the guidance for determining the useful life of a
recognized intangible asset must be applied prospectively to intangible assets
acquired after the effective date. The FSP is not expected to have a significant
impact on our financial condition, results of operations or cash
flow.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities - an amendment of SFAS
No. 133.” SFAS No. 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance and cash flows. Entities
are required to provide enhanced disclosures about: how and why an entity uses
derivative instruments; how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations; and how
derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. We do not expect the adoption of SFAS No. 161 to
have a material impact on our financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160,
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company’s noncontrolling interest in a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a
material impact on our financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which
replaces SFAS No. 141, “Business Combinations.” SFAS No. 141R, among other
things, establishes principles and requirements for how an acquirer entity
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed and any controlling interests in the acquired
entity; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. Costs of the acquisition
will be recognized separately from the business combination. SFAS No. 141R
applies to business combinations for fiscal years beginning after December 15,
2008.
Effective
December 30, 2007, we adopted FASB Staff Position (“FSP”)
No. FIN 39-1, “Amendment of FASB Interpretation No. 39,” or
FSP 39-1. FSP 39-1 amends FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts (“FIN 39”), to permit a
reporting entity to offset fair value amounts recognized for the right to
reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under the same master netting
arrangement
that have been offset in accordance with FIN 39. FSP 39-1 also amends
FIN 39 for certain terminology modifications. Upon adoption of
FSP 39-1, we did not change our accounting policy of not offsetting fair
value amounts recognized for derivative instruments under master netting
arrangements. The adoption of FSP 39-1 did not have an impact on our
financial position, results of operations or cash flows.
Effective
December 30, 2007, we adopted the provisions of SFAS No. 157, “Fair Value
Measurements” on our financial assets and liabilities. SFAS No. 157 clarifies
the definition of fair value, establishes a framework for defining fair value as
it relates to other accounting pronouncements that require or permit fair value
measurements, and expands the disclosures of fair value measurements. The
adoption of SFAS 157 did not have any impact on our financial condition, results
of operations or cash flows. We did not apply the provisions of SFAS No. 157 for
nonfinancial assets and liabilities except for those recognized or disclosed on
a recurring basis (at least annually) as allowed by the issuance of FSP 157-2.
We will fully adopt the provisions of SFAS 157 effective during our first
quarter of fiscal 2009.
Effective
December 30, 2007, we adopted the provisions of 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. We elected not to apply fair value on our existing
financial assets and liabilities upon adoption. Therefore, this adoption did not
have a material effect on our financial position, results of operations or cash
flows.
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. We adopted the
measurement date provisions of SFAS No. 158 on December 30, 2007. We have
elected to apply the alternate transition method under which a 14-month
measurement will cover the period from November 1, 2007 through January 3, 2009.
The change in the measurement date will not have a material impact on our
financial condition, results of operations or cash flows.
ITEM
3. |
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 29, 2007. At July 12, 2008, 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 29,
2007.
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
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended July 12, 2008 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM
2. |
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS |
The
following table sets forth the information with respect to repurchases of our
common stock for the quarter ended July 12, 2008 (amounts in thousands, except
per share amounts):
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price
Paid
per
Share (1)
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
|
|
Maximum
Dollar Value that May Yet Be Purchased Under the Plans or Programs
(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
20, 2008, to May 17, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
250,000 |
|
May
18, 2008, to June 14, 2008
|
|
|
7 |
|
|
|
38.92 |
|
|
|
7 |
|
|
|
249,711 |
|
June
15, 2008, to July 12, 2008
|
|
|
194 |
|
|
|
37.14 |
|
|
|
194 |
|
|
|
242,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
201 |
|
|
$ |
37.20 |
|
|
|
201 |
|
|
$ |
242,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average
price paid per share excludes related expenses paid on previous
repurchases.
|
(2)
|
All
of the above repurchases were made on the open market at prevailing market
rates plus related expenses under our stock repurchase program, which
authorized the repurchase of up to $250 million in common stock. Our stock
repurchase program was authorized by our Board of Directors and publicly
announced on May 15, 2008 which replaced the remaining portion of the $500
million stock repurchase program authorized by our Board of Directors and
publicly announced on August 8,
2007.
|
(3)
|
The
maximum dollar value yet to be purchased under our stock repurchase
program excludes related expenses paid on previous purchases or
anticipated expenses on future
purchases.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
We held
our annual meeting of stockholders on May 15, 2008. The following matters were
submitted to the vote of security holders at the meeting:
1.
|
Election
of nominees to our board of directors. All nominees were elected as
indicated by the following vote
counts:
|
Nominee
|
|
Votes
For
|
|
Votes
Withheld
|
|
|
|
|
|
John
C. Brouillard
|
|
86,090,155
|
|
616,912
|
Lawrence
P. Castellani
|
|
86,632,691
|
|
74,376
|
Darren
R. Jackson
|
|
86,631,916
|
|
75,151
|
Nicholas
J. LaHowchic
|
|
86,634,876
|
|
72,191
|
William
S. Oglesby
|
|
86,634,256
|
|
72,811
|
Gilbert
T. Ray
|
|
86,313,629
|
|
393,438
|
Carlos
A. Saladrigas
|
|
85,677,741
|
|
1,029,326
|
Francesca
M. Spinelli
|
|
86,632,512
|
|
74,555
|
2.
|
The
stockholders voted upon and approved the ratification of Deloitte &
Touche LLP as our independent registered public accounting firm for 2008.
The vote on the proposal was as
follows:
|
For
|
|
Against
|
|
Abstentions
|
|
|
|
|
|
86,653,348
|
|
48,177
|
|
5,542
|
|
|
|
|
|