The
accompanying condensed consolidated financial statements include the accounts of
Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The
condensed consolidated balance sheets as of April 25, 2009 and January 3, 2009,
the condensed consolidated statements of operations for the sixteen weeks ended
April 25, 2009 and April 19, 2008, and the condensed consolidated statements of
cash flows for the sixteen week periods ended April 25, 2009 and April 19, 2008,
have been prepared by the Company. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position of the Company, the results of its
operations and cash flows have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company’s consolidated financial statements for the
fiscal year ended January 3, 2009.
The
results of operations for the interim periods are not necessarily indicative of
the operating results to be expected for the full fiscal year.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates.
Vendor
Incentives
The
Company receives incentives in the form of reductions to amounts owed and/or
payments from vendors related to cooperative advertising allowances, volume
rebates and other promotional considerations. The Company accounts for vendor
incentives in accordance with Emerging Issues Task Force, or EITF, No. 02-16,
“Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor.” Many of these incentives are under long-term agreements
(terms in excess of one year), while others are negotiated on an annual basis or
less (short-term). Both cooperative advertising allowances and volume rebates
are earned based on inventory purchases and initially recorded as a reduction to
inventory. These deferred amounts are included as a reduction to cost of sales
as the inventory is sold since these payments do not represent reimbursements
for specific, incremental and identifiable costs. Total deferred vendor
incentives included in Inventory, net were $47,585 and $50,527 at April 25, 2009
and January 3, 2009, respectively.
Similarly,
the Company recognizes other promotional incentives earned under long-term
agreements as a reduction to cost of sales. However, these incentives are
recognized based on the cumulative net purchases as a percentage of total
estimated net purchases over the life of the agreement. The Company's margins
could be impacted positively or negatively if actual purchases or results from
any one year differ from its estimates; however, the impact over the life of the
agreement would be the same. Short-term incentives (terms less than one year)
are generally recognized as a reduction to cost of sales over the duration of
any short-term agreements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(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 related to the
opening of new stores, are expensed as incurred.
Warranty
Liabilities
The
warranty obligation on the majority of merchandise sold by the Company with a
manufacturer’s warranty is the responsibility of the Company’s
vendors. However, the Company has an obligation to provide customers free
replacement of merchandise or merchandise at a prorated cost if under a warranty
and not covered by the manufacturer. Merchandise sold with warranty coverage by
the Company primarily includes batteries but may also include other parts such
as brakes and shocks. The Company estimates its warranty obligation based on the
historical return experience of the product sold and records any change as
income or expense in the period the product is sold.
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
estimates 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 material at April 25, 2009 and January 3,
2009.
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 its inventory and accretes
this discount to the resulting short-term payable to the bank through interest
expense over the extended term. At April 25, 2009 and January 3, 2009, $95,180
and $136,386, 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.
The
balance in Financed vendor accounts payable continues to diminish as the Company
transitions its merchandise vendors to customer-managed services
arrangements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
Cost
of Sales and Selling, General and Administrative (“SG&A”)
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
merchandise 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
and other handling costs associated with
|
|
●
|
Professional
services; and
|
|
moving
merchandise inventories through our
|
●
|
Other
administrative costs, such as credit card
|
|
supply
chain |
|
|
service
fees, supplies, travel and lodging.
|
|
–
|
From
our distribution centers to our retail |
|
|
|
|
|
store
locations, and |
|
|
|
|
–
|
From our
Local Area Warehouses, or LAWs, |
|
|
|
|
|
and
Parts Delivered Quickly warehouses, |
|
|
|
|
|
or
PDQs®,
to our retail stores after the customer
|
|
|
|
|
|
has
special-ordered the merchandise. |
|
|
|
Please
see Note 2 for a discussion of a change in accounting principle for costs
included in inventory.
New
Accounting Pronouncements
In June
2008, the Financial Accounting Standards Board, or 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. The Company adopted the provisions of EITF 08-3 effective January 4,
2009. The adoption of EITF 08-3 had no impact on the Company’s financial
position, results of operations or cash flows.
In
April 2008, the FASB issued FASB Staff Position, or FSP, 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 Statement of Financial Accounting Standards,
or SFAS, No. 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 No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141, “Business Combinations.”
The Company adopted the provisions of FSP FAS 142-3 effective January 4,
2009. The adoption of the FSP had no 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 Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
On April
9, 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” which amends SFAS 157 by
incorporating a two-step process to determine whether a market is not active and
a transaction is not distressed. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009. The Company does not expect the
adoption of FSP FAS 157-4 to have a material impact on the Company's
consolidated financial statements.
On April
9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Statements” which amends the interim disclosure
requirements in scope for SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.” This FSP is effective for interim and annual
periods ending after June 15, 2009. The Company does not expect the
adoption of this FSP to have a material impact on the Company’s consolidated
financial statements.
2. |
Change
in Accounting Principle:
|
Effective
January 4, 2009, the Company implemented a change in accounting principle for
costs included in inventory. Under the Company’s historical accounting policy,
freight and other handling costs (collectively “handling costs”) associated with
moving merchandise inventories from our distribution centers to our retail
stores and handling costs associated with moving our merchandise inventories
from our vendors to our distribution centers were capitalized as inventory and
expensed in cost of sales as inventory is sold. However, handling costs
associated with moving merchandise inventories from our LAWs and PDQs to our
retail stores after a customer had special-ordered the merchandise were expensed
as incurred in SG&A.
The
change relates to capitalizing handling costs associated with moving merchandise
inventories from our LAWs and PDQs to our retail stores, which are now treated
as inventory product costs. Such costs are includable in inventory and expensed
in cost of sales as inventory is sold because it relates to the acquisition of
goods for resale by the Company. The Company has determined that it is
preferable to capitalize such handling costs into inventory because it better
represents the costs incurred to prepare inventory for sale to the customer and
it is consistent with the Company’s treatment of other handling costs associated
with moving merchandise inventories from our distribution centers to our retail
stores.
In
accordance with SFAS No. 154, “Accounting Changes and Error Corrections,” the
change in accounting principle has been retrospectively applied to all prior
periods presented herein related to cost of sales and
SG&A. However, because the inventory transferred is typically at
the retail store for only one or two days until customer pick-up, the current
and historical impact of this change on the consolidated balance sheets,
consolidated net income, earnings per share, and consolidated statements of cash
flows is not material and, as a result, Inventories, net was not
adjusted. Accordingly, there is no impact on any financial statement
line items other than cost of sales and SG&A, and there was no cumulative
effect of the change in accounting principle on retained earnings as of December
30, 2007, the beginning of the earliest period presented. The tables
below represent the impact of the accounting change on the current period and on
previously reported amounts:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
Sixteen
week period ended April 25, 2009
|
|
Prior
to Effect of
Accounting Change
|
|
|
Adjustments
|
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, including purchasing and warehousing costs
|
|
$ |
842,812 |
|
|
$ |
18,836 |
|
|
$ |
861,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
840,824 |
|
|
|
(18,836 |
) |
|
|
821,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
683,242 |
|
|
|
(18,836 |
) |
|
|
664,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sixteen
week period ended April 19, 2008
|
|
|
|
|
Adjustments
|
|
|
As
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales, including purchasing and warehousing costs
|
|
$ |
782,681 |
|
|
$ |
18,597 |
|
|
$ |
801,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
743,451 |
|
|
|
(18,597 |
) |
|
|
724,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
599,173 |
|
|
|
(18,597 |
) |
|
|
580,576 |
|
3. |
Store
Closures and
Impairment:
|
During
the sixteen weeks ended April 25, 2009, the Company identified 36 stores to
close as part of its store divesture plan. For fiscal 2009, the Company
currently expects to divest a total of approximately 40 to 55 stores in addition
to its normal annual store closings. This plan consisted of a review
of operating stores to identify locations for potential closing based on both
financial and operating factors. These factors included cash flow,
profitability, strategic market importance, store full potential and current
lease rates. The store closures under the store divestiture plan are exclusive
of approximately 15 stores that will also be closed throughout 2009 as part of
the Company’s routine review and closure of underperforming stores. During the
sixteen weeks ended April 25, 2009, the Company closed 9 stores, including 4
stores under the store divestiture plan.
During
the first quarter of 2009, the Company recognized $5,795 of total expense
associated with the 36 stores identified to be closed. This expense included
impairment charges of $4,259 and closed store exit costs of $1,536. The closed
store exit costs primarily included the establishment of the liability for
future lease obligations as well as severance benefits in accordance with SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”
Closed store liabilities primarily include the present value of the remaining
lease obligations and management’s estimate of future costs of insurance,
property tax and common area maintenance (reduced by the present value of
estimated revenues from subleases and lease buyouts). New provisions are
established by a charge to selling, general and administrative costs in the
accompanying consolidated statement of operations at the time the facilities
actually close.
A summary
of the Company’s closed store liabilities, which are recorded in accrued
expenses (current portion) and long-term liabilities (long-term portion) in the
accompanying condensed consolidated balance sheet, are presented in the
following table:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
|
|
Lease
Obligations
|
|
|
Severance
and
Other
Exit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Closed
Store Liabilities, January 3, 2009
|
|
$ |
5,067 |
|
|
$ |
- |
|
|
$ |
5,067 |
|
Reserves
established
|
|
|
1,498 |
|
|
|
91 |
|
|
|
1,589 |
|
Change
in estimates
|
|
|
(602 |
) |
|
|
- |
|
|
|
(602 |
) |
Reserves
utilized
|
|
|
(837 |
) |
|
|
(91 |
) |
|
|
(928 |
) |
Closed
Store Liabilities, April 25, 2009
|
|
$ |
5,126 |
|
|
$ |
- |
|
|
$ |
5,126 |
|
The Company’s ending
closed store liabilities at April 25, 2009, include $1,408 related to the store
divestiture plan.
The
impairment charges were recognized in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” and included in SG&A in
the accompanying condensed consolidated statement of operations. This charge
primarily consisted of the impairment of store assets contained in leased store
locations where the carrying amount of those assets is not recoverable. Also
included in the total impairment charge for the quarter is the $923 write-down
of one owned store location that was identified to be closed in connection with
the store divestiture plan. At April 25, 2009, the fair value of the store
location is $775, which will be held for sale and therefore will be reclassified
to Assets Held for Sale in the Company’s condensed consolidated balance sheet
when the store closes subsequent to April 25, 2009.
Merchandise
Inventory
Inventories
are stated at the lower of cost or market. The Company uses the LIFO
method of accounting for approximately 95% of inventories at both April 25,
2009 and January 3, 2009. Under LIFO, the Company’s cost of sales reflects the
costs of the most recently purchased inventories, while the inventory carrying
balance represents the costs for inventories purchased in fiscal 2009 and prior
years. Historically, the Company’s overall costs to acquire inventory for the
same or similar products have been decreasing due to the Company’s significant
growth. As a result of utilizing LIFO, the Company recorded a reduction to cost
of sales of $10,156 and $7,409 for the sixteen weeks ended April 25, 2009 and
April 19, 2008, respectively.
An actual
valuation of inventory under the LIFO method is performed by the Company at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must be based on management’s estimates
of expected fiscal year-end inventory levels and costs.
Product
Cores
The
remaining inventories are comprised of product cores, which consist of the
non-consumable portion of certain parts and batteries, which are valued under
the first-in, first-out ("FIFO") method. Product cores are included as part of
the Company’s merchandise costs that are either passed on to the customer or
returned to the vendor. Since product cores are not subject to frequent cost
changes like the Company’s other merchandise inventory, there is no material
difference when applying either the LIFO or FIFO valuation method.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
Inventory
Overhead Costs
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at April 25,
2009 and January 3, 2009, were $104,953 and $104,594, respectively.
Inventory
Balances and Inventory Reserves
Inventory
balances at April 25, 2009 and January 3, 2009 were as follows:
|
|
April
25,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
Inventories
at FIFO, net
|
|
$ |
1,589,963 |
|
|
$ |
1,541,871 |
|
Adjustments
to state inventories at LIFO
|
|
|
91,373 |
|
|
|
81,217 |
|
Inventories
at LIFO, net
|
|
$ |
1,681,336 |
|
|
$ |
1,623,088 |
|
|
|
|
|
|
|
|
|
|
Inventory
quantities are tracked through a perpetual inventory system. The Company uses a
cycle counting program in all distribution centers and PDQs® to
ensure the accuracy of the perpetual inventory quantities of both merchandise
and product core inventory. For our retail stores, the Company began completing
physical inventories during its third quarter of fiscal 2008 in addition to
cycle counting to ensure the accuracy of the perpetual inventory quantities of
both merchandise and core inventory in these locations. The Company establishes
reserves for estimated shrink based on results of completed physical
inventories, actual results from recent cycle counts and historical results from
the Company’s cycle counting program.
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 (i) current
inventory levels, (ii) the historical analysis of product sales and (iii)
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 $59,977 and $62,898 at April 25, 2009 and January 3, 2009,
respectively.
5. |
Goodwill
and Intangible
Assets:
|
Goodwill
The
following table reflects the carrying amount of goodwill pertaining to the
Company’s two segments, and the changes in goodwill carrying amounts, for the
sixteen weeks ended April 25, 2009:
|
|
AAP
Segment
|
|
|
AI
Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 3, 2009
|
|
$ |
16,093 |
|
|
$ |
18,510 |
|
|
$ |
34,603 |
|
Fiscal
2009 activity
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
at April 25, 2009
|
|
$ |
16,093 |
|
|
$ |
18,510 |
|
|
$ |
34,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
Intangible
Assets Other Than Goodwill
The
carrying amount and accumulated amortization of acquired intangible assets as of
April 25, 2009 and January 3, 2009 are comprised of the following:
|
|
Acquired
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Not
Subject
|
|
|
|
|
|
|
Subject
to Amortization
|
|
|
to
Amortization
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
Trademark
and
|
|
|
Intangible
|
|
|
|
Relationships
|
|
|
Other
|
|
|
Tradenames
|
|
|
Assets,
net
|
|
Gross:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount at January 3, 2009
|
|
$ |
9,800 |
|
|
$ |
885 |
|
|
$ |
20,550 |
|
|
$ |
31,235 |
|
Additions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Gross
carrying amount at April 25, 2009
|
|
$ |
9,800 |
|
|
$ |
885 |
|
|
$ |
20,550 |
|
|
$ |
31,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
book value at January 3, 2009
|
|
$ |
6,566 |
|
|
$ |
451 |
|
|
$ |
20,550 |
|
|
$ |
27,567 |
|
Additions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2009
amortization
|
|
|
(335 |
) |
|
|
(37 |
) |
|
|
- |
|
|
|
(372 |
) |
Net
book value at April 25, 2009
|
|
$ |
6,231 |
|
|
$ |
414 |
|
|
$ |
20,550 |
|
|
$ |
27,195 |
|
Future
Amortization Expense
The table
below shows expected amortization expense for the next five years for acquired
intangible assets recorded as of April 25, 2009:
Fiscal
Year
|
|
|
Remainder
of 2009
|
|
$ 770
|
2010
|
|
1,059
|
2011
|
|
967
|
2012
|
|
967
|
2013
|
|
967
|
Receivables
consist of the following:
|
|
April
25,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Trade
|
|
$ |
19,817 |
|
|
$ |
17,843 |
|
Vendor
|
|
|
69,801 |
|
|
|
81,265 |
|
Other
|
|
|
3,666 |
|
|
|
3,125 |
|
Total
receivables |
|
|
93,284 |
|
|
|
102,233 |
|
Less:
Allowance for doubtful accounts |
|
|
(5,765 |
) |
|
|
(5,030 |
) |
Receivables,
net
|
|
|
87,519 |
|
|
|
97,203 |
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
7. |
Derivative
Instruments and Hedging
Activities:
|
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities.” SFAS No. 161 amends and
expands the previous disclosure requirements of SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” to provide more qualitative
and quantitative information on 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. The Company adopted SFAS No. 161 as
of January 4, 2009 on a prospective basis; accordingly, disclosures related
to interim periods prior to the date of adoption have not been presented. The
adoption had no impact on the Company’s consolidated financial statements other
than the additional disclosures.
The
Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking hedge transactions. The Company’s derivatives that are designated as
hedging instruments under SFAS No. 133 currently consist solely of interest
rate swaps. Interest rate swaps are entered into to limit cash flow risk
associated with the Company’s floating-rate borrowings. The Company
also utilizes forward commodity contracts to manage the risk of fluctuating fuel
prices. The Company has elected to apply the normal purchase election allowed
under SFAS No. 133 and therefore does not account for these contracts at fair
value.
All
derivative instruments designated as hedging instruments under SFAS No. 133
are classified as fair value, cash flow or net investment hedges. All
derivatives (including those not designated as hedging instruments under SFAS
No. 133) are recognized on the consolidated balance sheet at fair value and
classified based on the instruments’ maturity date. Changes in the fair value
measurements of the effective portion of the derivative instruments designated
as hedging instruments are reflected as adjustments to other comprehensive
income, or OCI, with the remaining changes recorded through current
earnings.
The
Company seeks to manage and mitigate cash flow risk on its variable rate debt
via receive variable/pay fixed interest rate swaps. Current outstanding interest
rate swaps have fixed the Company’s interest rate on an aggregate of $275,000 of
hedged debt at rates ranging from 4.01% to 4.98%. The Company elects
to receive interest payments based on the 90-day adjusted LIBOR interest rate
and has the intent and ability to continue to use this rate on its hedged
borrowings. Accordingly, 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,” the Company does
not recognize any ineffectiveness on the swaps. All of the Company’s
interest rate swaps expire in October 2011.
The fair
value of these interest rate swaps are determined based on a forward yield curve
and the contracted interest rates stated in the interest rate swap agreements.
The fair value of the Company’s interest rate swaps at April 25, 2009 and
January 3, 2009, respectively, was an unrecognized loss of $20,444 and $21,979,
which is reflected in Accumulated other comprehensive income (loss). Any amounts
received or paid under these hedges are recorded in the statement of operations
during the accounting period the interest on the hedged debt is paid. Based on
the estimated current and future fair values of the hedge arrangements at April
25, 2009, the Company estimates amounts currently included in Accumulated other
comprehensive income (loss) pertaining to the interest rate swaps that will be
reclassified and recorded in the statement of earnings in the next 12 months
will consist of a net loss of $9,458.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
The table
below presents the fair value of the Company’s derivative financial instruments
as well as their classification on the balance sheet as April 25,
2009:
The table
below presents the effect of the Company’s derivative financial instruments on
the statement of operations for the sixteen weeks ended April 25,
2009:
Derivatives
in SFAS
133
Cash Flow
Hedging
Relationships
|
|
Amount
of
Gain
or
(Loss)
Recognized
in
OCI on Derivative (Effective
Portion),
net
of tax
|
|
Location
of Gain or
(Loss)
Reclassified
from
Accumulated
OCI
into Income
(Effective
Portion)
|
|
Amount
of
Gain
or (Loss) Reclassified
from
Accumulated
OCI
into
Income
(Effective
Portion)
|
|
Location
of Gain or
(Loss)
Recognized in
Income
on Derivative
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness
Testing)
|
|
Amount
of
Gain
or (Loss) Recognized in Income on
Derivative
(Ineffective
Portion
and
Amount
Excluded
from Effectiveness Testing)
|
|
Interest
rate swaps
|
|
$ |
932 |
|
Interest
expense
|
|
$ |
(932 |
) |
Interest
expense
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company adopted SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value and expands disclosure
requirements. SFAS No. 157 defines fair value as the price that would be
received from the sale of an asset, or paid to transfer a liability (an exit
price), on the measurement date in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants
(with no compulsion to buy or sell). In February 2008, the FASB deferred the
effective date of SFAS No. 157 for one year for certain non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (i.e.,
at least annually). The Company adopted the required provisions of SFAS
No. 157 related to derivatives as of December 30, 2007 and adopted the
remaining required provisions for non-financial assets and liabilities as of
January 4, 2009. The effect of adopting this standard was not significant
in either period.
The
Company’s 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
these assets or liabilities. These levels are:
|
Level
1 – Unadjusted quoted prices that are available in active markets for
identical assets or liabilities at the measurement
date.
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
|
Level
2 – Inputs other than quoted prices that are observable for assets and
liabilities at the measurement date, either directly or indirectly. These
inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
markets that are less active, inputs other than quoted prices that are
observable for the asset or liability or corroborated by other observable
market data.
|
|
Level
3 – Unobservable inputs for assets or liabilities that are not able to be
corroborated by observable market data and reflect the use of a reporting
entity’s own assumptions. These values are
generally determined using pricing models for which the assumptions
utilize management’s estimates of market participant
assumptions.
|
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The fair
value hierarchy requires the use of observable market data when available. In
instances where inputs used to measure fair value fall into different levels of
the fair value hierarchy, the fair value measurement has been determined based
on the lowest level input that is significant to the fair value measurement in
its entirety. Our assessment of the significance of a particular item to the
fair value measurement in its entirety requires judgment, including the
consideration of inputs specific to the asset or liability.
The
following table sets forth our financial liabilities that were measured at fair
value on a recurring basis during first quarter 2009, including at April 25,
2009:
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
Fair
Value at April
25, 2009
|
|
|
Quoted
Prices in Active
Markets for Identical
Assets
|
|
|
Significant
Other Observable
Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ |
20,444 |
|
|
$ |
- |
|
|
$ |
20,444 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of these interest rate swaps as of April 25, 2009, was an
unrecognized loss of $20,444. The fair value of the Company’s
interest rate swaps is mainly based on observable interest rate yield curves for
similar instruments.
Non-Financial
Assets and Liabilities Measured at Fair Value on a Non-Recurring
Basis
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the assets and liabilities are not measured at fair value on an ongoing
basis but are subject to fair value adjustments in certain circumstances (e.g.,
when there is evidence of impairment). At April 25, 2009, the Company had no
significant non-financial assets or liabilities that had been adjusted to fair
value subsequent to initial recognition. A majority of the Company’s store
assets that were subject to impairment in connection with its store divestiture
plan had no remaining value and, as a result, were not subject to the fair value
disclosure requirements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
Long-term
debt consists of the following:
|
|
April
25, 2009
|
|
|
January
3, 2009
|
|
Revolving
facility at variable interest rates
|
|
|
|
|
|
|
(1.94%
and 4.81% at April 25, 2009 and January 3,
|
|
|
|
|
|
|
2009,
respectively) due October 2011
|
|
$ |
75,000 |
|
|
$ |
251,500 |
|
Term
loan at variable interest rates
|
|
|
|
|
|
|
|
|
(2.22%
and 3.02% at April 25, 2009 and January 3,
|
|
|
|
|
|
|
|
|
2009,
respectively) due October 2011
|
|
|
200,000 |
|
|
|
200,000 |
|
Other
|
|
|
5,104 |
|
|
|
4,664 |
|
|
|
|
280,104 |
|
|
|
456,164 |
|
Less:
Current portion of long-term debt
|
|
|
(1,094 |
) |
|
|
(1,003 |
) |
Long-term
debt, excluding current portion
|
|
$ |
279,010 |
|
|
$ |
455,161 |
|
Bank
Debt
The
Company has a $750,000 unsecured five-year revolving credit facility with the
Company’s wholly-owned subsidiary, Advance Stores Company, Incorporated, or
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 (up to a total commitment of
$1,000,000) 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. The revolving credit facility terminates
on October 5, 2011.
As of
April 25, 2009, the Company had $75,000 outstanding under
its revolving credit facility, and letters of credit outstanding of $89,179,
which reduced the availability under the revolving credit facility to $585,821.
(The letters of credit generally have a term of one year or less.) A commitment
fee is charged on the unused portion of the revolver, payable in arrears. The
current commitment fee rate is 0.150% per annum.
In
addition to the revolving credit facility, the Company has borrowed $200,000
under its unsecured four-year term loan as of April 25, 2009. The Company
entered into the term loan with Stores serving as borrower. The proceeds from
the term loan were used to repurchase shares of the Company's common stock
under its stock repurchase program during fiscal 2008. 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% 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
revolving credit facility, the interest rate and commitment fee are based on the
Company’s credit rating.
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 1.0% and 0.0% per annum for the adjusted
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
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 is based on the Company’s credit rating.
Other
As of
April 25, 2009, the Company had $5,104 outstanding under an economic development
note and other financing arrangements.
Guarantees
and Covenants
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 its ability 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 Company’s status as a holding
company. The Company is also required to comply with financial covenants with
respect to a maximum leverage ratio and a minimum consolidated coverage
ratio. The Company was in compliance with these covenants at
April 25, 2009 and January 3, 2009. The Company’s term loan and revolving credit
facility also provide for customary events of default, covenant defaults and
cross-defaults to its other material indebtedness.
The
following table presents changes in the Company’s warranty
reserves:
|
|
April
25,
2009
|
|
|
January
3,
2009
|
|
|
|
(16
weeks ended)
|
|
|
(53
weeks ended)
|
|
Warranty
reserve, beginning of period
|
|
$ |
28,662 |
|
|
$ |
17,757 |
|
Additions
to warranty reserves
|
|
|
10,431 |
|
|
|
38,459 |
|
Reserves
utilized
|
|
|
(9,092 |
) |
|
|
(27,554 |
) |
|
|
|
|
|
|
|
|
|
Warranty
reserve, end of period
|
|
$ |
30,001 |
|
|
$ |
28,662 |
|
11. |
Stock
Repurchase
Program:
|
During
the sixteen weeks ended April 25, 2009, no shares were repurchased. During
the sixteen weeks ended April 19, 2008, the Company repurchased 4,563 shares of
common stock at an aggregate cost of $155,350, or an average price of $34.04 per
share. Additionally, the Company settled $2,959 on shares repurchased prior to
the end of fiscal 2007. As of April 25, 2009, the Company has $188,911 remaining
under its $250 million stock repurchase program, excluding related
expenses.
The
Company computes earnings per share in accordance with SFAS No. 128, “Earnings
Per Share.” Basic earnings per share is computed by dividing net income
applicable to common shares by the weighted average number of shares of common
stock outstanding during the period. On January 4, 2009, the Company adopted FSP
EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
Securities”
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment awards are participating securities prior to vesting, and
therefore, need to be included in the earnings allocation when computing
earnings per share under the two-class method as described in SFAS No. 128. In
accordance with FSP EITF 03-6-1, unvested share-based payment awards that
contain non-forfeitable 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. Upon
adoption, all prior-period earnings per share data presented were adjusted
retrospectively with no material impact.
Certain
of the Company’s shares granted to employees in the form of restricted stock are
considered participating securities which require the use of the two-class
method for the computation of basic and diluted earnings per share. For the
sixteen week periods ended April 25, 2009 and April 19, 2008, earnings of $498
and $236, respectively, were allocated to the participating
securities.
Diluted
earnings per share of common stock reflects the weighted-average number of
shares of common stock outstanding (subject to the two class method effective
January 4, 2009), outstanding deferred stock units and the impact of outstanding
stock options, stock appreciation rights and certain of the Company’s restricted
stock (collectively “share-based awards”). Diluted earnings per share
is calculated by including the effect of dilutive securities. Share-based awards
to purchase approximately 2,655 and 5,415 shares of common stock that had an
exercise price in excess of the average market price of the common stock during
the sixteen week periods ended April 25, 2009 and April 19, 2008, respectively,
were not included in the calculation of diluted earnings per share because they
are anti-dilutive .
The
following table illustrates the computation of basic and diluted earnings per
share for the sixteen week periods ended April 25, 2009 and April 19, 2008,
respectively:
|
|
Sixteen
Weeks Ended
|
|
|
|
April
25,
|
|
|
April
19,
|
|
|
|
2009
|
|
|
2008
|
|
Numerator
|
|
|
|
|
|
|
Net
income applicable to common shares
|
|
$ |
93,585 |
|
|
$ |
82,086 |
|
Participating
securities' share in earnings
|
|
|
(498 |
) |
|
|
(236 |
) |
Net
income applicable to common shares
|
|
|
93,087 |
|
|
|
81,850 |
|
Denominator
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares
|
|
|
94,473 |
|
|
|
94,987 |
|
Dilutive
impact of share based awards
|
|
|
416 |
|
|
|
620 |
|
Diluted
weighted average common shares
|
|
|
94,889 |
|
|
|
95,607 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
|
|
|
|
|
|
|
Net
income applicable to common stockholders
|
|
$ |
0.99 |
|
|
$ |
0.86 |
|
Diluted
earnings per common share
|
|
|
|
|
|
|
|
|
Net
income applicable to common stockholders
|
|
$ |
0.98 |
|
|
$ |
0.86 |
|
The
Company provides certain health and life insurance benefits for eligible retired
Team Members through a postretirement plan, or 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 January 3, 2009 was 6.25%, and remained
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
unchanged
through the sixteen weeks ended April 25, 2009. The Company expects fiscal 2009
plan contributions to completely offset benefits paid, consistent with fiscal
2008.
The
Company’s net periodic postretirement benefit cost includes the amortization of
a reduction in unrecognized prior service costs as a result of plan amendment in
fiscal 2004. The components of net periodic postretirement benefit cost for the
sixteen weeks ended April 25, 2009, and April 19, 2008, respectively, are as
follows:
|
|
Sixteen
Weeks Ended
|
|
|
|
April
25,
|
|
|
April
19,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
140 |
|
|
$ |
153 |
|
Amortization
of negative prior service cost
|
|
|
(179 |
) |
|
|
(179 |
) |
Amortization
of unrecognized net gain
|
|
|
(29 |
) |
|
|
(4 |
) |
Net
periodic postretirement benefit cost
|
|
$ |
(68 |
) |
|
$ |
(30 |
) |
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 sixteen weeks ended April 25, 2009 and April 19, 2008 is as
follows:
|
|
Sixteen
Weeks Ended
|
|
|
|
April
25, 2009
|
|
|
April
19, 2008
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
93,585 |
|
|
$ |
82,086 |
|
Unrealized
gain (loss) on hedge
|
|
|
|
|
|
|
|
|
arrangements,
net of tax
|
|
|
932 |
|
|
|
(2,971 |
) |
Changes
in net unrecognized other
|
|
|
|
|
|
|
|
|
postretirement
benefit cost, net of tax
|
|
|
(127 |
) |
|
|
(111 |
) |
Comprehensive
income
|
|
$ |
94,390 |
|
|
$ |
79,004 |
|
15. |
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.
The AI
segment consists solely of the operations of Autopart International, which
operates as an independent, wholly-owned subsidiary. AI’s business serves the
growing commercial market in addition to warehouse distributors and jobbers
located throughout the Northeastern region of the United States.
The
Company evaluates each of its segment’s financial performance-based on net sales
and operating profit for purposes of allocating resources and assessing
performance. The accounting policies of the reportable segments
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Sixteen Week Periods Ended April
25, 2009 and April 19, 2008
(in
thousands, except per share data)
(unaudited)
are the
same as those described in the summary of significant accounting policies in
Note 1.
The
following table summarizes financial information for each of the Company's
business segments for the sixteen weeks ended April 25, 2009 and April 19, 2008,
respectively.
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
25,
|
|
|
April
19,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
|
|
|
|
|
AAP
|
|
$ |
1,627,817 |
|
|
$ |
1,481,498 |
|
AI
|
|
|
57,813 |
|
|
|
45,934 |
|
Eliminations
|
|
|
(1,994 |
) |
|
|
(1,300 |
) |
Total
net sales
|
|
$ |
1,683,636 |
|
|
$ |
1,526,132 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
148,508 |
|
|
$ |
132,094 |
|
AI
|
|
|
1,359 |
|
|
|
(113 |
) |
Total
income (loss) before provision (benefit) for
|
|
|
|
|
|
|
|
|
income
taxes
|
|
$ |
149,867 |
|
|
$ |
131,981 |
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
55,789 |
|
|
$ |
49,943 |
|
AI
|
|
|
493 |
|
|
|
(48 |
) |
Total
provision (benefit) for income taxes
|
|
$ |
56,282 |
|
|
$ |
49,895 |
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
|
|
|
|
|
|
|
AAP
|
|
$ |
2,833,437 |
|
|
$ |
2,717,154 |
|
AI
|
|
|
168,291 |
|
|
|
155,973 |
|
Total
segment assets
|
|
$ |
3,001,728 |
|
|
$ |
2,873,127 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes to those statements that appear
elsewhere in this report. Our first quarter consists of 16 weeks divided into
four equal periods. Our remaining three quarters consist of 12 weeks with each
quarter divided into three equal periods. Fiscal 2008 was an exception to this
rule with the fourth quarter containing 13 weeks due to our 53-week fiscal
year.
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. Forward-looking statements are usually identified by the
use of words such as "anticipate," "believe," "could," "estimate," "expect,"
"forecast," "intend," "likely," "may," "plan," "position," "possible,"
"potential," "probable," "project," "projection," "should," "strategy," "will,"
or similar expressions. We intend for any forward-looking statements to be
covered by, and we claim the protection under, the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
These
forward-looking statements are based upon assessments and assumptions of
management in light of historical results and trends, current conditions and
potential future developments that often involve judgment, estimates,
assumptions and projections. Forward-looking statements reflect current views
about our plans, strategies and prospects, which are based on information
currently available.
Although
we believe that our plans, intentions and expectations as reflected in or
suggested by any forward-looking statements are reasonable, we do not guarantee
or give assurance that such plans, intentions or expectations will be
achieved. Actual results may differ materially from our anticipated
results described or implied in our forward-looking statements, and such
differences may be due to a variety of factors. Our business could also be
affected by additional factors that are presently unknown to us or that we
currently believe to be immaterial to our business.
Listed
below and discussed in our Annual Report on Form 10-K for the year ended January
3, 2009 (filed with the SEC on March 4, 2009), or 2008 Form 10-K, are some
important risks, uncertainties and contingencies which could cause our actual
results, performance or achievements to be materially different from any
forward-looking statements made or implied in this report. These include, but
are not limited to, the following:
● |
|
a
decrease in demand for our products;
|
● |
|
deterioration
in general economic conditions, including unemployment, inflation,
consumer debt levels, energy costs and unavailability of credit leading to
reduced consumer spending on discretionary items;
|
● |
|
our
ability to develop and implement business strategies and achieve desired
goals;
|
● |
|
our
ability to expand our business, including locating available and suitable
real estate for new store locations and the integration of any acquired
businesses;
|
● |
|
competitive
pricing and other competitive pressures;
|
● |
|
our
overall credit rating, which impacts our debt interest rate and our
ability to borrow additional funds to finance our
operations;
|
● |
|
deteriorating
and uncertain credit markets could negatively impact our merchandise
vendors, as well as our ability to secure additional capital at favorable
(or at least feasible) terms in the future;
|
● |
|
bankruptcies
of auto manufacturers, which will likely have an impact on the
operations and cash flows of our auto parts suppliers;
|
● |
|
our
relationships with our vendors;
|
● |
|
our
ability to attract and retain qualified Team Members;
|
● |
|
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 and other
losses;
|
● |
|
high
fuel costs, which impacts our cost to operate and the consumer’s ability
to shop in our stores;
|
● |
|
regulatory
and legal risks, such as environmental or OSHA risks, including being
named as a defendant in administrative investigations or litigation, and
the incurrence of legal fees and costs, the payment of fines or the
payment of sums to settle litigation cases or administrative
investigations or proceedings;
|
● |
|
adherence
to the restrictions and covenants imposed under our revolving and term
loan facilities; and
|
● |
|
|
We assume
no obligations 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, or SEC, and you
should not place undue reliance on those statements.
Introduction
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 currently are the second
largest specialty retailer of automotive parts, accessories and maintenance
items to "do-it-yourself," or DIY, and Commercial customers in the United
States, based on store count and sales. At April 25, 2009, we
operated a total of 3,405 stores.
We
operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart
International, Inc., or AI. The AAP segment is comprised of our store
operations within the United States, Puerto Rico and the Virgin Islands which
operate under the trade names “Advance Auto Parts,” “Advance Discount Auto
Parts” and “Western Auto.” At April 25, 2009, we operated 3,270 stores in the
AAP segment, of which 3,242 stores operated under the trade names “Advance Auto
Parts” and “Advance Discount Auto Parts” throughout 40 states in the
Northeastern, Southeastern and Midwestern regions of the United States. These
stores offer automotive replacement parts, accessories and maintenance
items. In addition, we operated 28 stores offshore under the “Western
Auto” and “Advance Auto Parts” trade names, located in Puerto Rico and the
Virgin Islands.
The AI
segment consists solely of the operations of AI, which operates as an
independent, wholly-owned subsidiary. AI’s business primarily serves the
Commercial market from its store locations. In addition, its North American
Sales Division services warehouse distributors and jobbers throughout North
America. At April 25, 2009, we operated 135 stores in the AI segment under the
“Autopart International” trade name. For additional information regarding our
segments, see Note 15, Segments and Related
Information, of the Notes to Condensed Consolidated Financial Statements
in this Quarterly Report on Form 10-Q.
Management
Overview
During
our first quarter of fiscal 2009, we experienced better than expected financial
results primarily due to significant top-line sales growth resulting in earnings
per diluted share of $0.98 compared to $0.86 during first quarter last year. Our
earnings per diluted share of $0.98 included the impact of a $0.04 charge
related to expenses associated with our store divestiture plan. We also
continued to make strategic investments in our four key turnaround strategies
and paid down a significant portion of our bank debt.
Change
in Accounting Principle
Effective
January 4, 2009, we made a change in accounting principle for freight and other
handling costs associated with transferring merchandise from Local Area
Warehouses, or LAWs, and Parts Delivered Quickly warehouses, or PDQs, to our
retail stores from recording such costs as selling, general and administrative
expenses, or SG&A, to recording such costs in cost of sales. This
change, which had no impact to operating income or cash flows, more accurately
reflects the nature of the expense.
We have
retrospectively adjusted all comparable periods related to cost of sales and
SG&A. The net adjustment increasing cost of sales and decreasing SG&A
for the quarter ended April 25, 2009 and April 19, 2008
was $18.8
million and $18.6 million, respectively. As a result of the adjustment,
gross profit, as percentage of sales, decreased from 49.9% to 48.8% and from
48.7% to 47.5% for the quarters ended April 25, 2009 and April 19, 2008,
respectively. In addition, SG&A, as a percentage of sales,
decreased from 40.6% to 39.5% and from 39.3% to 38.0% for the quarters ended
April 25, 2009 and April 19, 2008, respectively. For additional information
regarding this change, see Note 2, Change in Accounting
Principle, of the Notes to Condensed Consolidated Financial Statements in
this Quarterly Report on Form 10-Q.
First
Quarter Highlights
Highlights
from our first quarter fiscal 2009 include:
● |
|
Total
sales during the first quarter increased 10.3% to $1.68 billion as
compared to the first quarter of fiscal 2008, driven by a comparable store
sales increase of 8.2% and sales from the net addition of 114 new stores
in the past twelve months. Our total comparable sales increase was
comprised of an increase in Commercial sales of 17.5% and DIY sales of
4.4%.
|
|
|
|
● |
|
Our
gross profit rate increased 133 basis points as compared to the first
quarter of fiscal 2008 primarily due to more effective pricing and better
store execution.
|
|
|
|
● |
|
Our
SG&A rate increased 142 basis points as compared to the first quarter
of fiscal 2008 and was driven primarily by higher incentive compensation,
store divesture expenses and continued strategic capability investments to
improve our gross profit rate and accelerate the Commercial business as
well as other benefits we expect to realize over a longer
term.
|
|
|
|
● |
|
We
generated operating cash flow of $292.7 million during the first quarter,
an increase of 37% over the comparable period in fiscal 2008, which was
primarily driven by higher earnings and a decrease in working capital. We
used available operating cash to pay down $176.5 million of outstanding
debt on our revolving credit facility.
|
|
|
|
● |
|
We
identified 36 stores to close, four of which closed by April 25, 2009, as
part of our store divesture plan announced earlier in the year. For fiscal
2009, we currently expect to divest a total of approximately 40 to 55
stores that are strategically or financially delivering unacceptable
results in addition to our normal annual store closings. During
the sixteen weeks ended April 25, 2009, we recognized expense of $5.8
million comprised of asset impairments and closed store exit costs in
connection with the divestiture plan. Currently, we anticipate recognizing
expenses of approximately $0.15 to $0.22 per diluted share for the
entire year in connection with the closure of stores under the store
divestiture plan. The majority of this expense is related to the estimated
remaining lease obligations at the time of the anticipated
closures.
|
Update
on Turnaround Strategies
We
continue to make significant investments in each of our key turnaround
strategies with the ultimate focus on the customer and growth in our business.
Although we realize our business is benefiting from the current economic crisis
to some degree, we believe we are also experiencing improved results from the
investments we have made over the last year. Updates from each of our four
turnaround strategies are provided below.
Ø
|
Commercial
Acceleration
|
We
experienced a 17.5% Commercial comparable store sales increase during the first
quarter, our fifth consecutive quarter of double-digit growth. We believe our
consistent growth in Commercial sales and market share is being driven in part
by the investments we have made over the last year and continue to make under
our Commercial Acceleration strategy. Specifically, our Commercial
business has benefitted from the added parts and key brands, more parts
professionals and an increase in delivery trucks and drivers. We continue to
build a sales
force
with a focus on driving sales, including account managers who can reach
commercial opportunities through either acquiring new commercial customers or
increasing our share of existing customers’ purchases.
Our first
quarter DIY comparable sales increase of 4.4% marks our first positive increase
in twelve quarters. Positive comparable sales results were reported throughout a
majority of our store chain. It is evident that our industry has realized
improved DIY results during the first few months of 2009 from increased customer
traffic as consumers are saving money by maintaining their existing vehicles
rather than replacing them. We also have industry data that indicate we slightly
increased our DIY market share during the first quarter. We believe
we can continue to increase DIY sales through parts availability and customer
service initiatives focused on converting customer needs to sales.
From a
long-term perspective, we are striving to transform our DIY business into a
sustainable opportunity regardless of the variability in the economy. We
continue to build a capability that is best-in-class at understanding, managing
and optimizing the experience of our customers. Through our DIY transformation,
we intend to make Advance Auto Parts a distinctive and differentiated brand.
Finally, we will utilize actionable insights from customer feedback in achieving
this transformation as well as achieving more consistent company-wide execution
through utilizing various Team Member initiatives under our Superior Experience
strategy.
Our
ability to achieve successful results in our Commercial Acceleration and DIY
Transformation strategies is also dependent on our Availability Excellence and
Superior Experience strategies.
Ø
|
Availability
Excellence
|
Our
Availability Excellence strategy represents our commitment to enhance the
breadth and depth of our parts availability in our stores, and the speed of our parts
delivery, to better
serve both our Commercial and DIY customers. We
believe our Commerical and DIY sales results during the first quarter are
partially due to the expanded product availability and custom mix initiatives
rolled out over the last year. More recently, we have added two PDQ’s and 21
LAW’s to provide a wider assortment of parts for our customers.
As
disclosed in our Form 10-K for the year ended January 3, 2009, we reviewed
our inventory productivity and changed our inventory management approach for
slow moving inventory. This change was intended to increase our inventory
productivity by reducing the amount of slow moving inventory and utilizing
vendor return privileges earlier in the life-cycle of our inventory which will
allow us to add faster moving custom mix inventory. During our first quarter, we
disposed of approximately $6.5 million of the $37.5 million of inventory
identified and reserved in fiscal 2008 and will continue to dispose of the
remainder throughout fiscal 2009. We continue to manage our inventory
productivity by removing unproductive inventory from our store assortments
through utilizing markdown strategies and our vendor return privileges. We
expect to more effectively manage the growth in our inventory as compared to our
sales growth. As of April 25, 2009, our inventory increased 3.9% over
the ending balance from first quarter last year as compared to our sales growth
of 10.3% during the first quarter. Excluding the impact of the inventory
write-down, our inventory increased 5.8%.
We have
also made progress in pricing and merchandising initiatives to improve gross
margin. Our gross margin for the first quarter increased 133 basis points over
the first quarter of last year. We are currently on track to
implement a core merchandising system during the second half of fiscal 2009 and
2010 which we expect to help drive improved product category performance.
Finally, we opened our Asia sourcing operation during the first quarter. We
expect this direct importing program will provide for gross margin improvement
and allow us to more quickly source products that our customers want and
need.
Superior
Experience is centered around our store operations and providing superior
customer service. We have begun to evaluate our customer service through the
measurement of Team Member engagement and customer satisfaction. We believe we
will gain valuable information from these results which will drive improvement
in our results in future quarters. We are also implementing various changes to
improve store execution including the use of
peer
groups and changes in our incentive programs. We believe these initiatives will
result in an improved level of proficiency and consistency in our store
operations, better customer service and a higher level of
profitability.
Industry
Challenging
macroeconomic conditions continue with the unemployment rate at a 25-year high
and consumer confidence near an all-time low. However, the automotive
aftermarket industry will likely have an opportunity to benefit from the
economic downturn because consumers are keeping their vehicles longer, which in
turn increases the average age of vehicles and the need to repair and complete
routine maintenance on those vehicles. Additionally, reductions in total miles
driven over the last six quarters are likely to be short-term with miles driven
increasing in the long-term due to the increasing number of vehicles on the
road. Recent financial results from automotive aftermarket retailers suggest
that the entire industry is benefiting from the economic downturn particularly
in the DIY business.
We are
pleased with out first quarter results but recognize that we are still in the
early stages of implementing our four key turnaround strategies. We are
committed to making the necessary investments to help ensure our long-term
success.
Consolidated
Operating Results and Key Statistics and Metrics
The
following table highlights certain consolidated operating results and key
statistics and metrics for the sixteen weeks ended April 25, 2009, fiscal 2008
quarters and fiscal years ended January 3, 2009 and December 29, 2007. We will
use these key statistics and metrics to measure the financial progress of our
turnaround strategies.
|
|
Q1
2009
|
|
Q4
2008 (1)
|
|
Q3
2008
|
|
Q2
2008
|
|
Q1
2008
|
|
FY
2008
(1)
|
|
FY
2007
|
Operating Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales (in
000s)
|
|
$1,683,636
|
|
$1,192,388
|
|
$1,187,952
|
|
$1,235,783
|
|
$1,526,132
|
|
$5,142,255
|
|
$4,844,404
|
Total
commercial net sales (in
000s)
|
|
$ 529,416
|
|
$ 359,784
|
|
$ 359,420
|
|
$ 357,495
|
|
$ 438,672
|
|
$1,515,371
|
|
$1,290,602
|
Comparable
store net sales growth (2)
|
|
8.2%
|
|
3.0%
|
|
(0.1%)
|
|
2.9%
|
|
0.6%
|
|
1.5%
|
|
0.7%
|
DIY
comparable store net sales growth (2)
|
|
4.4%
|
|
(1.1%)
|
|
(4.1%)
|
|
(0.8%)
|
|
(3.0%)
|
|
(2.3%)
|
|
(1.1%)
|
Commercial
comparable store net sales growth (2)
|
|
17.5%
|
|
13.7%
|
|
10.8%
|
|
13.5%
|
|
10.6%
|
|
12.1%
|
|
6.2%
|
Gross
profit (3)(4)
|
|
48.8%
|
|
44.1%
|
|
47.3%
|
|
47.4%
|
|
47.5%
|
|
46.7%
|
|
46.6%
|
SG&A
(3)
|
|
39.5%
|
|
40.2%
|
|
39.3%
|
|
37.1%
|
|
38.0%
|
|
38.6%
|
|
38.0%
|
Operating
profit (5)
|
|
9.4%
|
|
3.9%
|
|
8.1%
|
|
10.4%
|
|
9.5%
|
|
8.1%
|
|
8.6%
|
Diluted
earnings per share (6)
|
|
$ 0.98
|
|
$ 0.26
|
|
$ 0.59
|
|
$ 0.79
|
|
$ 0.86
|
|
$ 2.50
|
|
$ 2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Statistics and Metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores, end of period
|
|
3,405
|
|
3,368
|
|
3,352
|
|
3,325
|
|
3,291
|
|
3,368
|
|
3,261
|
Total
store square footage, end of period (in
000s)
|
|
24,918
|
|
24,711
|
|
24,627
|
|
24,431
|
|
24,212
|
|
24,711
|
|
23,982
|
Total
Team Members, end of period
|
|
49,265
|
|
47,853
|
|
47,886
|
|
47,050
|
|
45,174
|
|
47,582
|
|
44,141
|
Average
net sales per square foot (7)(8)
|
|
$ 212
|
|
$ 211
|
|
$ 207
|
|
$ 207
|
|
$ 207
|
|
$ 211
|
|
$ 207
|
Operating
income per Team Member (in 000s) (7)(9)
|
|
$ 9.07
|
|
$ 9.02
|
|
$ 9.25
|
|
$ 9.42
|
|
$ 9.45
|
|
$ 9.02
|
|
$ 9.40
|
SG&A
expenses per store (in
000s)
(3)(7)(10)
|
|
$ 618
|
|
$ 599
|
|
$ 584
|
|
$ 582
|
|
$ 580
|
|
$ 599
|
|
$ 581
|
Gross
margin return on inventory (3)(7)(11)
|
|
$ 3.71
|
|
$ 3.47
|
|
$ 3.46
|
|
$ 3.54
|
|
$ 3.42
|
|
$ 3.47
|
|
$ 3.29
|
(1)
|
Our
fourth quarter of fiscal year 2008 and fiscal year 2008 included 13 weeks
and 53 weeks, respectively.
|
(2)
|
Comparable
store sales is calculated based on the change in net sales starting once a
store has been open for 13 complete accounting periods (each period
represents four weeks). Relocations are included in comparable store sales
from the original date of opening. Four quarter 2008 and fiscal 2008
comparable store sales exclude sales from the 13th
week and 53rd
week, respectively.
|
(3)
|
Effective
first quarter 2009, the Company implemented a change in accounting
principle for costs included in inventory. Accordingly, the Company has
retrospectively applied the change in accounting principle to all prior
periods presented herein related to cost of sales and
SG&A.
|
(4)
|
Excluding
the gross profit impact of the 53rd
week of fiscal 2008 of approximately $44.1 million and a
$37.5
|
|
million
non-cash obsolete inventory write-down in the fourth quarter of fiscal
2008, gross profit was 47.0% and 47.3% for the fourth quarter and fiscal
year of 2008, respectively.
|
(5)
|
Excluding
the operating income impact of the 53rd week
of fiscal 2008 of approximately $15.8 million and a $37.5 million non-cash
obsolete inventory write-down in the fourth quarter of fiscal 2008,
operating profit was 6.2% and 8.6% for the fourth quarter and fiscal year
of 2008, respectively.
|
(6)
|
Excluding
the net income impact of the 53rd
week of fiscal 2008 of approximately $9.6 million and a $23.7 million
non-cash obsolete inventory write-down in the fourth quarter of fiscal
2008, diluted earnings per share was $0.41 and $2.65 for the fourth
quarter and fiscal year of 2008,
respectively.
|
(7)
|
These
financial metrics presented for each quarter are calculated on an annual
basis and accordingly reflect the last four fiscal quarters
completed.
|
(8)
|
Average
net sales per square foot is calculated as net sales divided by the
average of the beginning and ending total store square footage for the
respective period. Excluding the net sales impact of the 53rd
week of fiscal 2008 of approximately $89.0 million, average net sales per
square foot in the first quarter of fiscal 2009 and fourth quarter and
fiscal year of 2008 were $212 and $208,
respectively.
|
(9)
|
Operating
income per Team Member is calculated as operating income divided by an
average of beginning and ending number of team members. Operating income
per team member in the first quarter of fiscal 2009 was $9.65 excluding
the impact of store divestitures for the first quarter of fiscal 2009 of
approximately $5.8 million, impact of the 53rd
week of fiscal 2008 and inventory write-down in fiscal 2008. Operating
income per Team Member for the fourth quarter and fiscal year of 2008 was
$9.49 excluding the impact of the 53rd
week of fiscal 2008 and inventory write-down in fiscal
2008.
|
(10)
|
SG&A
per store is calculated as total SG&A divided by the average of
beginning and ending store count. SG&A expenses per store in first
quarter fiscal 2009 were $607 excluding the impact of store divestitures
for the first quarter of fiscal 2009 of approximately $5.8 million and
impact of the 53rd
week of fiscal 2008 of approximately $28.4 million. SG&A expenses per
store for the fourth quarter and fiscal year of 2008 were $590 excluding
the impact of the 53rd
week of fiscal 2008 of approximately $28.4
million.
|
(11)
|
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. Excluding the impact of the 53rd
week of fiscal 2008 and inventory write-down in the fourth quarter of
fiscal 2008, gross margin return on inventory in first quarter fiscal 2009
and fourth quarter and fiscal year of 2008 was $3.60 and
$3.37.
|
Store
Development by Segment
AAP
Segment
At April
25, 2009, we operated 3,270 AAP stores within the United States, Puerto Rico and
the Virgin Islands. We operated 3,242 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 28 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 sixteen
weeks ended April 25, 2009, 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 81% of our AAP
stores.
|
|
Sixteen
|
|
|
|
Weeks
Ended
|
|
|
|
April
25, 2009
|
|
Number
of stores, beginning of period
|
|
|
3,243 |
|
New
stores
|
|
|
35 |
|
Closed
stores
|
|
|
(8 |
) |
Number
of stores, end of period
|
|
|
3,270 |
|
Relocated
stores
|
|
|
2 |
|
Stores
with commercial programs
|
|
|
2,790 |
|
AI
Segment
At April
25, 2009, we operated 135 AI 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 sixteen weeks ended April 25, 2009. We
lease 100% of our AI stores.
|
|
Sixteen
|
|
|
|
Weeks
Ended
|
|
|
|
April
25, 2009
|
|
Number
of stores, beginning of period
|
|
|
125 |
|
New
stores
|
|
|
11 |
|
Closed
stores
|
|
|
(1 |
) |
Number
of stores, end of period
|
|
|
135 |
|
Relocated
stores
|
|
|
1 |
|
Stores
with commercial programs
|
|
|
135 |
|
As
previously disclosed in our 2008 Form 10-K, we anticipate that we will add a
total of approximately 75 AAP and 30 AI stores during 2009 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 materially from these estimates. During
the sixteen weeks ended April 25, 2009, we consistently applied the critical
accounting policies discussed in our 2008 Form 10-K. For a complete discussion
regarding these critical accounting policies, refer to the 2008 Form
10-K.
Components
of Statement of Operations
Net
Sales
Net sales
consist primarily of merchandise sales from our retail store locations to both
our DIY and Commercial customers. Our total sales growth is comprised of both
comparable store sales and new store sales. We calculate comparable store sales
based on the change in store sales starting once a store has been opened for 13
complete accounting periods (approximately one year). We include sales from
relocated stores in comparable store sales from the original date of opening.
The comparable periods have been adjusted accordingly. Fiscal 2008 comparable
store sales exclude the effect of the 53rd
week.
Cost
of Sales
Our cost
of sales consists of merchandise costs, net of incentives under vendor programs;
inventory shrinkage, defective merchandise and warranty costs; and warehouse and
distribution expenses. Gross profit as a percentage of net sales may be affected
by (i) variations in our product mix, (ii) price changes in response to
competitive factors and fluctuations in merchandise costs, (iii) vendor
programs, (iv) inventory shrinkage, (v) defective merchandise and warranty costs
and (v) warehouse and distribution costs. We seek to minimize
fluctuations
in merchandise costs and instability of supply by entering into long-term
purchasing agreements, without minimum purchase volume requirements, 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 to our condensed consolidated financial statements elsewhere in this report
for additional discussion of these costs and Note 2 for additional discussion of
a change in accounting principle for freight and other handling costs associated
with transferring merchandise from LAWs and PDQs to our retail stores from
recording such costs as SG&A to recording such costs in cost of
sales.
Selling,
General and Administrative Expenses
SG&A
consists 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
expenses, self-insurance costs and other related expenses. See Note 1 to our
consolidated financial statements for additional discussion of these costs and
Note 2 for additional discussion of a change in accounting
principle.
Results
of Operations
The
following table sets forth certain of our operating data expressed as a
percentage of net sales for the periods indicated.
|
|
Sixteen
Week Periods Ended
|
|
|
|
(unaudited)
|
|
|
|
April
25,
|
|
|
April
19,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
Cost
of sales, including purchasing and
|
|
|
|
|
|
|
|
|
warehousing
costs
|
|
|
51.2 |
|
|
|
52.5 |
|
Gross
profit
|
|
|
48.8 |
|
|
|
47.5 |
|
Selling,
general and administrative expenses
|
|
|
39.5 |
|
|
|
38.0 |
|
Operating
income
|
|
|
9.4 |
|
|
|
9.5 |
|
Interest
expense
|
|
|
(0.5 |
) |
|
|
(0.8 |
) |
Other
(loss) income, net
|
|
|
(0.0 |
) |
|
|
0.0 |
|
Provision
for income taxes
|
|
|
3.3 |
|
|
|
3.3 |
|
Net
income
|
|
|
5.6
|
% |
|
|
5.4
|
% |
Sixteen
Weeks Ended April 25, 2009 Compared to Sixteen Weeks Ended April 19,
2008
Net sales
for the sixteen weeks ended April 25, 2009 were $1,683.6 million, an
increase of $157.5 million, or 10.3%, as compared to net sales for the
sixteen weeks ended April 19, 2008. The net sales increase was due to an
increase in comparable store sales of 8.2% and sales from the 114 net new AAP
and AI stores opened within the last four quarters. The impact of the
calendar shift as a result of the 53rd week in
fiscal 2008 added approximately 1% to our total comparable sales increase for
the first quarter.
AAP
produced net sales of $1,627.8 million, an increase of $146.3 million, or 9.9%,
as compared to net sales for the sixteen weeks ended April 19, 2008. AAP’s net
sales increase was primarily driven by an 8.1% comparable store sales increase
and sales from the 91 net new stores opened within the last four quarters. The
AAP comparable store sales increase was driven by an increase in average ticket
sales and overall customer traffic. AI produced net sales of $57.8 million, an
increase of $11.9 million, or 25.9%, as compared to net sales for the sixteen
weeks
ended April 19, 2008. AI’s sales increase was primarily driven by a 10.6%
comparable store sales increase and sales from 23 net new stores opened within
the last four quarters.
Gross
profit for the sixteen weeks ended April 25, 2009 was $822.0 million, or 48.8%
of net sales, as compared to $724.9 million, or 47.5% of net sales, for the
sixteen weeks ended April 19, 2008, or an increase of 133 basis points. The
increase in gross profit as a percentage of net sales was primarily driven by
more effective pricing and better store execution. We believe we are beginning
to realize benefits from the investments we have made over the past year and
quarter in terms of both our Commercial and DIY pricing and merchandising
capabilities. We believe our improved store execution is a result of a new
incentive structure with a more focused emphasis on driving sales growth and
gross margin improvement.
SG&A
increased to $664.4 million, or 39.5% of net sales, for the sixteen weeks ended
April 25, 2009, from $580.6 million, or 38.0% of net sales, for the sixteen
weeks ended April 19, 2008, or an increase of 142 basis points. The increase in
SG&A as a percentage of sales was primarily due to:
● |
|
higher
incentive compensation driven by a structural change we made to our
incentive program for 2009 which is now based on growth rather than a
fixed budget;
|
● |
|
store
divesture expenses associated with our store divestiture plan, including
impairment on store assets and closed store exit costs;
and
|
● |
|
continued
strategic capability investments, some of which are beginning to result in
benefits such as improvement in the Company’s gross profit rate
and growth in Commercial sales, whereas some of the expected benefits will
be realized longer
term.
|
These
increases were partially offset by occupancy and advertising expense leverage as
a result of the Company’s 8.2% comparable store sales increase.
Operating
income for the sixteen weeks ended April 25, 2009 was $157.6 million, or 9.4% of
net sales, as compared to $144.3 million, or 9.5% of net sales, for the sixteen
weeks ended April 19, 2008, or a decrease of 9 basis points. This decrease in
operating income, as a percentage of net sales, reflected higher selling,
general and administrative expenses as previously discussed partially offset by
an increase in gross profit. AAP produced operating income of $156.3 million, or
9.6% of net sales, for the sixteen weeks ended April 25, 2009 as compared to
$144.4 million, or 9.7% of net sales, for the sixteen weeks ended April 19,
2008. AI generated operating income of $1.3 million for the sixteen weeks ended
April 25, 2009 as compared to an operating loss of $0.1 million for the
comparable period last year. AI’s operating income increased primarily due to
the positive sales results during the quarter and a decrease in payroll expense
as a percentage of sales.
Interest
expense for the sixteen weeks ended April 25, 2009 was $7.6 million, or 0.5% of
net sales, as compared to $12.3 million, or 0.8% of net sales, for the sixteen
weeks ended April 19, 2008. The decrease in interest expense as a percentage of
sales is a primarily a result of lower outstanding borrowings as well as lower
average borrowing rates during the sixteen weeks ended April 25, 2009 compared
to the same period ended April 19, 2008.
Income
tax expense for the sixteen weeks ended April 25, 2009 was $56.3 million, as
compared to $49.9 million for the sixteen weeks ended April 19, 2008. Our
effective income tax rate was 37.6% for the sixteen weeks ended April 25, 2009
compared to 37.8% for the same period ended April 19, 2008.
We
generated net income of $93.6 million, or $0.98 per diluted share, for the
sixteen weeks ended April 25, 2009, as compared to $82.1 million, or $0.86 per
diluted share, for the sixteen weeks ended April 19, 2008. As a percentage of
net sales, net income for the sixteen weeks ended April 25, 2009 was 5.6%, as
compared to 5.4% for the sixteen weeks ended April 19, 2008. The increase in
diluted earnings per share was primarily due to growth in our operating
income.
Liquidity
and Capital Resources
Overview
Our
primary cash requirements to maintain our current operations include payroll and
benefits, the purchase of inventory, contractual obligations and capital
expenditures as well as the payment of quarterly cash dividends. In addition, we
have used available funds to repay borrowings under our revolving credit
facility and periodically repurchase shares of common stock under our stock
repurchase program. We have funded these requirements primarily through cash
generated from operations, supplemented by borrowings under our credit
facilities as needed. 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 fiscal
year.
At April
25, 2009, our cash and cash equivalents balance was $50.9 million, an increase
of $13.5 million compared to January 3, 2009. This increase resulted from
additional cash flow from operating activities (including higher earnings and
reduction in working capital) and proceeds from common stock, partially offset
by capital expenditures and the repayment of debt. Additional discussion of our
cash flow results is set forth in the Analysis of Cash Flows
section.
Our
outstanding indebtedness was $176.1 million lower at April 25, 2009 when
compared to January 3, 2009 and consisted of borrowings of $75.0 million under
our revolving credit facility, $200.0 million under our term loan, $3.8 million
outstanding on an economic development note and $1.3 outstanding under other
financing arrangements. Additionally, we had $89.2 million in letters of credit
outstanding, which reduced our total availability under the revolving credit
facility to $585.8 million. The letters of credit serve as collateral for our
self-insurance policies and routine purchases of imported
merchandise.
In light
of the uncertainty in the credit markets, it is possible that one or more of the
banks in our revolving credit facility syndicate may be unable to provide our
remaining available credit. We have 15 lenders participating in our revolving
credit facility, each with a commitment of not more than 15% of the total $750
million commitment. All of these lenders have met their contractual funding
commitments to us through April 25, 2009. An inability to obtain sufficient
financing at cost-effective rates could have a materially adverse impact on our
business, financial condition, results of operations and cash
flows.
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, maintenance of existing stores, the construction and upgrading of
distribution centers, and the development of proprietary information systems and
purchased information systems. Our capital expenditures were $50.2 million for
the sixteen weeks ended April 25, 2009, or $8.6 million less than the comparable
period of fiscal 2008 due primarily to timing in store development. During the
sixteen weeks ended April 25, 2009, we opened 46 stores, relocated 3 stores and
remodeled 2 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 investments
we make in information technology and supply chain networks. As previously
disclosed in our 2008 Form 10-K, we anticipate adding 75 new AAP and 30 new
AI stores during fiscal 2009.
We also
plan to make continued investments in the maintenance of our existing stores and
supply chain network as well as investing in new information systems to support
our turnaround strategies, including the implementation of a merchandising
system over a multi-year timeframe. As previously disclosed in our 2008 Form
10-K, we anticipate that our capital expenditures will be approximately $180.0
million to $200.0 million during fiscal 2009.
Vendor
Financing Program
Historically,
we have negotiated extended payment terms from suppliers that help finance
inventory growth. 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
further reduce our working capital invested in current inventory levels and
finance future inventory growth. At April 25, 2009 and January 3, 2009, $95.2
million and $136.4 million, respectively, was payable to the bank by us under
this program.
We are
anticipating the balance in financed vendor accounts payable to diminish as we
transition our merchandise vendors to customer-managed services arrangements, or
vendor program. As of April 25, 2009, we had approximately $56 million in
outstanding payables under our vendor program. It is possible that
any ongoing or worsening deterioration in the credit markets could adversely
impact funding for this program, which would reduce our anticipated
savings, including but not limited to, causing us to increase our borrowings
under our revolving credit facility.
Stock
Repurchase Program
As of
April 25, 2009, the stock repurchase program had $188.9 million remaining,
excluding related expenses.
Dividend
During
the sixteen weeks ended April 25, 2009, we paid $11.4 million in quarterly cash
dividends, $5.7 million of which was declared during our first quarter of fiscal
2009. Subsequent to April 25, 2009, our Board of Directors declared a quarterly
dividend of $0.06 per share to be paid on July 10, 2009 to all common
stockholders of record as of June 26, 2009.
Analysis
of Cash Flows
A summary
and analysis of our cash flows for the sixteen week period ended April 25, 2009
as compared to the sixteen week period ended April 19, 2008 is included
below.
|
|
Sixteen
Week Periods Ended
|
|
|
|
April
25, 2009
|
|
|
April
19, 2008
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
$ |
292.7 |
|
|
$ |
213.6 |
|
Cash
flows from investing activities
|
|
|
(50.1 |
) |
|
|
(56.5 |
) |
Cash
flows from financing activities
|
|
|
(229.1 |
) |
|
|
(152.6 |
) |
Net
increase in cash and
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
$ |
13.5 |
|
|
$ |
4.5 |
|
Operating
Activities
For the
sixteen weeks ended April 25, 2009, net cash provided by operating activities
increased $79.1 million to $292.7 million, as compared to the sixteen weeks
ended April 19, 2008. This net increase in operating cash was driven primarily
by:
● |
|
an
increase in net income of $11.5 million during the sixteen weeks ended
April 25, 2009 as compared to the comparable period in
2008;
|
● |
|
a
$37.2 million increase in cash flows from inventory, net of accounts
payable, reflective of our slow down in inventory growth combined with the
addition of vendors to our new vendor program;
and
|
● |
|
an
overall decrease in other working
capital.
|
The net
increase was partially offset by a $7.6 million increase in net losses
on property and equipment, which primarily reflects $4.3 million of
impairment in connection with the store divestiture plan.
Investing
Activities
For the
sixteen weeks ended April 25, 2009, net cash used in investing activities
decreased by $6.4 million to $50.1 million, as compared to the sixteen weeks
ended April 19, 2008. The decrease in cash used was due primarily to timing in
store development.
Financing
Activities
For the
sixteen weeks ended April 25, 2009, net cash used in financing activities
increased by $76.5 million to $229.1 million, as compared to the sixteen weeks
ended April 19, 2008.
Cash
flows from financing activities increased primarily as result of:
● |
|
a
decrease of $158.3 million in repurchases of common stock under our stock
repurchase program during the sixteen weeks ended April 19,
2008;
|
● |
|
a
$15.5 million cash inflow resulting from the timing of bank overdrafts;
and
|
● |
|
an
$8.6 million increase from the issuance of common stock, resulting from an
increase in the exercise of stock
options.
|
Cash
flows from financing activities decreased primarily as result of:
● |
|
a
$224.9 million reduction in net borrowings, primarily under our revolving
credit facility; and
|
● |
|
a
$34.6 million decrease in financed vendor accounts payable driven by the
transition of our vendors from our vendor financing program to our new
vendor
program.
|
Off-Balance-Sheet
Arrangements
As of
April 25, 2009, 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
April 25, 2009, there were no material changes to our outstanding contractual
obligations other than the reduction in our long-term debt. For
information regarding our contractual obligations see “Contractual Obligations”
in our 2008 Form 10-K.
Long
Term Debt
We have a
$750 million unsecured five-year revolving credit facility with Advance Stores
Company, Incorporated, or 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
request, subject to agreement by one or more lenders, that the total revolving
commitment be increased by an amount not exceeding $250 million (up to a total
commitment of $1 billion) 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. The revolving credit facility
terminates on October 5, 2011.
In
addition to the revolving credit facility, we have outstanding a $200 million
unsecured four-year term loan with Stores serving as borrower. The proceeds
from this term loan were used to repurchase shares of our common stock
under our stock repurchase program during fiscal 2008. The term
loan terminates on October 5, 2011. Voluntary prepayments and voluntary
reductions of the term loan balance are permitted in whole or in part, at our
option, in minimum principal amounts as specified in the term loan.
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. Under
the terms of the revolving credit facility, the interest rate and commitment fee
are based on our credit rating.
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 is
based on our credit rating.
At April
25, 2009, we had interest rate swaps in place that effectively fixed our
interest rate on approximately 99% of our long-term debt as a result of the
first quarter reduction in the revolver balance.
Guarantees
and Covenants
The term
loan and revolving credit facility are fully and unconditionally guaranteed by
Advance Auto Parts, Inc. Our debt agreements collectively contain covenants
restricting our ability 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 status as a holding company. We are required to comply with
financial covenants with respect to a maximum leverage ratio and a minimum
consolidated coverage ratio. We were in compliance with these covenants at April
25, 2009 and January 3, 2009. Our term loan and revolving credit
facility also provide for customary events of default, covenant defaults and
cross-defaults to our other material indebtedness.
Credit
Ratings
At April
25, 2009, we had a credit rating from Standard & Poor’s of BB+ and a credit
rating of Ba1 from Moody’s Investor Service, unchanged from January 3, 2009. The
current outlook of Standard & Poor’s and Moody’s is negative and stable,
respectively, but does not affect our current credit ratings. The current
pricing grid used to determine our borrowing rates under our term loan and
revolving credit facility is based on our credit ratings. If these credit
ratings decline, our interest expense may increase. Conversely, if these credit
ratings improve, our interest expense may decrease. If our credit ratings
decline, our access to financing may become more limited.
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.
Recent
Accounting Developments
Earnings
per Share
We
compute earnings per share in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 128, “Earnings per Share.” Basic earnings per common
share is computed by dividing net income applicable to common shares by the
weighted average number of shares of common stock outstanding during the period.
On January 4, 2009, we adopted 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”). FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment awards are participating securities
prior to vesting, and therefore, need to be included in the earnings allocation
when computing earnings per share under the two-class method as described in
SFAS No. 128. In accordance with FSP EITF 03-6-1, unvested share-based payment
awards that contain non-forfeitable 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. Certain
of the Company’s shares granted to employees in the form of restricted stock are
considered participating securities which require the use of the two-class
method for the computation of basic and diluted earnings per share. Upon
adoption, all prior-period earnings per share data presented were adjusted
retrospectively with no material impact.
Fair
Value
We
adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value and expands disclosure
requirements. SFAS No. 157 defines fair value as the price that would be
received to sell an asset, or paid to transfer a liability (an exit price), on
the measurement date in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants (with no
compulsion to buy or sell). In February 2008, the FASB deferred the effective
date of SFAS No. 157 for one year for certain non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (i.e., at least
annually). We adopted the required provisions of SFAS No. 157 related to
debt and derivatives as of December 30, 2007 and adopted the remaining required
provisions for non-financial assets and liabilities as of January 4, 2009.
The effect of adopting this standard was not significant in either
period.
Disclosures
of Derivative and Hedging Activities
In March
2008, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging
Activities.” SFAS No. 161 amends and expands the previous
disclosure requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” to provide more qualitative and
quantitative information on 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. We adopted SFAS No. 161 as of January 4,
2009 on a prospective basis; accordingly, disclosures related to interim periods
prior to the date of adoption have not been presented. The adoption had no
impact on our consolidated financial statements other than the additional
disclosures.
New
Accounting Pronouncements
In June
2008, the FASB Issued FSP EITF 08-3, “Accounting by Lessees for Nonrefundable
Maintenance Deposits.” FSP 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. We adopted the provisions of FSP EITF 08-3
effective January 4, 2009. The adoption of FSP EITF 08-3 had no impact on
our financial position, results of operations or cash flows.
In
April 2008, the FASB issued FSP 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 No. 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 No. 142 and the period
of expected cash flows used to measure the
fair value of the asset under SFAS No. 141, “Business Combinations.”
We adopted the provisions of FSP FAS 142-3 effective January 4, 2009. The
adoption of FSP FAS 142-3 had no impact on our financial position, results of
operations or cash flows.
On April
9, 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly,” which amends SFAS No. 157 by
incorporating a two-step process to determine whether a market is not active and
a transaction is not distressed. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009. We do not expect the adoption of
FSP FAS 157-4 to have a material impact on our consolidated financial
statements.
On April
9, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Statements,” which amends the interim disclosure
requirements in scope for SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments.” This FSP is effective for interim and annual
periods ending after June 15, 2009. We do not expect the adoption of this
FSP to have a material impact on our consolidated financial
statements.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Interest
Rate Risk
We are
exposed to cash flow risk due to changes in interest rates with respect to our
long-term bank debt as a result of the movements in LIBOR. Our long-term bank
debt consists of borrowings under a revolving credit facility and a term loan.
While we cannot predict the impact interest rate movements will have on our bank
debt, exposure to rate changes is managed through the use of hedging activities.
Our cash flow risk decreased during the first quarter as a result of paying down
a significant portion of our revolving credit facility balance.
For
additional information regarding market risk see “Item 7A. Quantitative and
Qualitative Disclosures About Market Risks” in our 2008 Form
10-K.
Fuel
Risk
We manage
the risk of fluctuating fuel prices through fixed price commodity contracts for
approximately 70% of our estimated diesel fuel consumption for fiscal 2009. We
have applied the normal purchase election under SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities,” to exclude these contracts from
fair value accounting.
Disclosure Controls and
Procedures. 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 in
accordance with Rule 13a-15(b) under the Exchange Act. 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 our internal control over financial reporting that occurred
during the quarter ended April 25, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.