UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended
October 10, 2009
OR
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period from
________ to ________.
Commission file number
001-16797
ADVANCE AUTO PARTS,
INC.
(Exact name of registrant as
specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
54-2049910
(I.R.S.
Employer
Identification No.)
|
5008 Airport Road, Roanoke, Virginia
24012
(Address
of Principal Executive Offices)
(Zip
Code)
(540) 362-4911
(Registrant’s
telephone number, including area code)
Not Applicable
(Former
name, former address and former fiscal year, if changed since last
report).
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes p No p
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definition of “large accelerated filer,” "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer x | Accelerated filer p |
| Non-accelerated filer p (Do not check if a smaller reporting company) | Smaller reporting company p |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
p No
x
As of
November 16, 2009,
the registrant had outstanding 94,631,221 shares
of Common Stock, par value $0.0001 per share (the only class of common stock of
the registrant outstanding).
PART I. FINANCIAL INFORMATION
| ITEM 1. |
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE
AUTO PARTS, INC. AND SUBSIDIARIES
|
Advance Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
October
10, 2009 and January 3, 2009
(in
thousands, except per share data)
(unaudited)
|
October
10,
|
January
3,
|
|||||||
|
Assets
|
2009
|
2009
|
||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 216,215 | $ | 37,358 | ||||
|
Receivables,
net
|
92,993 | 97,203 | ||||||
|
Inventories,
net
|
1,657,067 | 1,623,088 | ||||||
|
Other
current assets
|
46,381 | 49,977 | ||||||
|
Total
current assets
|
2,012,656 | 1,807,626 | ||||||
|
Property
and equipment, net of accumulated depreciation of
|
||||||||
|
$884,027
and $817,428
|
1,070,217 | 1,071,405 | ||||||
|
Assets
held for sale
|
3,062 | 2,301 | ||||||
|
Goodwill
|
34,387 | 34,603 | ||||||
|
Intangible
assets, net
|
26,670 | 27,567 | ||||||
|
Other
assets, net
|
18,906 | 20,563 | ||||||
| $ | 3,165,898 | $ | 2,964,065 | |||||
|
Liabilities and Stockholders'
Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Bank
overdrafts
|
$ | - | $ | 20,588 | ||||
|
Current
portion of long-term debt
|
1,307 | 1,003 | ||||||
|
Financed
vendor accounts payable
|
51,953 | 136,386 | ||||||
|
Accounts
payable
|
959,692 | 791,330 | ||||||
|
Accrued
expenses
|
400,965 | 372,510 | ||||||
|
Other
current liabilities
|
59,041 | 43,177 | ||||||
|
Total
current liabilities
|
1,472,958 | 1,364,994 | ||||||
|
Long-term
debt
|
278,149 | 455,161 | ||||||
|
Other
long-term liabilities
|
122,235 | 68,744 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, nonvoting, $0.0001 par value,
|
||||||||
|
10,000
shares authorized; no shares issued or outstanding
|
- | - | ||||||
|
Common
stock, voting, $0.0001 par value, 200,000 shares
authorized;
|
||||||||
|
104,036
shares issued and 94,663 outstanding at October 10, 2009
|
||||||||
|
and
103,000 shares issued and 94,852 outstanding at January 3,
2009
|
10 | 10 | ||||||
|
Additional
paid-in capital
|
382,766 | 335,991 | ||||||
|
Treasury
stock, at cost, 9,373 and 8,148 shares
|
(340,681 | ) | (291,114 | ) | ||||
|
Accumulated
other comprehensive loss
|
(7,946 | ) | (9,349 | ) | ||||
|
Retained
earnings
|
1,258,407 | 1,039,628 | ||||||
|
Total
stockholders' equity
|
1,292,556 | 1,075,166 | ||||||
| $ | 3,165,898 | $ | 2,964,065 | |||||
The accompanying notes to the condensed
consolidated financial statements
are an integral part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
For
the Twelve and Forty Week Periods Ended
October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
|
Twelve
Week Periods Ended
|
Forty
Week Periods Ended
|
|||||||||||||||
|
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales
|
$ | 1,262,576 | $ | 1,187,952 | $ | 4,269,056 | $ | 3,949,867 | ||||||||
|
Cost of sales, including
purchasing and warehousing costs
|
641,117 | 625,777 | 2,172,959 | 2,076,555 | ||||||||||||
|
Gross
profit
|
621,459 | 562,175 | 2,096,097 | 1,873,312 | ||||||||||||
|
Selling,
general and administrative expenses
|
516,604 | 466,278 | 1,698,885 | 1,505,178 | ||||||||||||
|
Operating
income
|
104,855 | 95,897 | 397,212 | 368,134 | ||||||||||||
|
Other,
net:
|
||||||||||||||||
|
Interest
expense
|
(5,339 | ) | (6,672 | ) | (18,430 | ) | (26,247 | ) | ||||||||
|
Other
income (expense), net
|
487 | (223 | ) | 633 | (287 | ) | ||||||||||
|
Total
other, net
|
(4,852 | ) | (6,895 | ) | (17,797 | ) | (26,534 | ) | ||||||||
|
Income
before provision for income taxes
|
100,003 | 89,002 | 379,415 | 341,600 | ||||||||||||
|
Provision
for income taxes
|
38,024 | 32,847 | 143,521 | 127,973 | ||||||||||||
|
Net
income
|
$ | 61,979 | $ | 56,155 | $ | 235,894 | $ | 213,627 | ||||||||
|
Basic
earnings per share
|
$ | 0.65 | $ | 0.59 | $ | 2.48 | $ | 2.24 | ||||||||
|
Diluted
earnings per share
|
$ | 0.65 | $ | 0.58 | $ | 2.46 | $ | 2.23 | ||||||||
|
Average
common shares outstanding
|
94,656 | 95,019 | 94,647 | 95,003 | ||||||||||||
|
Average
common shares outstanding - assuming dilution
|
95,474 | 95,758 | 95,325 | 95,669 | ||||||||||||
The accompanying notes to the condensed
consolidated financial statements
are an integral part of these
statements.
Advance Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
For
the Forty Week Periods Ended
October
10, 2009 and October 4, 2008
(in
thousands)
(unaudited)
|
Forty
Week Periods Ended
|
||||||||
|
October
10,
|
October
4,
|
|||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 235,894 | $ | 213,627 | ||||
|
Adjustments
to reconcile net income to net cash provided by
|
||||||||
|
operating
activities:
|
||||||||
|
Depreciation
and amortization
|
114,856 | 113,297 | ||||||
|
Amortization
of deferred debt issuance costs
|
277 | 277 | ||||||
|
Share-based
compensation
|
13,446 | 13,405 | ||||||
|
Loss
on property and equipment, net
|
7,979 | 1,272 | ||||||
|
Provision
(benefit) for deferred income taxes
|
56,013 | (1,465 | ) | |||||
|
Excess
tax benefit from share-based compensation
|
(2,531 | ) | (8,994 | ) | ||||
|
Net
decrease (increase) in:
|
||||||||
|
Receivables,
net
|
4,210 | (8,518 | ) | |||||
|
Inventories,
net
|
(33,979 | ) | (187,741 | ) | ||||
|
Other
assets
|
4,988 | 7,501 | ||||||
|
Net
increase in:
|
||||||||
|
Accounts
payable
|
168,362 | 164,869 | ||||||
|
Accrued
expenses
|
43,576 | 60,656 | ||||||
|
Other
liabilities
|
15,359 | 7,658 | ||||||
|
Net
cash provided by operating activities
|
628,450 | 375,844 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchases
of property and equipment
|
(132,622 | ) | (136,954 | ) | ||||
|
Proceeds
from sales of property and equipment
|
2,565 | 6,351 | ||||||
|
Other
|
- | (3,413 | ) | |||||
|
Net
cash used in investing activities
|
(130,057 | ) | (134,016 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Decrease
in bank overdrafts
|
(20,565 | ) | (30,000 | ) | ||||
|
(Decrease)
increase in financed vendor accounts payable
|
(84,433 | ) | 28,380 | |||||
|
Dividends
paid
|
(22,772 | ) | (23,155 | ) | ||||
|
Payments
on note payable
|
(512 | ) | (498 | ) | ||||
|
Borrowings
under credit facilities
|
173,400 | 301,700 | ||||||
|
Payments
on credit facilities
|
(349,900 | ) | (335,700 | ) | ||||
|
Proceeds
from the issuance of common stock, primarily exercise
|
||||||||
|
of
stock options
|
31,978 | 34,533 | ||||||
|
Excess
tax benefit from share-based compensation
|
2,531 | 8,994 | ||||||
|
Repurchase
of common stock
|
(49,567 | ) | (219,429 | ) | ||||
|
Other
|
304 | - | ||||||
|
Net
cash used in financing activities
|
(319,536 | ) | (235,175 | ) | ||||
|
Net
increase in cash and cash equivalents
|
178,857 | 6,653 | ||||||
|
Cash and cash
equivalents, beginning of period
|
37,358 | 14,654 | ||||||
|
Cash and cash
equivalents, end of period
|
$ | 216,215 | $ | 21,307 | ||||
The
accompanying notes to the condensed consolidated financial
statements
are an integral
part of these statements.
Advance
Auto Parts, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows - (Continued)
For
the Forty Week Periods Ended
October
10, 2009 and October 4, 2008
(in
thousands)
(unaudited)
|
Forty
Week Periods Ended
|
||||||||
|
October
10,
|
October
4,
|
|||||||
|
2009
|
2008
|
|||||||
|
Supplemental
cash flow information:
|
|
|||||||
|
Interest
paid
|
$ | 17,868 | $ | 21,100 | ||||
|
Income
tax payments, net
|
98,551 | 106,418 | ||||||
|
Non-cash
transactions:
|
||||||||
|
Accrued
purchases of property and equipment
|
19,488 | 22,584 | ||||||
|
Changes
in other comprehensive income (loss)
|
1,403 | (2,550 | ) | |||||
The
accompanying notes to the condensed consolidated financial
statements
are an integral
part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
| 1. |
Basis
of Presentation:
|
The
accompanying condensed consolidated financial statements include the accounts of
Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The
condensed consolidated balance sheets as of October 10, 2009 and January 3,
2009, the condensed consolidated statements of operations for the twelve and
forty week periods ended October 10, 2009 and October 4, 2008, and the condensed
consolidated statements of cash flows for the forty week periods ended October
10, 2009 and October 4, 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, or GAAP, 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 GAAP 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. 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 $47,206 and $50,527
at October 10, 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.
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
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
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 October 10, 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 October 10, 2009 and January 3, 2009, $51,953
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.
Earnings
per Share
The
Company computes earnings per share in accordance with SFAS No. 128, “Earnings
per Share” and FASB Staff Position, or FSP, EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” (collectively now under ASC Topic 260). The Company adopted FSP EITF
03-6-1 effective January 4, 2009 (the Company’s first quarter), which 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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Accordingly,
earnings per share is determined using the two-class method and is computed by
dividing net income attributable to the Company’s common shareholders by the
weighted-average common shares outstanding during the period. The
two-class method is an earnings allocation formula that determines income
per share for each class of common stock and participating security according to
dividends declared and participation rights in undistributed earnings. Diluted
income per common share reflects the more dilutive earnings per share amount
calculated using the treasury stock method or the
two-class method.
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
|
●
|
Self-insurance
costs;
|
|||||
|
●
|
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 certain of our larger stores which stock a |
|
|
||||
| wider variety and greater supply of inventory, or |
|
|
|||||
| HUB stores, and Parts Delivered Quickly warehouses, | |||||||
|
or
PDQ®s,
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
2009, the Financial Accounting Standards Board, or FASB, approved the FASB
Accounting Standards Codification, or ASC, as the single source of authoritative
nongovernmental GAAP. All existing accounting standard guidance issued by the
FASB, American Institute of Certified Public Accountants, Emerging Issues Task
Force and related literature, excluding guidance from the Securities and
Exchange Commission, or SEC, has been superseded by the ASC. All other
non-grandfathered, non-SEC accounting literature not included in the ASC has
become non-authoritative. The ASC did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The ASC was effective for interim or annual
periods ending after September 15, 2009.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Accordingly,
the Company adopted the ASC as of October 10, 2009 as provided by Accounting
Standards Update, or ASU, No. 2009-01, “Topic 105 – Generally Accepted
Accounting Principles – amendments based on Statement of Financial Accounting
Standards No. 168, The FASB
Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles.” As a result of this adoption, previous
references to new accounting standards and literature are no longer applicable.
In the current quarter financial statements, the Company has provided references
to both new and old guidance to assist in understanding the impacts of recently
adopted accounting literature, particularly for guidance adopted since the
beginning of the current fiscal year but prior to the ASC.
Effective
October 10, 2009, the Company adopted ASU No. 2009-05, “Fair Value
Measurements and Disclosures (ASC Topic 820): Measuring Liabilities at Fair
Value.” This ASU provides amendments to ASC Topic 820-10, “Fair Value
Measurements and Disclosures – Overall,” for the fair value measurement of
liabilities. It provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using (a) a valuation
technique that uses the quoted price of the identical liability when traded as
an asset or quoted prices for similar liabilities and/or (b) an income
approach valuation technique or a market approach valuation technique,
consistent with the principles of ASC Topic 820. The adoption did not
have a significant impact on the Company’s consolidated financial
statements.
Effective
July 18, 2009 (the Company’s second quarter), the Company adopted FSP No.
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” (currently included in ASC Topic
820-10-65-4). This FSP provides guidance for estimating the fair value of an
asset or liability when the volume and level of activity for the asset or
liability have significantly decreased, as well as guidance on identifying
circumstances that indicate a transaction is not orderly. It also requires
disclosure in interim and annual periods of the inputs and valuation techniques
used to measure fair value and a discussion of changes in valuation techniques
and related inputs, if any, during the period. The adoption had no significant
impact on the Company’s consolidated financial statements.
Effective
July 18, 2009 (the Company’s second quarter), the Company adopted FSP No.
FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of
Financial Instruments” (currently included in ASC Topic 825-10-65-1). This FSP
amends SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,” to require disclosures about fair value of financial instruments
for interim reporting periods as well as in annual financial statements. This
FSP also requires disclosure about the methods and significant assumptions used
to estimate the fair value of financial instruments and changes in those methods
and significant assumptions, if any, during the period. The adoption had no
impact on the Company’s consolidated financial statements other than the
additional disclosures.
Effective
July 18, 2009 (the Company’s second quarter), the Company adopted SFAS No. 165,
“Subsequent Events” (currently ASC Topic 855-10). This statement sets
forth general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are
issued. The Company evaluated all activity through November 19,
2009 (the issuance date of the financial statements) and concluded that no
subsequent events have occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the related notes to the
condensed consolidated financial statements.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
| 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 was sold. However, handling costs
associated with moving merchandise inventories from our HUB stores and PDQ®s
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 HUB stores and PDQ®s
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 they related 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.
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. The change in accounting principle was initially reported in the
Company’s first quarter Form 10-Q for fiscal
2009. The tables below represent the impact of the accounting change on the
current periods presented for the twelve
and forty weeks ended October 10, 2009 and previously reported amounts for the
comparable periods in fiscal 2008:
|
Twelve
week period ended October 10, 2009
|
Forty
week period ended October 10, 2009
|
|||||||||||||||||||||||
|
Prior
to Effect
of
Accounting
Change
|
Adjustments
|
As
Reported
|
Prior
to Effect
of
Accounting
Change
|
Adjustments
|
As
Reported
|
|||||||||||||||||||
|
Cost
of sales, including purchasing
|
||||||||||||||||||||||||
|
and
warehousing costs
|
$ | 623,963 | $ | 17,154 | $ | 641,117 | $ | 2,121,168 | $ | 51,791 | $ | 2,172,959 | ||||||||||||
|
Gross
profit
|
$ | 638,613 | $ | (17,154 | ) | $ | 621,459 | $ | 2,147,888 | $ | (51,791 | ) | $ | 2,096,097 | ||||||||||
|
Selling,
general and administrative expenses
|
$ | 533,758 | $ | (17,154 | ) | $ | 516,604 | $ | 1,750,676 | $ | (51,791 | ) | $ | 1,698,885 | ||||||||||
|
Twelve
week period ended October 4, 2008
|
Forty
week period ended October 4, 2008
|
|||||||||||||||||||||||
|
As
Previously
Reported
|
Adjustments
|
As
Adjusted
|
As
Previously
Reported
|
Adjustments
|
As
Adjusted
|
|||||||||||||||||||
|
Cost
of sales, including purchasing
|
||||||||||||||||||||||||
|
and
warehousing costs
|
$ | 610,833 | $ | 14,944 | $ | 625,777 | $ | 2,028,459 | $ | 48,096 | $ | 2,076,555 | ||||||||||||
|
Gross
profit
|
$ | 577,119 | $ | (14,944 | ) | $ | 562,175 | $ | 1,921,408 | $ | (48,096 | ) | $ | 1,873,312 | ||||||||||
|
Selling,
general and administrative expenses
|
$ | 481,222 | $ | (14,944 | ) | $ | 466,278 | $ | 1,553,274 | $ | (48,096 | ) | $ | 1,505,178 | ||||||||||
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
| 3. |
Store
Closures and
Impairment:
|
For
fiscal 2009, the Company currently expects to divest a total of approximately 40
to 50 stores as part of its store divestiture plan. These store closures will be
in addition to approximately 15 stores that will also be closed throughout 2009
as part of the Company’s routine review and closure of underperforming stores at
or near the end of their respective lease terms. The store divestiture 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.
As of
October 10, 2009, the Company had identified 45 stores to close as part of its
store divestiture plan. During the twelve weeks ended October 10, 2009, the
Company closed 13 stores, 12 of which were under the store divestiture plan.
During the forty weeks ended October 10, 2009, the Company closed 43 stores, 36
of which were closed under the store divestiture plan.
During
the twelve and forty weeks ended October 10, 2009, the Company recognized $7,129
and $22,235, respectively, of total expense associated with the 45 stores
identified to be closed, or divestiture expense. For the twelve and forty weeks
ended October 10, 2009, divestiture expense included closed store exit costs of
$6,655 and $17,502, respectively. The closed store exit costs primarily included
the establishment of the liability for future lease obligations as well as
severance. 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 SG&A 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:
|
Lease
Obligations
|
Severance
and
Other
Exit
|
Total
|
||||||||||
|
For
the twelve weeks ended October 10, 2009:
|
||||||||||||
|
Closed
Store Liabilities, July 18, 2009:
|
$ | 12,242 | $ | - | $ | 12,242 | ||||||
|
Reserves
established
|
6,756 | 205 | 6,961 | |||||||||
|
Change
in estimates
|
(69 | ) | - | (69 | ) | |||||||
|
Reserves
utilized
|
(1,008 | ) | (205 | ) | (1,213 | ) | ||||||
|
Closed
Store Liabilities, October 10, 2009
|
$ | 17,921 | $ | - | $ | 17,921 | ||||||
|
For
the forty weeks ended October 10, 2009:
|
||||||||||||
|
Closed
Store Liabilities, January 3, 2009
|
$ | 5,067 | $ | - | $ | 5,067 | ||||||
|
Reserves
established
|
17,068 | 630 | 17,698 | |||||||||
|
Change
in estimates
|
(440 | ) | - | (440 | ) | |||||||
|
Reserves
utilized
|
(3,774 | ) | (630 | ) | (4,404 | ) | ||||||
|
Closed
Store Liabilities, October 10, 2009
|
$ | 17,921 | $ | - | $ | 17,921 | ||||||
The
Company’s ending closed store liabilities at October 10, 2009 included $15,555
related to the store divestiture plan.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
The
Company also included impairment charges of $474 and $4,733 in its total
divestiture expense during the twelve and forty weeks ended October 10, 2009,
respectively. The impairment charges, which primarily consisted of the
impairment of store assets contained in leased store locations where the
carrying amount of those assets is not recoverable, are included in SG&A in
the accompanying condensed consolidated statement of operations.
| 4. |
Inventories,
net:
|
Merchandise
Inventory
Inventories
are stated at the lower of cost or market. The Company used the LIFO method of
accounting for approximately 95% of inventories at both October 10, 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 $16,577 and $6,118 for the forty weeks ended October 10, 2009 and October 4,
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, 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.
Because 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.
Inventory
Overhead Costs
The
Company capitalizes certain purchasing and warehousing costs into inventory.
Purchasing and warehousing costs included in inventory, at FIFO, at October 10,
2009 and January 3, 2009, were $104,836 and $104,594, respectively.
Inventory
Balances and Inventory Reserves
Inventory
balances at October 10, 2009 and January 3, 2009 were as follows:
|
October
10,
|
January
3,
|
|||||||
|
2009
|
2009
|
|||||||
|
Inventories
at FIFO, net
|
$ | 1,559,273 | $ | 1,541,871 | ||||
|
Adjustments
to state inventories at LIFO
|
97,794 | 81,217 | ||||||
|
Inventories
at LIFO, net
|
$ | 1,657,067 | $ | 1,623,088 | ||||
Inventory
quantities are tracked through a perpetual inventory system. The Company uses a
cycle counting program in all distribution centers and PDQ®s to
ensure the accuracy of the perpetual inventory quantities of both
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
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 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 $24,042 and $62,898
at October 10, 2009 and January 3, 2009, respectively. The reduction in the
Company’s inventory reserves during the forty weeks ended October 10, 2009 is
primarily related to the utilization of its reserve for slow moving inventory
primarily established during the fourth quarter of fiscal 2008 in connection
with a change in inventory management approach for slow moving
inventory.
| 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
forty weeks ended October 10, 2009:
|
AAP
Segment
|
AI
Segment
|
Total
|
||||||||||
|
Balance
at January 3, 2009
|
$ | 16,093 | $ | 18,510 | $ | 34,603 | ||||||
|
Fiscal
2009 activity
|
- | (216 | ) | (216 | ) | |||||||
|
Balance
at October 10, 2009
|
$ | 16,093 | $ | 18,294 | $ | 34,387 | ||||||
Intangible
Assets Other Than Goodwill
The
carrying amount and accumulated amortization of acquired intangible assets as of
October 10, 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
carrying amount at January 3, 2009
|
$ | 9,800 | $ | 885 | $ | 20,550 | $ | 31,235 | ||||||||
|
Accumulated
Amortization
|
3,234 | 434 | - | 3,668 | ||||||||||||
|
Net
book value at January 3, 2009
|
$ | 6,566 | $ | 451 | $ | 20,550 | $ | 27,567 | ||||||||
|
Gross
carrying amount at October 10, 2009
|
$ | 9,800 | $ | 885 | $ | 20,550 | $ | 31,235 | ||||||||
|
Accumulated
Amortization
|
4,035 | 530 | - | 4,565 | ||||||||||||
|
Net
book value at October 10, 2009
|
$ | 5,765 | $ | 355 | $ | 20,550 | $ | 26,670 | ||||||||
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
|
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
October
10, 2009
|
October
4, 2008
|
October
10, 2009
|
October
4, 2008
|
|||||||||||||
|
Amortization
expense
|
$ | 252 | $ | 296 | $ | 897 | $ | 905 | ||||||||
Future
Amortization Expense
The table
below shows expected amortization expense for the next five years for acquired
intangible assets recorded as of October 10, 2009:
|
Fiscal
Year
|
||||
|
Remainder
of 2009
|
$ | 250 | ||
|
2010
|
1,059 | |||
|
2011
|
967 | |||
|
2012
|
967 | |||
|
2013
|
967 | |||
| 6. |
Receivables,
net:
|
Receivables
consist of the following:
|
October
10,
2009
|
January
3,
2009
|
|||||||
|
Trade
|
$ | 18,732 | $ | 17,843 | ||||
|
Vendor
|
76,293 | 81,265 | ||||||
|
Other
|
3,175 | 3,125 | ||||||
|
Total
receivables
|
98,200 | 102,233 | ||||||
|
Less:
Allowance for doubtful accounts
|
(5,207 | ) | (5,030 | ) | ||||
|
Receivables,
net
|
$ | 92,993 | $ | 97,203 | ||||
| 7. |
Derivative
Instruments and Hedging
Activities:
|
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 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 and therefore does not account for
these contracts at fair value.
All
derivative instruments designated as hedging are classified as fair value, cash
flow or net investment hedges. All derivatives (including those not designated
as hedging instruments) are recognized on the condensed consolidated balance
sheet at fair value and classified based on the instruments’ maturity dates.
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.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
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, 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 October 10, 2009 and
January 3, 2009, respectively, was an unrecognized loss of $19,151 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
October 10, 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 $11,410.
The table
below presents the fair value of the Company’s derivative financial instruments
as well as their classification on the balance sheet as of October 10, 2009 and
January 3, 2009:
|
Liability
Derivatives
|
|||||||||
|
Balance
Sheet
|
Fair
Value as of
|
Fair
Value as of
|
|||||||
|
Location
|
October
10, 2009
|
January
3, 2009
|
|||||||
|
Derivatives
designated as hedging
|
|||||||||
|
instruments:
|
|||||||||
|
Interest
rate swaps
|
Accrued
expenses
|
$ | 11,410 | $ | 9,222 | ||||
|
Interest
rate swaps
|
Other
long-term liabilities
|
7,741 | 12,757 | ||||||
| $ | 19,151 | $ | 21,979 | ||||||
The table
below presents the effect of the Company’s derivative financial instruments on
the statement of operations for the twelve and forty weeks ended October 10,
2009 and October 4, 2008, respectively:
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
|
Derivatives
in SFAS 133
Cash
Flow Hedging
Relationships
|
Amount
of
Gain
or
(Loss)
Recognized
in
OCI on
Derivative,
net
of tax
(Effective
Portion)
|
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)
|
|||||||||
|
For
the Twelve Weeks
Ended
October 10, 2009:
|
|
|||||||||||||
|
Interest
rate swaps
|
$ | 183 |
Interest
expense
|
$ | (183 | ) |
Interest
expense
|
$ | - | |||||
|
For
the Twelve Weeks
Ended
October 4, 2008:
|
|
|||||||||||||
|
Interest
rate swaps
|
$ | (1,730 | ) |
Interest
expense
|
$ | 1,730 |
Interest
expense
|
$ | - | |||||
|
For
the Forty Weeks Ended
October
10, 2009:
|
|
|||||||||||||
|
Interest
rate swaps
|
$ | 1,720 |
Interest
expense
|
$ | (1,720 | ) |
Interest
expense
|
$ | - | |||||
|
For
the Forty Weeks Ended
October
4, 2008:
|
|
|||||||||||||
|
Interest
rate swaps
|
$ | (2,271 | ) |
Interest
expense
|
$ | 2,271 |
Interest
expense
|
$ | - | |||||
| 8. |
Fair
Value
Measurements:
|
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.
|
|
●
|
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.
|
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
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 as of October 10, 2009 and January 3,
2009:
|
|
Fair
Value Measurements at Reporting Date Using
|
|||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
|
Quoted
Prices in
|
Significant
|
|||||||||||||||
|
Active
Markets for
|
Significant
Other
|
Unobservable
|
||||||||||||||
|
Fair
Value
|
Identical
Assets
|
Observable
Inputs
|
Inputs
|
|||||||||||||
|
October 10, 2009:
|
||||||||||||||||
|
Interest
rate swaps
|
$ | 19,151 | $ | - | $ | 19,151 | $ | - | ||||||||
|
January 3, 2009:
|
||||||||||||||||
|
Interest
rate swaps
|
$ | 21,979 | $ | - | $ | 21,979 | $ | - | ||||||||
The fair
value of these interest rate swaps as of October 10, 2009 and January 3, 2009,
was an unrecognized loss of $19,151 and $21,979, respectively. The fair value of
the Company’s interest rate swaps is mainly based on observable interest rate
yield curves for similar instruments.
The
carrying amount of the Company’s cash and cash equivalents, accounts receivable,
bank overdrafts, financed vendor accounts payable, accounts payable, accrued
expenses and current portion of long term debt approximate their fair values due
to the relatively short term nature of these instruments. As of October 10,
2009, the fair value of the Company’s long-term debt with a carrying value of
$278,149, was approximately $265,000, and was based on similar long-term debt
issues available to the Company as of that date. The fair value of the Company’s
fixed rate debt was determined by using an assumed market interest rate
commensurate with the Company’s credit risk.
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 October 10, 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 Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
| 9. |
Long-term
Debt:
|
Long-term
debt consists of the following:
|
October
10,
2009
|
January
3,
2009
|
|||||||
|
Revolving
facility at variable interest rates
|
||||||||
|
(1.06%
and 4.81% at October 10, 2009 and January 3,
|
||||||||
|
2009,
respectively) due October 2011
|
$ | 75,000 | $ | 251,500 | ||||
|
Term
loan at variable interest rates
|
||||||||
|
(1.33%
and 3.02% at October 10, 2009 and January 3,
|
||||||||
|
2009,
respectively) due October 2011
|
200,000 | 200,000 | ||||||
|
Other
|
4,456 | 4,664 | ||||||
| 279,456 | 456,164 | |||||||
|
Less:
Current portion of long-term debt
|
(1,307 | ) | (1,003 | ) | ||||
|
Long-term
debt, excluding current portion
|
$ | 278,149 | $ | 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
October 10, 2009, the Company had $75,000 outstanding under
its revolving credit facility, and letters of credit outstanding of $102,997,
which reduced the availability under the revolving credit facility to $572,003.
(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 October 10, 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
LIBOR and alternate base rate borrowings, respectively. The Company has elected
to use the 90-day adjusted
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
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
October 10, 2009, the Company had $4,456 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 October 10, 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.
| 10. |
Warranty
Liabilities:
|
The
following table presents changes in the Company’s warranty
reserves:
|
October
10,
2009
|
January
3,
2009
|
|||||||
|
(40
weeks ended)
|
(53
weeks ended)
|
|||||||
|
Warranty
reserve, beginning of period
|
$ | 28,662 | $ | 17,757 | ||||
|
Additions
to warranty reserves
|
26,083 | 38,459 | ||||||
|
Reserves
utilized
|
(23,896 | ) | (27,554 | ) | ||||
|
Warranty
reserve, end of period
|
$ | 30,849 | $ | 28,662 | ||||
| 11. |
Stock
Repurchase
Program:
|
During
the twelve weeks ended October 10, 2009, the Company repurchased 880 shares of
common stock at an aggregate cost of $35,198, or an average price of $40.00 per
share. During the forty weeks ended October 10, 2009, the Company repurchased
1,225 shares of common stock at an aggregate cost of $49,567, or an average
price of $40.48 per share. These shares were repurchased in accordance with the
Company’s $250,000 stock repurchase program authorized by its Board of Directors
in the second quarter of fiscal 2008.
During
the twelve weeks ended October 4, 2008, the Company repurchased 1,372 shares of
common stock at an aggregate cost of $53,623, or an average price of $39.09 per
share. These shares were repurchased in accordance with the Company’s $250,000
stock repurchase program authorized by its Board of Directors in the second
quarter of fiscal 2008. During the forty weeks ended October 4, 2008, the
Company repurchased 6,136 shares of common stock at an aggregate cost of
$216,471, or an average price of $35.28 per share, of which 4,564 shares of
common stock were repurchased under the previous $500,000 stock repurchase
program. Additionally, the Company settled $2,959 on shares repurchased prior to
the end of fiscal 2007.
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
As of
October 10, 2009, the Company has $139,381 remaining under its $250,000 stock
repurchase program, excluding related expenses.
| 12. |
Earnings
per
Share:
|
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
twelve week periods ended October 10, 2009 and October 4, 2008, earnings of $309
and $215, respectively, were allocated to the participating securities exclusive
of any cash dividends already reflected in net income. For the forty week
periods ended October 10, 2009 and October 4, 2008, earnings of $1,214 and $740,
respectively, were allocated to the participating securities exclusive of any
cash dividends already reflected in net income.
Diluted
earnings per share of common stock reflects the weighted-average number of
shares of common stock outstanding, outstanding deferred stock units and the
impact of outstanding stock options, and stock appreciation rights (collectively
“share-based awards”). Diluted earnings per share are calculated by including
the effect of dilutive securities. Share-based awards to purchase approximately
64 and 89 shares of common stock that had an exercise price in excess of the
average market price of the common stock during the twelve week periods ended
October 10, 2009 and October 4, 2008, respectively, were not included in the
calculation of diluted earnings per share because they are anti-dilutive.
Share-based awards to purchase approximately 1,097 and 2,036 shares of common
stock that had an exercise price in excess of the average market price of the
common stock during the forty week periods ended October 10, 2009 and October 4,
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 twelve and forty week periods ended October 10, 2009 and October
4, 2008, respectively:
|
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Numerator
|
||||||||||||||||
|
Net
income applicable to common shares
|
$ | 61,979 | $ | 56,155 | $ | 235,894 | $ | 213,627 | ||||||||
|
Participating
securities' share in earnings
|
(309 | ) | (215 | ) | (1,214 | ) | (740 | ) | ||||||||
|
Net
income applicable to common shares
|
61,670 | 55,940 | 234,680 | 212,887 | ||||||||||||
|
Denominator
|
||||||||||||||||
|
Basic
weighted average common shares
|
94,656 | 95,019 | 94,647 | 95,003 | ||||||||||||
|
Dilutive
impact of share based awards
|
818 | 739 | 678 | 666 | ||||||||||||
|
Diluted
weighted average common shares
|
95,474 | 95,758 | 95,325 | 95,669 | ||||||||||||
|
Basic
earnings per common share
|
||||||||||||||||
|
Net
income applicable to common stockholders
|
$ | 0.65 | $ | 0.59 | $ | 2.48 | $ | 2.24 | ||||||||
|
Diluted
earnings per common share
|
||||||||||||||||
|
Net
income applicable to common stockholders
|
$ | 0.65 | $ | 0.58 | $ | 2.46 | $ | 2.23 | ||||||||
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
Earnings
per share for the twelve weeks and forty weeks ended October 4, 2008 were
adjusted retrospectively due to the application of the two-class method rather
than the treasury method for the earnings per share calculation. As a result,
diluted earnings per share were decreased by $0.01 for the twelve week period
ended October 4, 2008 and basic earnings per share were decreased by $0.01 for
the forty week period ended October 4, 2008.
| 13. |
Postretirement
Plan:
|
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 unchanged
through the forty weeks ended October 10, 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 a plan amendment
in fiscal 2004. The components of net periodic postretirement benefit cost for
the twelve and forty weeks ended October 10, 2009, and October 4, 2008,
respectively, was as follows:
|
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Interest
cost
|
$ | 105 | $ | 115 | $ | 351 | $ | 383 | ||||||||
|
Amortization
of negative prior service cost
|
(134 | ) | (134 | ) | (447 | ) | (447 | ) | ||||||||
|
Amortization
of unrecognized net gain
|
(22 | ) | (3 | ) | (74 | ) | (10 | ) | ||||||||
|
Net
periodic postretirement benefit cost
|
$ | (51 | ) | $ | (22 | ) | $ | (170 | ) | $ | (74 | ) | ||||
| 14. |
Comprehensive
Income:
|
The
Company includes in comprehensive income the changes in fair value of the
Company’s interest rate swaps and changes in net unrecognized other
postretirement benefit costs.
Comprehensive
income for the twelve and forty weeks ended October 10, 2009 and October 4, 2008
was as follows:
|
Twelve
Weeks Ended
|
Forty
Weeks Ended
|
|||||||||||||||
|
October
10,
2009
|
October
4,
2008
|
October
10,
2009
|
October
4,
2008
|
|||||||||||||
|
Net
income
|
$ | 61,979 | $ | 56,155 | $ | 235,894 | $ | 213,627 | ||||||||
|
Unrealized
gain (loss) on hedge
|
||||||||||||||||
|
arrangements,
net of tax
|
183 | (1,730 | ) | 1,720 | (2,271 | ) | ||||||||||
|
Changes
in net unrecognized other
|
||||||||||||||||
|
postretirement
benefit cost, net of tax
|
(95 | ) | (84 | ) | (317 | ) | (279 | ) | ||||||||
|
Comprehensive
income
|
$ | 62,067 | $ | 54,341 | $ | 237,297 | $ | 211,077 | ||||||||
Advance
Auto Parts, Inc. and Subsidiaries
Notes
to the Condensed Consolidated Financial Statements
For
the Twelve and Forty Week Periods Ended October
10, 2009 and October 4, 2008
(in
thousands, except per share data)
(unaudited)
| 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 primarily
serves the Commercial market from its store locations throughout the Northeast
and recent expansion into the Southeast. In addition, its North American Sales
Division services warehouse distributors and jobbers throughout North
America.
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 are the same as
those described in the summary of significant accounting policies in Note
1.
The
following table summarizes financial information for each of the Company's
business segments for the twelve and forty weeks ended October 10, 2009 and
October 4, 2008, respectively.
|
Twelve
Week Periods Ended
|
Forty
Week Periods Ended
|
|||||||||||||||
|
October
10,
|
October
4,
|
October
10,
|
October
4,
|
|||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
sales
|
||||||||||||||||
|
AAP
|
$ | 1,213,422 | $ | 1,146,516 | $ | 4,115,291 | $ | 3,822,585 | ||||||||
|
AI
|
51,332 | 41,436 | 159,929 | 127,282 | ||||||||||||
|
Eliminations
(1)
|
(2,178 | ) | - | (6,164 | ) | - | ||||||||||
|
Total
net sales
|
$ | 1,262,576 | $ | 1,187,952 | $ | 4,269,056 | $ | 3,949,867 | ||||||||
|
Income
before provision for
|
||||||||||||||||
|
income
taxes
|
||||||||||||||||
|
AAP
|
$ | 96,239 | $ | 87,143 | $ | 370,813 | $ | 337,667 | ||||||||
|
AI
|
3,764 | 1,859 | 8,602 | 3,933 | ||||||||||||
|
Total
income before provision for
|
||||||||||||||||
|
income
taxes
|
$ | 100,003 | $ | 89,002 | $ | 379,415 | $ | 341,600 | ||||||||
|
Provision
for income taxes
|
||||||||||||||||
|
AAP
|
$ | 36,627 | $ | 32,065 | $ | 140,277 | $ | 126,343 | ||||||||
|
AI
|
1,397 | 782 | 3,244 | 1,630 | ||||||||||||
|
Total
provision for income taxes
|
$ | 38,024 | $ | 32,847 | $ | 143,521 | $ | 127,973 | ||||||||
|
Segment
assets
|
||||||||||||||||
|
AAP
|
$ | 2,992,639 | $ | 2,850,789 | $ | 2,992,639 | $ | 2,850,789 | ||||||||
|
AI
|
173,259 | 157,470 | 173,259 | 157,470 | ||||||||||||
|
Total
segment assets
|
$ | 3,165,898 | $ | 3,008,259 | $ | 3,165,898 | $ | 3,008,259 | ||||||||
|
(1)
|
For
the twelve weeks ended October 10, 2009, eliminations represent net sales
of $993 from AAP to AI and $1,185 from AI to AAP. For the forty weeks
ended October 10, 2009, eliminations represent net sales of $2,755 from
AAP to AI and $3,409 from AI to
AAP.
|
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 Sectio