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Advance Auto Parts 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Graphic
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
aap10q.htm

 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 23, 2011
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.
 

 
 
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 x No o
 
 
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 May 27, 2011, the registrant had outstanding 76,637,258 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 (unaudited):   
       
    Condensed Consolidated Balance Sheets as of April 23, 2011, January 1, 2011 and April 24, 2010 
 1
       
    Condensed Consolidated Statements of Operations for the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010  
 2
       
    Condensed Consolidated Statements of Changes in Stockholders' Equity for the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010 
 3
       
    Condensed Consolidated Statements of Cash Flows for the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010  4
       
    Notes to the Condensed Consolidated Financial Statements 
 6
       
  Management's Discussion and Analysis of Financial Condition and Results of Operations
17
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
       
  Item 4.  Controls and Procedures 
29
       
PART II.  OTHER INFORMATION 
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  29
       
  Item 6. Exhibits 
30
       
SIGNATURE     
S-1
 
 
 
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
 
 
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
April 23, 2011, January 1, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)

   
April 23,
   
January 1,
   
April 24,
 
Assets
 
2011
   
2011
   
2010
 
                   
Current assets:
                 
Cash and cash equivalents
  $ 53,667     $ 59,209     $ 133,286  
Receivables, net
    115,424       124,227       110,471  
Inventories, net
    2,118,119       1,863,870       1,745,555  
Other current assets
    48,278       76,965       33,984  
          Total current assets
    2,335,488       2,124,271       2,023,296  
Property and equipment, net of accumulated depreciation of
                       
$947,678, $927,564 and $925,389
    1,151,926       1,143,170       1,095,935  
Assets held for sale
    707       1,472       1,552  
Goodwill
    34,387       34,387       34,387  
Intangible assets, net
    25,062       25,360       26,085  
Other assets, net
    25,813       25,557       21,553  
    $ 3,573,383     $ 3,354,217     $ 3,202,808  
Liabilities and Stockholders' Equity
                       
Current liabilities:
                       
Current portion of long-term debt
  $ 923     $ 973     $ 1,293  
Financed vendor accounts payable
    -       31,648       17,557  
Accounts payable
    1,574,347       1,292,113       1,185,782  
Accrued expenses
    386,552       404,086       424,961  
Other current liabilities
    114,508       119,229       68,122  
          Total current liabilities
    2,076,330       1,848,049       1,697,715  
Long-term debt
    430,832       300,851       277,695  
Other long-term liabilities
    182,337       165,943       118,015  
Commitments and contingencies
                       
Stockholders' equity:
                       
Preferred stock, nonvoting, $0.0001 par value
    -       -       -  
Common stock, voting, $0.0001 par value
    11       11       10  
Additional paid-in capital
    468,753       456,645       404,803  
Treasury stock, at cost
    (1,302,998 )     (1,028,612 )     (680,583 )
Accumulated other comprehensive income (loss)
    379       (1,597 )     (6,230 )
Retained earnings
    1,717,739       1,612,927       1,391,383  
          Total stockholders' equity
    883,884       1,039,374       1,109,383  
    $ 3,573,383     $ 3,354,217     $ 3,202,808  
                         


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 Sixteen Week Periods Ended
April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
   
Sixteen Week Periods Ended
 
   
April 23,
   
April 24,
 
   
2011
   
2010
 
             
Net sales
  $ 1,898,063     $ 1,830,606  
Cost of sales, including purchasing and warehousing costs
    939,862       919,829  
         Gross profit
    958,201       910,777  
Selling, general and administrative expenses
    772,224       728,605  
         Operating income
    185,977       182,172  
Other, net:
               
     Interest expense
    (9,719 )     (5,956 )
     Other income, net
    55       524  
         Total other, net
    (9,664 )     (5,432 )
Income before provision for income taxes
    176,313       176,740  
Provision for income taxes
    66,730       67,309  
Net income
  $ 109,583     $ 109,431  
                 
Basic earnings per share
  $ 1.37     $ 1.20  
                 
Diluted earnings per share
  $ 1.35     $ 1.19  
                 
Average common shares outstanding
    79,468       90,712  
                 
Average common shares outstanding - assuming dilution
    81,019       91,473  
                 

 

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 Changes in Stockholders' Equity
For the Sixteen Week Periods Ended
April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
   
Preferred Stock
   
Common Stock
   
Additional
Paid-in
   
Treasury Stock,
at cost
   
Accumulated
Other
Comprehensive
   
Retained
   
Total
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Shares
   
Amount
   
Income (Loss)
   
Earnings
   
Equity
 
Balance, January 1, 2011
    -     $ -       105,682     $ 11     $ 456,645       23,726     $ (1,028,612 )   $ (1,597 )   $ 1,612,927     $ 1,039,374  
Net income
                                                                    109,583       109,583  
Changes in net unrecognized other postretirement benefit costs, net of $90 tax
                                                            (140             (140
Amortization of unrecognized losses on interest rate swaps, net of $1,374 tax
                                                            2,116               2,116  
   Comprehensive income
                                                                            111,559  
Issuance of shares upon the exercise of stock options
                    193               2,875                                       2,875  
Tax benefit from share-based compensation
                                    2,663                                       2,663  
Issuance of restricted stock, net of forfeitures
                    4                                                       -  
Amortization of restricted stock balance
                                    2,287                                       2,287  
Share-based compensation
                                    3,673                                       3,673  
Stock issued under employee stock purchase plan
                    9               542                                       542  
Treasury stock purchased
                                            4,307       (274,386 )                     (274,386 )
Cash dividends
                                                                    (4,771 )     (4,771 )
Other
                                    68                                       68  
Balance, April 23, 2011
    -     $ -       105,888     $ 11     $ 468,753       28,033     $ (1,302,998 )   $ 379     $ 1,717,739     $ 883,884  
                                                                                 
Balance, January 2, 2010      -     $ -       104,251     $ 10     $ 392,962       10,628     $ (391,176   $ (6,699   $ 1,287,268     $ 1,282,365  
Net income
                                                                    109,431       109,431  
Changes in net unrecognized other postretirement benefit costs, net of $82 tax
                                                            (128 )             (128 )
Unrealized gain on hedge arrangement, net of $637 tax
                                                            597               597  
   Comprehensive income
                                                                            109,900  
Issuance of shares upon the exercise of stock options
                    178               4,126                                       4,126  
Tax benefit from share-based compensation
                                    476                                       476  
Issuance of restricted stock, net of forfeitures
                    (7                                                     -  
Amortization of restricted stock balance
                                    3,106                                       3,106  
Share-based compensation
                                    3,568                                       3,568  
Stock issued under employee stock purchase plan
                    13               509                                       509  
Treasury stock purchased
                                            6,955       (289,407 )                     (289,407 )
Cash dividends
                                                                    (5,316 )     (5,316 )
Other
                                    56                                       56  
Balance, April 24, 2010
    -     $ -       104,435     $ 10     $ 404,803       17,583     $ (680,583 )   $ (6,230 )   $ 1,391,383     $ 1,109,383  
 
 

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 Sixteen Week Periods Ended
April 23, 2011 and April 24, 2010
(in thousands)
(unaudited)
 

   
Sixteen Week Periods Ended
 
   
April 23,
   
April 24,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 109,583     $ 109,431  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation and amortization
    52,539       49,683  
Share-based compensation
    5,960       6,674  
Loss on property and equipment, net
    1,291       1,508  
Other
    235       304  
Provision (benefit) for deferred income taxes
    14,109       (1,883 )
Excess tax benefit from share-based compensation
    (2,692 )     (809 )
Net decrease (increase) in:
               
Receivables, net
    8,821       (17,911 )
Inventories, net
    (254,249 )     (113,688 )
Other assets
    28,228       30,043  
Net increase in:
               
Accounts payable
    282,234       219,508  
Accrued expenses
    20,941       51,348  
Other liabilities
    5,450       3,796  
Net cash provided by operating activities
    272,450       338,004  
Cash flows from investing activities:
               
Purchases of property and equipment
    (88,883 )     (60,675 )
Proceeds from sales of property and equipment
    1,021       93  
Net cash used in investing activities
    (87,862 )     (60,582 )
Cash flows from financing activities:
               
Decrease in bank overdrafts
    (4,471 )     (9,526 )
Decrease in financed vendor accounts payable
    (31,648 )     (14,535 )
Borrowings under credit facilities
    443,200       75,000  
Payments on credit facilities
    (313,000 )     -  
Payments on note payable
    (239 )     (232 )
Dividends paid
    (9,701 )     (10,903 )
Proceeds from the issuance of common stock, primarily exercise
               
of stock options
    3,485       4,691  
Excess tax benefit from share-based compensation
    2,692       809  
Repurchase of common stock
    (280,389 )     (289,407 )
Other
    (59 )     (51 )
Net cash used in financing activities
    (190,130 )     (244,154 )
Net (decrease) increase in cash and cash equivalents
    (5,542 )     33,268  
Cash and cash equivalents, beginning of period
    59,209       100,018  
Cash and cash equivalents, end of period
  $ 53,667     $ 133,286  

 
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 Sixteen Week Periods Ended
April 23, 2011 and April 24, 2010
(in thousands)
(unaudited)
 

   
Sixteen Week Periods Ended
 
   
April 23,
   
April 24,
 
   
2011
   
2010
 
             
Supplemental cash flow information:
           
Interest paid
  $ 6,769     $ 7,831  
Income tax payments, net
    14,185       16,508  
Non-cash transactions:
               
Accrued purchases of property and equipment
    17,102       15,002  
Repurchases of common stock not settled
    8,991       -  
Changes in other comprehensive income
    1,976       469  

 
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 Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
1.  
Basis of Presentation:
 
The accompanying condensed consolidated financial statements include the accounts of Advance Auto Parts, Inc. and its wholly owned subsidiaries, or the Company. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheets as of April 23, 2011, January 1, 2011 and April 24, 2010, the condensed consolidated statements of operations for the sixteen week periods ended April 23, 2011 and April 24, 2010, the condensed consolidated statements of changes in stockholders’ equity for the sixteen week periods ended April 23, 2011 and April 24, 2010 and the condensed consolidated statements of cash flows for the sixteen week periods ended April 23, 2011 and April 24, 2010, 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 1, 2011, or Fiscal 2010.

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for Fiscal 2010 (filed with the Securities and Exchange Commission, or SEC, on March 1, 2011).

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.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board, or FASB, issued ASU No. 2010-06 “Fair Value Measurements and Disclosures – Improving Disclosures about Fair Value Measurements”. ASU 2010-06 requires new disclosures for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and the activity within Level 3 of the fair value hierarchy. The updated guidance also clarifies existing disclosures regarding the level of disaggregation of assets or liabilities and the valuation techniques and inputs used to measure fair value. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new Level 3 activity disclosures, which are effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of ASU 2010-06 had no impact on the Company’s condensed consolidated financial statements.
 


Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
2.  
Inventories, net:
 
Inventories are stated at the lower of cost or market. The Company used the LIFO method of accounting for approximately 95% of inventories at April 23, 2011, January 1, 2011 and April 24, 2010. 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 2011 and prior years. The Company’s overall costs to acquire inventory for the same or similar products have generally decreased historically as the Company has been able to leverage its continued growth. Additionally, the Company’s inventory costs have decreased in recent years as a result of the Company’s execution of merchandise strategies and realization of supply chain efficiencies. As a result of utilizing LIFO, the Company recorded a reduction to cost of sales of $4,083 and $18,250 for the sixteen weeks ended April 23, 2011 and April 24, 2010, 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 are based on management’s estimates of expected fiscal year-end inventory levels and costs.

Inventory balances at April 23, 2011, January 1, 2011 and April 24, 2010 were as follows:

   
April 23,
   
January 1,
   
April 24,
 
   
2011
   
2011
   
2010
 
Inventories at FIFO, net
  $ 1,987,225     $ 1,737,059     $ 1,630,048  
Adjustments to state inventories at LIFO
    130,894       126,811       115,507  
Inventories at LIFO, net
  $ 2,118,119     $ 1,863,870     $ 1,745,555  

 
3.  
Goodwill and Intangible Assets:
 
Goodwill

The Company has goodwill recorded in both the AAP and AI segments.  The AAP segment’s goodwill balance was $16,093 at April 23, 2011 and April 24, 2010.  The AI segment’s goodwill balance was $18,294 at April 23, 2011 and April 24, 2010. The Company recorded no activity to its goodwill balance for the sixteen weeks ended April 23, 2011 and April 24, 2010, respectively.


 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
Intangible Assets Other Than Goodwill

The gross and net carrying amounts of acquired intangible assets as of April 23, 2011, January 1, 2011 and April 24, 2010 are comprised of the following:
 

   
Acquired intangible assets
       
   
Subject to Amortization
   
Not Subject
to Amortization
       
   
Customer
Relationships
   
Other
   
Trademark and
Tradenames
   
Intangible
Assets, net
 
                         
Gross:
                       
Gross carrying amount at January 1, 2011
  $ 9,800     $ 885     $ 20,550     $ 31,235  
Additions
    -       -       -       -  
Gross carrying amount at April 23, 2011
  $ 9,800     $ 885     $ 20,550     $ 31,235  
                                 
Gross carrying amount at January 2, 2010
  $ 9,800     $ 885     $ 20,550     $ 31,235  
Additions
    -       -       -       -  
Gross carrying amount at April 24, 2010
  $ 9,800     $ 885     $ 20,550     $ 31,235  
                                 
Net:
                               
Net carrying amount at January 1, 2011
  $ 4,578     $ 232     $ 20,550     $ 25,360  
Additions
    -       -       -       -  
2011 amortization
    296       2       -       298  
Net book value at April 23, 2011
  $ 4,282     $ 230     $ 20,550     $ 25,062  
                                 
Net carrying amount at January 2, 2010
  $ 5,543     $ 326     $ 20,550     $ 26,419  
Additions
    -       -       -       -  
2010 amortization
    295       39       -       334  
Net book value at April 24, 2010
  $ 5,248     $ 287     $ 20,550     $ 26,085  
 
Future Amortization Expense

The table below shows expected amortization expense for the next five years for acquired intangible assets recorded as of April 23, 2011:
 
Fiscal Year
 
Amount
 
Remainder of 2011
  $ 669  
2012
    967  
2013
    967  
2014
    967  
2015
    751  
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
4.  
Long-term Debt:
 
Long-term debt consists of the following:

   
April 23, 
2011
   
January 1, 
2011
   
April 24, 
2010
 
Revolving facility at variable interest rates
                 
(0.97% and 1.06% at April 23, 2011 and April 24, 2010,
                 
respectively) due October 5, 2011
  $ 130,200     $ -     $ 75,000  
Term loan at variable interest rates
                       
(1.31% at April 24, 2010)
                       
repaid April 29, 2010 (1)
    -       -       200,000  
5.75% Senior Unsecured Notes
                       
(net of unamortized discount of
                       
$1,146 and $1,176 at April 23, 2011 and January 1, 2011,
                       
respectively) due May 1, 2020
    298,854       298,824       -  
Other
    2,701       3,000       3,988  
      431,755       301,824       278,988  
Less: Current portion of long-term debt
    (923 )     (973 )     (1,293 )
Long-term debt, excluding current portion
  $ 430,832     $ 300,851     $ 277,695  
 
(1) The original maturity of the Term loan was October 2011.

Senior Unsecured Notes

The Company’s 5.75% senior unsecured notes, the Notes, were issued in April 2010 at 99.587% of the principal amount of $300,000 and are due May 1, 2020. The parent company, or Advance, served as the issuer of the Notes with each of Advance’s domestic subsidiaries currently serving as a subsidiary guarantor. The terms of the Notes are governed by an indenture and supplemental indenture (collectively the “Indenture”) among the Company, the subsidiary guarantors and Wells Fargo Bank, National Association, as Trustee.

The Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year. The Company may redeem some or all of the Notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by each of the subsidiary guarantors. The Company will be permitted to release guarantees without the consent of holders of the Notes under the circumstances described in the Indenture.

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
The Indenture contains customary provisions for events of default including for (i) failure to pay principal or interest when due and payable, (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice, (iii) a default under any debt for money borrowed by the Company or any of its subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25,000 without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by the Company of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding, and (iv) events of bankruptcy, insolvency or reorganization affecting the Company and certain of its subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of the Company and its subsidiaries to incur debt secured by liens and to enter into sale and lease-back transactions.

Bank Debt

The Company has a $750,000 unsecured five-year revolving credit facility with Advance’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 matures on October 5, 2011.

As of April 23, 2011, the Company had $130,200 outstanding under its revolving credit facility, and had letters of credit outstanding of $93,268, which reduced the availability under the revolving credit facility to $526,532. (The letters of credit generally have a term of one year or less.) A commitment fee is charged on the unused portion of the revolving credit facility, payable in arrears. The current commitment fee rate is 0.125% per annum.  Although the Company’s revolving credit facility matures in the next twelve months, the Company classified the balance outstanding as of April 23, 2011 as long-term in its condensed consolidated balance sheets as of April 23, 2011 since the Company had the intent and ability to refinance the balance on a long-term basis. Subsequent to April 23, 2011, the Company completed the refinancing of its revolving credit facility as described further below.

The Company’s revolving credit facility contains covenants restricting its ability to, among other things:  (1) create, incur or assume additional debt, (2) incur liens or engage in sale-leaseback transactions, (3) make loans and investments (including acquisitions), (4) guarantee obligations, (5) engage in certain mergers and liquidations, (6) change the nature of the Company’s business and the business conducted by its subsidiaries, (7) enter into certain hedging transactions, and (8) change Advance’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 23, 2011 and January 1, 2011. The Company’s revolving credit facility also provides for customary events of default, covenant defaults and cross-defaults to its other material indebtedness.

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 0.625% and 0.0% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. Under the terms of the revolving credit facility, the interest rate and commitment fee are based on the Company’s credit rating.

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)

Debt Guarantees

Each of the Company’s domestic subsidiaries serves as guarantors of the Notes and revolving credit facility with Advance also serving as guarantor of the revolving credit facility. The subsidiary guarantees related to the Company’s revolving credit facility and Notes are full and unconditional and joint and several, and there are no restrictions on the ability of Advance to obtain funds from its subsidiaries. Also, Advance has no independent assets or operations, and the subsidiaries not guaranteeing the revolving credit facility and Notes are minor as defined by the SEC.

Subsequent Event

On May 27, 2011, the Company entered into a new $750,000 unsecured five-year revolving credit facility with Stores serving as the borrower. This new facility replaced the Company’s previous revolving credit facility. Proceeds from the new revolving credit facility were used to repay $165,000 of principal outstanding on the Company’s previous revolving credit facility. In conjunction with this refinancing, the Company incurred approximately $3,600 of financing costs which it will amortize over the term of the new revolving credit facility.

The terms of the new revolving credit facility are generally similar to the previous facility. Certain of the significant terms that are different from the previous facility include, but are not limited to: (1) initial margin is 1.5% and 0.5% per annum for the adjusted LIBOR rate and alternate base rate borrowing, respectively, (2)  a facility fee of 0.25% on the total amount of the facility, (3) a change in the calculation of the maximum leverage ratio, and (4) the new revolving credit facility is guaranteed by Advance and certain domestic subsidiaries of Stores, including its Material Subsidiaries (as defined in the credit agreement).
 
5.  
Derivative Instruments and Hedging Activities:
 
The Company had previously entered into interest rate swap agreements as a hedge to the variable rate interest payments on its bank debt.  Effective April 24, 2010, the Company’s outstanding interest rate swaps no longer qualified for hedge accounting as a result of the Company’s intent to pay off its bank debt with the proceeds from the offering of the Notes. Accordingly, the Company has recorded all subsequent changes in the fair value of the interest rate swaps through earnings and will amortize the remaining $4,963 of previously recorded unrecognized loss in accumulated other comprehensive loss over the remaining life of the swaps which mature in October 2011. As of April 23, 2011, the Company had interest rate swaps with an aggregate notional value of $275,000 at rates ranging from 4.01% to 4.98%.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheet as of April 23, 2011, January 1, 2011 and April 24, 2010:
 
 
Liability Derivatives
 
 
Balance Sheet
Location
 
Fair Value as of
April 23, 2011
   
Fair Value as of
January 1, 2011
   
Fair Value as of
April 24, 2010
 
Derivatives designated as hedging
                   
instruments:
                   
Interest rate swaps
Accrued expenses
  $ 5,807     $ 9,321     $ 11,007  
Interest rate swaps
Other long-term liabilities
    -       -       4,708  
      $ 5,807     $ 9,321     $ 15,715  

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the sixteen weeks ended April 23, 2011 and April 24, 2010, respectively:

Interest rate swaps
 
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, net of
tax (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, net
of tax
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
                       
For the Sixteen Weeks
Ended April 23, 2011:
  $ -  
Interest expense
  $ (2,116
Other (expense)
income, net
  $ (200 )
                             
For the Sixteen Weeks
Ended April 24, 2010:
  $ 597  
Interest expense
  $ (2,235 )
Interest expense
  $ 111  
 
6.  
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, and 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.
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
The following table sets forth the Company’s financial liabilities that were measured at fair value on a recurring basis as of April 23, 2011, January 1, 2011 and April 24, 2010:

 
       
Fair Value Measurements at Reporting Date Using
 
         
Level 1
   
Level 2
   
Level 3
 
                         
   
Fair Value
   
Quoted Prices in
Active Markets for
Identical Assets
   
Significant Other
Observable Inputs
   
Significant
Unobservable
Inputs
 
                         
As of April 23, 2011
                       
                         
Interest rate swaps
  $ 5,807     $ -     $ 5,807     $ -  
                                 
As of January 1, 2011
                               
                                 
Interest rate swaps
  $ 9,321     $ -     $ 9,321     $ -  
                                 
As of April 24, 2010
                               
                                 
Interest rate swaps
  $  15,715     $ -     $ 15,715     $ -  
 
The fair values of the Company’s interest rate swaps represent the estimated amounts that the Company would receive or pay to terminate the agreements taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities (based on the forward yield curve).

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 April 23, 2011, January 1, 2011 and April 24, 2010, the fair value of the Company’s long-term debt with a carrying value of $430,832, $300,851 and $277,695, respectively, was approximately $451,000, $316,000 and $273,000, respectively. The fair value of the Company’s senior unsecured notes was determined based on quoted market prices. The Company believes that the carrying value of its other long-term debt and certain long-term liabilities approximate fair value.

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 23, 2011, the Company had no significant non-financial assets or liabilities that had been adjusted to fair value subsequent to initial recognition.
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
7.  
Stock Repurchase Program:
 
The Company’s stock repurchase program allows it to repurchase its common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the SEC. During the sixteen weeks ended April 23, 2011, the Company repurchased 4,237 shares of its common stock at an aggregate cost of $269,983, or an average price of $63.72 per share. Of the total shares repurchased, the Company repurchased 1,938 shares at a cost of $121,561 under its $300,000 stock repurchase program authorized by its Board of Directors on August 10, 2010, and 2,299 shares at a cost of $148,422 under its $500,000 stock repurchase program authorized by its Board of Directors on February 8, 2011. At April 23, 2011, the Company had $351,578 remaining under the $500,000 stock repurchase program. Of the Company’s shares repurchased during the sixteen weeks ended April 23, 2011, 138 shares settled subsequent to April 23, 2011.

Additionally, the Company repurchased 71 shares of its common stock at an aggregate cost of $4,402 in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the sixteen weeks ended April 23, 2011.

During the sixteen weeks ended April 24, 2010, the Company repurchased 6,912 shares of its common stock at an aggregate cost of $287,666, or an average price of $41.62 per share, under its prior $500,000 stock repurchase program, authorized by its Board of Directors on February 16, 2010. Additionally, the Company repurchased 43 shares of its common stock at an aggregate cost of $1,741 in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the sixteen weeks ended April 24, 2010.

Subsequent to April 23, 2011, the Company repurchased 1,156 shares of its common stock at an aggregate cost of $73,822, or an average price of $63.84 per share. As of May 27, 2011, the Company had $277,756 remaining under the $500,000 stock repurchase program.
 
8.  
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 sixteen week periods ended April 23, 2011 and April 24, 2010, earnings of $342 and $532, respectively, were allocated to the participating securities.

Diluted earnings per share are calculated by including the effect of dilutive securities. Share-based awards to purchase approximately 3 and 67 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 23, 2011 and April 24, 2010, respectively, were not included in the calculation of diluted earnings per share because they are anti-dilutive.
 
 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)

The following table illustrates the computation of basic and diluted earnings per share for the sixteen week periods ended April 23, 2011 and April 24, 2010, respectively:
 
   
Sixteen Weeks Ended
 
   
April 23,
   
April 24,
 
   
2011
   
2010
 
Numerator
           
Net income applicable to common shares
  $ 109,583     $ 109,431  
Participating securities' share in earnings
    (342 )     (532 )
Net income applicable to common shares
  $ 109,241     $ 108,899  
Denominator
               
Basic weighted average common shares
    79,468       90,712  
Dilutive impact of share-based awards
    1,551       761  
Diluted weighted average common shares
    81,019       91,473  
                 
Basic earnings per common share
               
Net income applicable to common stockholders
  $ 1.37     $ 1.20  
Diluted earnings per common share
               
Net income applicable to common stockholders
  $ 1.35     $ 1.19  
 
9.  
Warranty Liabilities:
 
The following table presents changes in the Company’s warranty reserves:

   
April 23, 
2011
   
January 1, 
2011
   
April 24, 
2010
 
   
(16 weeks ended)
   
(52 weeks ended)
   
(16 weeks ended)
 
                   
Warranty reserve, beginning of period
  $ 36,352     $ 30,387     $ 30,387  
Additions to warranty reserves
    10,511       45,741       15,713  
Reserves utilized
    (10,203 )     (39,776 )     (15,655 )
                         
Warranty reserve, end of period
  $ 36,660     $ 36,352     $ 30,445  
 
The Company’s warranty liabilities are included in Accrued Expenses in its condensed consolidated financial balance sheets.
 
10.  
Segment and Related Information:

The Company has the following two reportable segments: Advance Auto Parts, or AAP, and Autopart International, or AI. The AAP segment is comprised of 3,397 stores as of April 23, 2011, which operated in the United States, Puerto Rico and the Virgin Islands 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.

 
 
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Sixteen Week Periods Ended April 23, 2011 and April 24, 2010
(in thousands, except per share data)
(unaudited)
 
The AI segment consists solely of the operations of Autopart International, and operates stores under the “Autopart International” trade name. AI mainly serves the Commercial market from its 203 stores as of April 23, 2011 located in the Northeastern and Mid-Atlantic regions of the United States and Florida. 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 used by the Company.

The following table summarizes financial information for each of the Company's business segments for the sixteen weeks ended April 23, 2011 and April 24, 2010, respectively.
 
   
Sixteen Week Periods Ended
 
   
April 23,
   
April 24,
 
   
2011
   
2010
 
Net sales
           
AAP
  $ 1,814,356     $ 1,765,569  
AI
    88,535       68,828  
Eliminations (1)
    (4,828 )     (3,791 )
Total net sales
  $ 1,898,063     $ 1,830,606  
                 
Income before provision for
               
 income taxes
               
AAP
  $ 174,668     $ 175,887  
AI
    1,645       853  
Total income before provision for
               
 income taxes
  $ 176,313     $ 176,740  
                 
Provision for income taxes
               
AAP
  $ 66,076     $ 67,000  
AI
    654       309  
Total provision for income taxes
  $ 66,730     $ 67,309  
                 
Segment assets
               
AAP
  $ 3,330,675     $ 3,015,969  
AI
    242,708       186,839  
Total segment assets
  $ 3,573,383     $ 3,202,808  
 
(1)  
For the sixteen weeks ended April 23, 2011, eliminations represented net sales of $2,745 from AAP to AI and $2,083 from AI to AAP. For the sixteen weeks ended April 24, 2010, eliminations represented net sales of $1,871 from AAP to AI and $1,920 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.

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 1, 2011 (filed with the Securities and Exchange Commission, or SEC, on March 1, 2011), which we refer to as our 2010 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;
·  
competitive pricing and other competitive pressures;
·  
our ability to implement our business strategy;
·  
our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;
·  
our ability to attract and retain qualified employees, or Team Members;
·  
deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, uncertain credit markets or other recessionary type conditions which could have a negative impact on our business, financial condition, results of operations and cash flows;
·  
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;
·  
business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism; and
·  
the impact of global climate change or legal and regulatory responses to such change.
  
 
 
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 SEC and you should not place undue reliance on those statements.

Introduction

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both "do-it-yourself," or DIY, and “do-it-for-me,” or Commercial, customers. Our Commercial customers consist primarily of delivery customers for whom we deliver product from our store locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers. At April 23, 2011, we operated a total of 3,600 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 Northeastern, Southeastern and Midwestern regions of 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 23, 2011, we operated 3,397 stores in the AAP segment. Our AAP 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 AAP segment also includes our e-commerce operations.

At April 23, 2011, we operated 203 stores in the AI segment under the “Autopart International” trade name. AI’s business primarily serves the Commercial market from its store locations in the Northeastern and Mid-Atlantic regions of the United States and Florida. In addition, its North American Sales Division services warehouse distributors and jobbers throughout North America. For additional information regarding our segments, see Note 10, Segments and Related Information, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Management Overview

Our sales and earnings momentum from Fiscal 2010 decelerated during our sixteen weeks ended April 23, 2011 (“first quarter of Fiscal 2011”). We generated earnings per diluted share, or diluted EPS, of $1.35 compared to $1.19 for the comparable period of Fiscal 2010. The increase in our diluted EPS was primarily driven by the repurchase of shares of our common stock as earnings were relatively flat compared to the first quarter of Fiscal 2010. Our comparable store sales growth was constrained by a number of external and internal factors. External factors included severe weather in certain of our geographic regions, higher gas prices and overall lower industry growth during the first quarter of 2011 over the comparable period of 2010. Internally, we believe the pace and breadth of change from the implementation of our strategic initiatives contributed to the slowdown in our momentum.

  Our gross profit rate continued to improve for the first quarter of Fiscal 2011 when compared to the first quarter of Fiscal 2010. Our selling, general and administrative expense, or SG&A rate, increased primarily as a result of higher advertising spend and fixed cost deleverage due to our modest comparable store sales increase. Although our operating cash flow for the first quarter of Fiscal 2011 was less than the comparable period of last year, we used available cash and borrowings to repurchase shares of our common stock and invest in capital improvements and initiatives to support our strategies as outlined in our previous Fiscal 2011 earnings guidance.  As discussed in the Business Update below, we remain committed to investing in our two key strategies. However, we have adapted the pace of change in response to the performance in our first quarter of Fiscal 2011.
 
 

Summary of First Quarter Financial Results

A high-level summary of our financial results for the first quarter of Fiscal 2011 is included below:
 
·  
Total sales during the first quarter of Fiscal 2011 increased 3.7% to $1,898.1 million as compared to the first quarter of Fiscal 2010, driven by the addition of 138 net new stores over the past 12 months and a 1.4% increase in comparable store sales.
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Our operating income increased $3.8 million for the first quarter of Fiscal 2011 over the comparable period of Fiscal 2010 and decreased as a percentage of total sales by 15 basis points due to the increase, or deleverage, of our SG&A rate partially offset by a higher gross profit rate.
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Our inventory balance as of April 23, 2011 increased $372.6 million, or 21.3%, over the comparable period of last year primarily driven by our Superior Availability initiatives, new store growth, seasonal demands of our business and lower than expected sales during the first quarter.
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We generated operating cash flow of $272.5 million in the first quarter of Fiscal 2011, a decrease of 19.4% over the comparable period in Fiscal 2010.