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EXCEL - IDEA: XBRL DOCUMENT - ADVANCE AUTO PARTS INCFinancial_Report.xls
EX-31.1 - EXHIBIT 31.1 - ADVANCE AUTO PARTS INCaap_exhibit311x10042014.htm
EX-32.1 - EXHIBIT 32.1 - ADVANCE AUTO PARTS INCaap_exhibit321x10042014.htm
EX-10.52 - EXHIBIT 10.52 - ADVANCE AUTO PARTS INCexhibit1052.htm
EX-31.2 - EXHIBIT 31.2 - ADVANCE AUTO PARTS INCaap_exhibit312x10042014.htm
EX-10.51 - EXHIBIT 10.51 - ADVANCE AUTO PARTS INCexhibit1051.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 October 4, 2014
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 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. (Check one):

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 7, 2014, the registrant had outstanding 72,994,178 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
 




 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


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 4, 2014, December 28, 2013 and October 5, 2013
(in thousands, except per share data)
(unaudited)

 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
Assets
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
89,664

 
$
1,112,471

 
$
567,301

Receivables, net
634,828

 
277,595

 
278,977

Inventories, net
3,941,549

 
2,556,557

 
2,463,978

Other current assets
97,232

 
42,761

 
68,435

Total current assets
4,763,273

 
3,989,384

 
3,378,691

Property and equipment, net of accumulated depreciation of $1,341,695, $1,255,474 and $1,231,119
1,424,569

 
1,283,970

 
1,278,655

Assets held for sale
615

 
2,064

 
2,064

Goodwill
997,715

 
199,835

 
199,835

Intangible assets, net
763,338

 
49,872

 
53,963

Other assets, net
48,227

 
39,649

 
31,491

 
$
7,997,737

 
$
5,564,774

 
$
4,944,699

Liabilities and Stockholders' Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Current portion of long-term debt
$
5,580

 
$
916

 
$
1,030

Accounts payable
3,090,991

 
2,180,614

 
2,057,615

Accrued expenses
573,183

 
428,625

 
429,171

Other current liabilities
114,288

 
154,630

 
148,528

Total current liabilities
3,784,042

 
2,764,785

 
2,636,344

Long-term debt
1,730,150

 
1,052,668

 
604,027

Other long-term liabilities
558,046

 
231,116

 
236,480

Commitments and contingencies


 


 


Stockholders' equity:
 

 
 

 
 

Preferred stock, nonvoting, $0.0001 par value

 

 

Common stock, voting, $0.0001 par value
7

 
7

 
7

Additional paid-in capital
553,729

 
531,293

 
524,741

Treasury stock, at cost
(108,729
)
 
(107,890
)
 
(105,732
)
Accumulated other comprehensive (loss) income
(4,818
)
 
3,683

 
4,608

Retained earnings
1,485,310

 
1,089,112

 
1,044,224

Total stockholders' equity
1,925,499

 
1,516,205

 
1,467,848

 
$
7,997,737

 
$
5,564,774

 
$
4,944,699


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.


1


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Forty Week Periods Ended
October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 4,
2014
 
October 5,
2013
 
October 4,
2014
 
October 5,
2013
Net sales
$
2,289,456

 
$
1,520,144

 
$
7,606,652

 
$
5,085,001

Cost of sales, including purchasing and warehousing costs
1,255,014

 
757,204

 
4,156,980

 
2,534,632

Gross profit
1,034,442

 
762,940

 
3,449,672

 
2,550,369

Selling, general and administrative expenses
825,284

 
592,216

 
2,744,039

 
1,980,895

Operating income
209,158

 
170,724

 
705,633

 
569,474

Other, net:
 

 
 

 
 
 
 
Interest expense
(15,903
)
 
(7,948
)
 
(56,406
)
 
(26,632
)
Other income, net
398

 
366

 
1,209

 
1,689

Total other, net
(15,505
)
 
(7,582
)
 
(55,197
)
 
(24,943
)
Income before provision for income taxes
193,653

 
163,142

 
650,436

 
544,531

Provision for income taxes
71,476

 
59,312

 
241,045

 
202,040

Net income
$
122,177

 
$
103,830

 
$
409,391

 
$
342,491

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.67

 
$
1.42

 
$
5.60

 
$
4.68

Diluted earnings per common share
$
1.66

 
$
1.42

 
$
5.56

 
$
4.65

Dividends declared per common share
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
72,955

 
72,747

 
72,913

 
72,981

Weighted average common shares outstanding - assuming dilution
73,427

 
73,128

 
73,390

 
73,463


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Twelve and Forty Week Periods Ended
October 4, 2014 and October 5, 2013
(in thousands)
(unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 4,
2014
 
October 5,
2013
 
October 4,
2014
 
October 5,
2013
Net income
$
122,177

 
$
103,830

 
$
409,391

 
$
342,491

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs, net of $89, $91, $296 and $248 tax
(138
)
 
(141
)
 
(461
)
 
(386
)
Postretirement benefit plan amendment

 

 

 
2,327

Currency translation
(11,454
)
 

 
(8,040
)
 

Total other comprehensive (loss) income
(11,592
)
 
(141
)
 
(8,501
)
 
1,941

Comprehensive income
$
110,585

 
$
103,689

 
$
400,890

 
$
344,432


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.


2



Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Forty Week Periods Ended
October 4, 2014 and October 5, 2013
(in thousands)
(unaudited)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock,
at cost
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance, December 28, 2013

 
$

 
74,224

 
$
7

 
$
531,293

 
1,384

 
$
(107,890
)
 
$
3,683

 
$
1,089,112

 
$
1,516,205

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
409,391

 
409,391

Total other comprehensive income (loss)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(8,501
)
 
 

 
(8,501
)
Issuance of shares upon the exercise of stock options and stock appreciation rights
 

 
 

 
119

 
 

 
1,874

 
 

 
 

 
 

 
 

 
1,874

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(4,730
)
 
 
 
 
 
 
 
 
 
(4,730
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
5,691

 
 

 
 

 
 

 
 

 
5,691

Restricted stock and restricted stock units vested
 

 
 

 
11

 
 

 
 

 
 

 
 

 
 

 
 

 

Share-based compensation
 

 
 

 
 

 
 

 
15,969

 
 

 
 

 
 

 
 

 
15,969

Stock issued under employee stock purchase plan
 

 
 

 
31

 
 

 
3,597

 
 

 
 

 
 

 
 

 
3,597

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
7

 
(839
)
 
 

 
 

 
(839
)
Cash dividends
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(13,193
)
 
(13,193
)
Other
 

 
 

 
 

 
 

 
35

 
 

 
 

 
 

 
 

 
35

Balance, October 4, 2014

 
$

 
74,385

 
$
7

 
$
553,729

 
1,391

 
$
(108,729
)
 
$
(4,818
)
 
$
1,485,310

 
$
1,925,499

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 29, 2012

 
$

 
73,731

 
$
7

 
$
520,215

 
348

 
$
(27,095
)
 
$
2,667

 
$
714,900

 
$
1,210,694

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
342,491

 
342,491

Total other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
1,941

 
 

 
1,941

Issuance of shares upon the exercise of stock options and stock appreciation rights
 

 
 

 
438

 

 
1,903

 
 

 
 

 
 

 
 

 
1,903

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(20,572
)
 
 
 
 
 
 
 
 
 
(20,572
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
14,979

 
 

 
 

 
 

 
 

 
14,979

Restricted stock and restricted stock units vested
 
 
 
 
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 

Share-based compensation
 

 
 

 
 

 
 

 
6,510

 
 

 
 

 
 

 
 

 
6,510

Stock issued under employee stock purchase plan
 

 
 

 
23

 
 

 
1,679

 
 

 
 

 
 

 
 

 
1,679

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
1,015

 
(78,637
)
 
 

 
 

 
(78,637
)
Cash dividends
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(13,167
)
 
(13,167
)
Other
 

 
 

 
 

 
 

 
27

 
 

 
 

 
 

 
 

 
27

Balance, October 5, 2013

 
$

 
74,182

 
$
7

 
$
524,741

 
1,363

 
$
(105,732
)
 
$
4,608

 
$
1,044,224

 
$
1,467,848


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.


3


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 4, 2014 and October 5, 2013
(in thousands)
(unaudited)
 
Forty Week Periods Ended
 
October 4,
2014
 
October 5,
2013
Cash flows from operating activities:
 
 
 
Net income
$
409,391

 
$
342,491

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
218,615

 
160,059

Share-based compensation
15,969

 
6,510

Loss on property and equipment, net
3,504

 
402

Other
2,014

 
1,226

Provision (benefit) for deferred income taxes
32,243

 
(3,797
)
Excess tax benefit from share-based compensation
(5,698
)
 
(15,168
)
Net increase in, net of effect from acquisition of businesses:
 
 
 
Receivables, net
(102,062
)
 
(30,529
)
Inventories, net
(227,557
)
 
(110,934
)
Other assets
(43,534
)
 
(14,902
)
Net increase (decrease) in, net of effect from acquisition of businesses:
 
 
 
Accounts payable
209,461

 
(9,502
)
Accrued expenses
29,103

 
69,724

Other liabilities
(1,155
)
 
2,887

Net cash provided by operating activities
540,294

 
398,467

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(161,542
)
 
(147,690
)
Business acquisitions, net of cash acquired
(2,060,816
)
 
(187,211
)
Sale of certain assets of acquired business

 
16,798

Proceeds from sales of property and equipment
710

 
723

Net cash used in investing activities
(2,221,648
)
 
(317,380
)
Cash flows from financing activities:
 

 
 

Increase (decrease) in bank overdrafts
3,366

 
(8,665
)
Borrowings under credit facilities
1,940,700

 

Payments on credit facilities
(1,258,400
)
 

Dividends paid
(17,561
)
 
(17,563
)
Proceeds from the issuance of common stock, primarily exercise of stock options
5,506

 
3,609

Tax withholdings related to the exercise of stock appreciation rights
(4,730
)
 
(20,572
)
Excess tax benefit from share-based compensation
5,698

 
15,168

Repurchase of common stock
(839
)
 
(78,637
)
Contingent consideration related to previous business acquisition
(10,047
)
 
(4,726
)
Other
(801
)
 
(511
)
Net cash provided by (used in) financing activities
662,892

 
(111,897
)
 
 
 
 
Effect of exchange rate changes on cash
(4,345
)
 

 
 
 
 
Net decrease in cash and cash equivalents
(1,022,807
)
 
(30,810
)
Cash and cash equivalents, beginning of period
1,112,471

 
598,111

Cash and cash equivalents, end of period
$
89,664

 
$
567,301

 
 
 
 


4


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 4, 2014 and October 5, 2013
(in thousands)
(unaudited)
 
Forty Week Periods Ended
 
October 4,
2014
 
October 5,
2013
Supplemental cash flow information:
 
 
 
Interest paid
$
40,266

 
$
25,491

Income tax payments
222,862

 
172,682

Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
21,801

 
16,698

Receivable for sale of certain assets of acquired business

 
1,074

Changes in other comprehensive income from post retirement benefits
(461
)
 
1,941

 
 
 
 

The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.


5

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)



1.
Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company and include the accounts of Advance Auto Parts, Inc. ("Advance"), its wholly owned subsidiary, Advance Stores Company, Incorporated ("Advance Stores"), and its subsidiaries (collectively, the "Company"). All intercompany balances and transactions have been eliminated in consolidation. 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 based upon the Securities and Exchange Commission ("SEC") interim reporting guidance. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements for the fiscal year ended December 28, 2013, or Fiscal 2013.

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 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for Fiscal 2013 (filed with the SEC on February 25, 2014).

The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full fiscal year. The first quarter of each of the Company's fiscal years contains 16 weeks. The Company's remaining three quarters consist of 12 weeks, with the exception of the fourth quarter of fiscal 2014 which will contain 13 weeks due to the 53-week fiscal year in 2014. The Company's last 53-week fiscal year was in 2008.

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.

Segment and Related Information
 
As a result of the acquisition of General Parts International, Inc. ("GPI") on January 2, 2014, which is further described in Note 3, Acquisition, the Company reevaluated the composition of its reportable segments. Based on this analysis, the Company determined that it operates as a single reportable segment. As of October 4, 2014, the Company's operations are comprised of 5,305 stores and 109 distribution branches, which operate in the United States, Canada, Puerto Rico and the U.S. Virgin Islands primarily under the trade names “Advance Auto Parts,” "Carquest," "Autopart International" and "Worldpac." These locations offer a broad selection of brand name, original equipment manufacturer ("OEM") and proprietary automotive replacement parts, accessories, and maintenance items primarily for domestic and imported cars and light trucks. While the mix of do-it-yourself ("DIY") and do-it-for-me ("Commercial") customers varies among the four store brands, all of the locations serve customers through similar distribution channels. The Company has begun implementation of its plan to fully integrate the Carquest company-operated stores and overall operations into Advance Auto Parts by the end of fiscal 2016 and to eventually integrate the availability of all of the Company's product offerings throughout the entire chain.

The Company's Advance Auto Parts operations are currently comprised of three geographic areas. Each of the Advance Auto Parts geographic areas, in addition to Carquest and Worldpac, are individually considered operating segments which are aggregated into one reportable segment. Effective Q1 2015, the Company's three geographic areas will expand to five areas, inclusive of the Carquest operations, at which time Carquest will no longer be an operating segment. Included in the Company's overall store operations are sales generated from its e-commerce platforms. The Company's e-commerce platforms, primarily consisting of its online websites and Commercial ordering platforms, are part of its integrated operating approach of serving its DIY and Commercial customers. The Company's online websites allow its DIY customers to pick up merchandise at a conveniently located store location or have their purchases shipped directly to them. The majority of the Company's online DIY


6

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


sales are picked up at store locations. Through the Company's online ordering platforms, Commercial customers can conveniently place orders with a designated store location for delivery to their places of business or pick-up.

New Accounting Pronouncements

In August 2014, the Financial Accounting Standard Board, or FASB, issued Accounting Standard Update, or ASU, 2014-15 “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." This new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In June 2014, the FASB, issued ASU 2014-12 “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on January 1, 2017. We are currently evaluating the impact of the adoption of this guidance on the Company's consolidated financial condition, results of operations and cash flows.

In April 2014, the FASB issued ASU No. 2014-08 "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of Equity", which amends the definition of a discontinued operation in Accounting Standards Codification, or ASC, 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The new guidance changes the definition of a discontinued operation and requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014; earlier adoption is permitted. The adoption of this guidance affects prospective presentation of disposals and therefore, is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In July 2013, the FASB issued ASU No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”  Under ASU 2013-11 an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance affects presentation only and, therefore, had no material impact on the Company's consolidated financial condition, results of operations or cash flows.


7

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(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 88% of inventories at October 4, 2014 and 95% of inventories at December 28, 2013 and October 5, 2013. 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 2014 and prior years. As a result of utilizing LIFO, the Company recorded a reduction to cost of sales of $4,172 for the forty weeks ended October 4, 2014 and an increase to cost of sales of $476 for the forty weeks ended October 5, 2013. 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, execution of merchandising strategies and realization of supply chain efficiencies.

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 October 4, 2014, December 28, 2013 and October 5, 2013 were as follows:

 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
Inventories at FIFO, net
$
3,805,615

 
$
2,424,795

 
$
2,338,264

Adjustments to state inventories at LIFO
135,934

 
131,762

 
125,714

Inventories at LIFO, net
$
3,941,549

 
$
2,556,557

 
$
2,463,978


3.
Acquisition:

On January 2, 2014, the Company acquired GPI in an all-cash transaction. GPI, formerly a privately-held company, is a leading distributor and supplier of original equipment and aftermarket replacement products for commercial markets operating under the Carquest and Worldpac brands. As of the acquisition date, GPI operated 1,233 Carquest stores and 103 Worldpac branches located in 45 states and Canada and serviced approximately 1,400 independently-owned Carquest stores. The Company believes the acquisition of GPI will allow the Company to expand its geographic presence, Commercial capabilities and overall scale to better serve customers.

The Company acquired all of GPI's assets and liabilities as a result of the transaction. Under the terms of the agreement, the Company acquired all of the outstanding stock of GPI for a purchase price of $2,080,804 (subject to adjustment for certain closing items) consisting of $1,307,991 in cash to GPI's shareholders, the repayment of $694,301 of GPI debt and $78,512 in make-whole fees and transaction-related expenses. The Company funded the purchase price with cash on-hand, $700,000 from a term loan and $306,046 from a revolving credit facility. Refer to Note 7, Long-Term Debt, for a more detailed description of this debt. The Company recognized $26,970 of acquisition-related costs during Fiscal 2013, which was included in selling, general and administrative expenses and interest expense. The Company recognized no acquisition-related costs during the twelve and forty weeks ended October 4, 2014, as all of these costs were recognized during Fiscal 2013. The Company has included the financial results of GPI in its consolidated financial statements commencing January 2, 2014. GPI contributed sales of $728,931 and net income of $19,329 during the twelve weeks ended October 4, 2014. GPI contributed sales of $2,345,942 and net income of $58,895 during the forty weeks ended October 4, 2014. The net income reflects amortization related to the acquired intangible assets and integration expenses.

Included in the total purchase price, $200,881 was placed in escrow to secure indemnification obligations of the sellers relating to the accuracy of representations and warranties and the satisfaction of covenants. Half of the escrow funds will be disbursed to the Sellers on July 2, 2015 and the remaining amounts distributed on January 2, 2017, after deducting for any claims indemnified from escrow. At the acquisition date, the Company recognized a net indemnification asset of $4,283 with respect to liabilities for which it intends to make a claim from escrow. According to the agreement, the Company will be


8

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


indemnified, for the escrow term of three years, against losses incurred relating to taxes owed by GPI for periods prior to June 30, 2013.

Purchase Price Allocation

The following table summarizes the consideration paid for GPI and the amounts of the assets acquired and liabilities assumed as of the acquisition date:

Total Consideration
 
$
2,080,804

 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
25,176

Receivables
 
255,997

Inventory
 
1,159,886

Other current assets
 
118,871

Property, plant and equipment
 
162,545

Intangible assets
 
756,571

Other assets
 
1,741

Accounts payable
 
(704,006
)
Accrued and other current liabilities
 
(136,784
)
Long-term liabilities
 
(356,584
)
Total identifiable net assets
 
1,283,413

 
 
 
Goodwill
 
797,391

 
 
 
Total acquired net assets
 
$
2,080,804


During the twelve weeks ended October 4, 2014 the Company obtained new information about facts and circumstances that existed as of the acquisition date that resulted in a change in the fair value of assets and liabilities recognized. Accordingly, the fair values of assets and liabilities have been revised as of the acquisition date, resulting in a decrease in goodwill of $757 primarily related to adjustments to income taxes payable. As of October 4, 2014, the valuation of the assets acquired and liabilities assumed is complete.

Due to the nature of GPI's business, the assets acquired and liabilities assumed as part of this acquisition are similar in nature to those of the Company. The goodwill attributable to the acquisition will not be amortizable or deductible for tax purposes. The goodwill of $797,391 arising from the acquisition consists largely of the anticipated synergies and economies of scale from the combined companies and the overall strategic importance of GPI to the Company. For additional information regarding goodwill and intangible assets acquired, see Note 5, Goodwill and Intangible Assets.

The Company recorded a liability associated with unfavorable leases of $48,604, which is included in other long-term liabilities. Favorable and unfavorable lease assets and liabilities will be amortized to rent expense over their expected lives, which approximates the period of time that the favorable or unfavorable lease terms will be in effect. The fair value of financial assets acquired included receivables of $255,997 primarily from Commercial customers and vendors. The gross amount due was $269,006, of which $13,009 was expected to be uncollectible.

       


9

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


Unaudited Pro Forma Financial Information

The following unaudited consolidated pro forma financial information combines the respective measure of the Company for the twelve and forty weeks ended October 5, 2013 and GPI for the three and nine months ended September 30, 2013. The pro forma financial information has been prepared by adjusting the historical data to give effect to the acquisition as if it had occurred on December 30, 2012 (the first day of the Company's fiscal 2013).
 
 
October 5,
2013
 
October 5,
2013
 
 
(Third Quarter Ended)
 
(Year to Date Ended)
Pro forma:
 
 
 
 
Net sales
 
$
2,295,241

 
$
7,332,864

 
 
 
 
 
Net income
 
$
126,074

 
$
392,738

 
 
 
 
 
Basic earnings per share
 
$
1.73

 
$
5.38

 
 
 
 
 
Diluted earnings per share
 
$
1.73

 
$
5.35

The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
The unaudited pro forma results have been adjusted with respect to certain aspects of the acquisition to reflect:
additional amortization expense that would have been recognized assuming fair value adjustments to the existing GPI assets acquired and liabilities assumed, including favorable and unfavorable lease values and other intangible assets;
adjustment of interest expense to reflect the additional borrowings of the Company in conjunction with the acquisition and removal of GPI historical debt;
elimination of the GPI recognition of a deferred gain in 2013 of $2,073 and $4,783 for the three and nine months ended September 30, 2013, respectively, from a sale leaseback transaction as the deferred values were subsequently removed in purchase accounting; and
elimination of acquisition-related transaction fees incurred by the Company of $5,114 for the twelve and forty weeks ended October 5, 2013.
The unaudited pro forma results do not reflect future events that either have occurred or may occur after the acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods. They also do not give effect to certain charges that the Company expects to incur in connection with the integration of GPI, including, but not limited to, additional professional fees, employee integration costs, potential asset impairments, and accelerated depreciation and amortization.

4. Exit Activities and Impairment:

In June 2014, the Company approved plans to relocate operations from its Minneapolis, Minnesota and Campbell, California offices to other existing offices of the Company, including in Newark, California, Roanoke, Virginia and Raleigh, North Carolina, and to close its Minneapolis and Campbell offices. The Company also expects to relocate various functions between its existing offices in Roanoke and Raleigh. The Company anticipates that the relocations and office closings will be substantially completed by the end of 2015. The Company also approved plans in June to consolidate approximately 100 Carquest stores during 2014. In August 2014, the Company approved plans to consolidate the operations of 33 of its 40


10

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


Autoparts International ("AI") stores in Florida into Advance Auto Parts stores by the end of 2015. The Company also plans to convert the remaining 7 AI stores in Florida to Advance Auto Parts by the end of 2015.

In connection with these relocations, office closings and store consolidations, the Company plans to relocate some employees and terminate the employment of others. The Board of Directors of the Company approved this action in order to take advantage of synergies following the acquisition of GPI and to capitalize on the strength of existing locations and organizational experience. The Company estimates that it will incur restructuring costs of approximately $38,600 over the next two years under these plans. Substantially all of these costs are expected to be cash expenditures. This estimate includes approximately $11,200 of employee severance costs, $17,600 of relocation costs and $9,800 of closed store lease liabilities.

Employees receiving severance/outplacement benefits will be required to render service until they are terminated in order to receive the benefits. Therefore, the severance/outplacement benefits will be recognized over the related service periods. During the twelve and forty weeks ended October 4, 2014 the Company recognized $2,217 and $3,868, respectively, of severance/outplacement benefits under these restructuring plans and other severance related to the acquisition of GPI.

Contract termination costs, such as those associated with closed store and office leases, will be recognized at the cease-use date. Closed lease liabilities 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). As of October 4, 2014, 26 Carquest stores and one AI store had been consolidated under these restructuring plans. The Company’s closed store lease obligations at October 4, 2014 included $1,182 related to these consolidations.

Other restructuring costs, including costs to consolidate or close facilities and relocate employees, will be recognized in the period in which the liability is incurred. During the twelve and forty weeks ended October 4, 2014 the Company recognized $2,990 and $5,108, respectively, of relocation and consolidation costs.

A summary of the Company’s restructuring 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:

 
 
Closed Store Lease Obligations
 
Severance
 
Relocation and Other Exit Costs
 
Total
 
For the twelve weeks ended October 4, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 12, 2014:
 
$
14,665

 
$
1,504

 
$
1,526

 
$
17,695

 
Reserves established
 
1,666

 
2,821

 
2,990

 
7,477

 
Change in estimates
 
(57
)
 
(603
)
 

 
(660
)
 
Cash payments
 
(1,456
)
 
(420
)
 
(2,192
)
 
(4,068
)
 
Balance, October 4, 2014
 
$
14,818

 
$
3,302

 
$
2,324

 
$
20,444

 
 
 
 
 
 
 
 
 
 
 
For the forty weeks ended October 4, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 28, 2013
 
$
11,212

 
$

 
$

 
$
11,212

 
Reserves acquired with GPI
 
3,455

 

 

 
3,455

 
Reserves established
 
4,378

 
4,472

 
5,108

 
13,958

 
Change in estimates
 
694

 
(603
)
 

 
91

 
Cash payments
 
(4,921
)
 
(567
)
 
(2,784
)
 
(8,272
)
 
Balance, October 4, 2014
 
$
14,818

 
$
3,302

 
$
2,324

 
$
20,444

 



11

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


The Company also evaluated certain store assets contained in locations identified as part of the store consolidation plan. The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable and exceeds its fair value. Accordingly, the Company determined that the carrying amounts of certain assets were considered to not be recoverable based on the stores’ closure and /or projected inability to produce sufficient cash flows. For those assets that were not considered to be recoverable, the Company determined the amount of impairment based on the excess of the assets’ carrying value as compared to their fair value. During the twelve and forty weeks ended October 4, 2014 impairment charges recognized related to the restructuring plan were $923 and $987, respectively.

5. Goodwill and Intangible Assets:

Goodwill

The following table reflects the carrying amount of goodwill and the changes in goodwill carrying amounts.
 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
 
(40 weeks ended)
 
(52 weeks ended)
 
(40 weeks ended)
Goodwill, beginning of period
$
199,835

 
$
76,389

 
$
76,389

Acquisitions
798,043

 
123,446

 
123,446

Changes in foreign currency exchange rates
(163
)
 

 

 
 
 
 
 
 
Goodwill, end of period
$
997,715

 
$
199,835

 
$
199,835


As discussed in Note 3, Acquisition, on January 2, 2014, the Company acquired GPI in an all-cash transaction which resulted in the addition of $797,391 of goodwill. During the forty weeks ended October 4, 2014, the Company also added $652 of goodwill associated with the acquisition of nine stores. On December 31, 2012, the Company acquired B.W.P. Distributors, Inc. ("BWP") in an all-cash transaction which resulted in the addition of $123,446 of goodwill.

Intangible Assets Other Than Goodwill

The Company recorded an increase to intangible assets of $757,453 during the forty weeks ended October 4, 2014 related to the acquisition of GPI and nine independent stores. The increase included customer relationships of $330,293 which will be amortized over 12 years, non-competes totaling $50,695 which will be amortized over 5 years and favorable leases of $56,465 which are amortized over the life of the leases at a weighted average of 4.5 years. The increase also includes indefinite-life intangibles of $320,000 from acquired brands.

The Company recorded an increase to intangible assets of $31,245 during the forty weeks ended October 5, 2013 related to the acquisition of BWP. The increase included Customer Relationships of $26,045 which will be amortized over 12 years and other intangible assets totaling $5,200 which will be amortized over a weighted average of 3.4 years.



12

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


The gross and net carrying amounts of acquired intangible assets as of October 4, 2014, December 28, 2013 and October 5, 2013 are comprised of the following:

 
Acquired Intangible Assets
 
 
 
Subject to Amortization
 
Not Subject to Amortization
 
Total Intangible Assets
(excluding goodwill)
 
Customer
Relationships
 
Acquired Technology
 
Favorable Leases
 
Non-Compete and Other
 
Brands, Trademark and
Tradenames
 
Gross:
 
 
 
 
 
 
 
 
 
 
 
Gross carrying amount at December 28, 2013
$
33,601

 
$
8,850

 
$

 
$
6,085

 
$
20,550

 
$
69,086

Additions
330,293

 

 
56,465

 
50,695

 
320,000

 
757,453

Effect of exchange rate changes on intangibles
(212
)
 

 
9

 

 
84

 
(119
)
Gross carrying amount at October 4, 2014
$
363,682

 
$
8,850

 
$
56,474

 
$
56,780

 
$
340,634

 
$
826,420

 
 
 
 
 
 
 
 
 
 
 
 
Gross carrying amount at December 29, 2012
$
9,800

 
$
8,850

 
$

 
$
885

 
$
20,550

 
$
40,085

Additions
26,045

 

 

 
5,200

 

 
31,245

Gross carrying amount at October 5, 2013
$
35,845

 
$
8,850

 
$

 
$
6,085

 
$
20,550

 
$
71,330

 
 
 
 
 
 
 
 
 
 
 
 
Net:
 

 
 
 
 
 
 

 
 

 
 

Net book value at December 28, 2013
$
23,292

 
$
2,469

 
$

 
$
3,561

 
$
20,550

 
$
49,872

Additions
330,293

 

 
56,465

 
50,695

 
320,000

 
757,453

2014 amortization
(23,353
)
 
(2,027
)
 
(9,220
)
 
(9,268
)
 

 
(43,868
)
Effect of exchange rate changes on intangibles
(212
)
 

 
9

 

 
84

 
(119
)
Net carrying amount at October 4, 2014
$
330,020

 
$
442

 
$
47,254

 
$
44,988

 
$
340,634

 
$
763,338

 
 
 
 
 
 
 
 
 
 
 
 
Net book value at December 29, 2012
$
2,658

 
$
5,419

 
$

 
$
218

 
$
20,550

 
$
28,845

Additions
26,045

 

 

 
5,200

 

 
31,245

2013 amortization
(2,429
)
 
(2,269
)
 

 
(1,429
)
 

 
(6,127
)
Net carrying amount at October 5, 2013
$
26,274

 
$
3,150

 
$

 
$
3,989

 
$
20,550

 
$
53,963

 


13

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


Future Amortization Expense

The table below shows expected amortization expense for the next five years for acquired intangible assets recorded as of October 4, 2014:

Fiscal Year
 
Amount
Remainder of 2014
 
$
12,701

2015
 
52,234

2016
 
48,413

2017
 
46,060

2018
 
43,176

Thereafter
 
220,120


6. Receivables, net:

Receivables consist of the following:
 
 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
 
Trade
 
$
435,377

 
$
145,670

 
$
149,670

 
Vendor
 
203,650

 
138,336

 
134,471

 
Other
 
14,801

 
6,884

 
6,821

 
Total receivables
 
653,828

 
290,890

 
290,962

 
Less: Allowance for doubtful accounts
 
(19,000
)
 
(13,295
)
 
(11,985
)
 
Receivables, net
 
$
634,828

 
$
277,595

 
$
278,977

 



14

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


7. Long-term Debt:

Long-term debt consists of the following:
 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
Revolving facility at variable interest rates (1.49% and 1.47% at October 4, 2014 and December 28, 2013, respectively, due December 5, 2018; and 1.67% at October 5, 2013, replaced by the current facility)
$
82,300

 
$

 
$

Term loan at variable interest rates (1.62% and 1.67% at October 4, 2014 and December 28, 2013, respectively) due January 2, 2019
600,000

 

 

5.75% Senior Unsecured Notes (net of unamortized discount of $776, $865 and $891 at October 4, 2014, December 28, 2013 and October 5, 2013, respectively) due May 1, 2020
299,224

 
299,135

 
299,109

4.50% Senior Unsecured Notes (net of unamortized discount of $74, $80 and $82 at October 4, 2014, December 28, 2013 and October 5, 2013, respectively) due January 15, 2022
299,926

 
299,920

 
299,918

4.50% Senior Unsecured Notes (net of unamortized discount of $1,300 and $1,387 at October 4, 2014 and December 28, 2013, respectively) due December 1, 2023
448,700

 
448,613

 

Other
5,580

 
5,916

 
6,030

 
1,735,730

 
1,053,584

 
605,057

Less: Current portion of long-term debt
(5,580
)
 
(916
)
 
(1,030
)
Long-term debt, excluding current portion
$
1,730,150

 
$
1,052,668

 
$
604,027

 
Bank Debt

On December 5, 2013, the Company entered into a new credit agreement (the “2013 Credit Agreement”) which provides a $700,000 unsecured term loan and a $1,000,000 unsecured revolving credit facility with Advance Stores, as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. This revolving credit facility replaced the revolver under the Company’s former Credit Agreement dated as of May 27, 2011 with Advance Stores, as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (the “2011 Credit Agreement”). Upon execution of the 2013 Credit Agreement, the lenders’ commitments under the 2011 Credit Agreement were terminated and the liabilities of the Company and its subsidiaries with respect to their obligations under the 2011 Credit Agreement were discharged. The new 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 to exceed $250,000 by those respective lenders (up to a total commitment of $1,250,000) during the term of the 2013 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 2013 Credit Agreement. Under the terms of the 2013 Credit Agreement the revolving credit facility terminates in December 2018 and the term loan matures in January 2019.

As of October 4, 2014, under the 2013 Credit Agreement, the Company had outstanding borrowings of $82,300 under the revolver and $600,000 under the term loan. As of October 4, 2014, the Company also had letters of credit outstanding of $155,438, which reduced the availability under the revolver to $762,262. The letters of credit generally have a term of one year or less and primarily serve as collateral for the Company’s self-insurance policies.

The interest rate on borrowings under the revolving credit facility is based, at the Company’s option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.30% and 0.30% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. A facility fee is charged on the total amount of the revolving credit facility, payable in arrears. The current facility fee rate is 0.20% per annum. Under the terms of the 2013 Credit Agreement, the interest rate and facility fee are subject to change based on the Company’s credit rating.


15

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


The interest rate on the term loan is based, at the Company’s option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.50% and 0.50% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. Under the terms of the term loan, the interest rate is subject to change based on the Company’s credit rating.

The 2013 Credit Agreement contains customary covenants restricting the ability of: (a) subsidiaries of Advance Stores to, among other things, create, incur or assume additional debt; (b) Advance Stores and its subsidiaries to, among other things, (i) incur liens, (ii) make loans and investments, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (c) Advance, Advance Stores and their subsidiaries to, among other things (i) engage in certain mergers, acquisitions, asset sales and liquidations, (ii) enter into certain hedging arrangements, (iii) enter into restrictive agreements limiting its ability to incur liens on any of its property or assets, pay distributions, repay loans, or guarantee indebtedness of its subsidiaries, and (iv) engage in sale-leaseback transactions; and (d) Advance, among other things, to change its holding company status. Advance and Advance Stores are required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. The 2013 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults to Advance Stores’ other material indebtedness. The Company was in compliance with its covenants with respect to the 2013 Credit Agreement at October 4, 2014 and December 28, 2013.

Senior Unsecured Notes

The Company issued 4.50% senior unsecured notes in December 2013 at 99.69% of the principal amount of $450,000 which are due December 1, 2023 (the “2023 Notes”). The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year. The net proceeds from the offering of these notes were approximately $445,200, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The net proceeds from the 2023 Notes were used in aggregate with borrowings under the Company’s revolving credit facility and term loan and cash on-hand to fund the Company’s acquisition of GPI on January 2, 2014.

The Company previously issued 4.50% senior unsecured notes in January 2012 at 99.968% of the principal amount of $300,000 which are due January 15, 2022 (the “2022 Notes”). The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. The Company’s 5.75% senior unsecured notes were issued in April 2010 at 99.587% of the principal amount of $300,000 and are due May 1, 2020 (the “2020 Notes” or collectively with the 2023 Notes and the 2022 Notes, “the Notes”). The 2020 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. Advance served as the issuer of the Notes with certain of Advance's domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among the Company, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.

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 for the Notes), 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: (i) upon the release of the guarantee of the Company’s other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon the Company’s exercise of its legal or covenant defeasance option.

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


16

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


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.

Debt Guarantees

The Company is a guarantor of loans made by banks to various independent store customers of the Company totaling $32,866 as of October 4, 2014. Upon entering into a relationship with certain independent stores, the Company guaranteed the debt of those stores to aid in the procurement of business loans. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the assets collateralized in these agreements is $67,253 as of October 4, 2014. The Company believes that the likelihood of performance under these guarantees is remote, and any fair value attributable to these guarantees would be very minimal.

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, 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 categorized 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.
 


17

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(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 October 4, 2014, December 28, 2013 and October 5, 2013:
 
 
 
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 October 4, 2014:
 
 
 
 
 
 
 
Contingent consideration related to business acquisitions
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
As of December 28, 2013:
 

 
 

 
 

 
 

Contingent consideration related to business acquisitions
$
9,475

 
$

 
$

 
$
9,475

 
 
 
 
 
 
 
 
As of October 5, 2013:
 

 
 

 
 

 
 

Contingent consideration related to business acquisitions
$
12,939

 
$

 
$

 
$
12,939

 
The fair value of the contingent consideration, which was recorded in Accrued expenses and Other long-term liabilities as of December 28, 2013 and October 5, 2013, was based on various estimates including the Company’s estimate of the probability of achieving the targets and the time value of money. During the forty weeks ended October 4, 2014, the contingent consideration previously recognized at fair value was paid.

The carrying amount of the Company’s cash and cash equivalents, accounts receivable, bank overdrafts, accounts payable, accrued expenses and the current portion of long term debt approximate their fair values due to the relatively short term nature of these instruments. The fair value of the Company’s senior unsecured notes was determined using Level 2 inputs based on quoted market prices, and the Company believes that the carrying value of its other long-term debt and certain long-term liabilities approximate fair value.

The carrying value and fair value of the Company's long-term debt as of October 4, 2014, December 28, 2013 and October 5, 2013, respectively, are as follows:
 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
Carrying Value
$
1,730,150

 
$
1,052,668

 
$
604,027

Fair Value
$
1,817,000

 
$
1,086,000

 
$
626,000


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). During the forty weeks ended October 4, 2014, the Company had no significant non-financial assets or liabilities that had been adjusted to fair value subsequent to initial recognition.
 


18

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


9. Stock Repurchases:

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. The Company's $500,000 stock repurchase program in place as of October 4, 2014 was authorized by its Board of Directors on May 14, 2012.

During the twelve and forty weeks ended October 4, 2014, the Company repurchased no shares of its common stock under its stock repurchase program. The Company had $415,092 remaining under its stock repurchase program as of October 4, 2014. During the twelve weeks ended October 5, 2013, the Company repurchased 35 shares of its common stock at an aggregate cost of $2,782, or an average price of $79.94 per share under its stock repurchase program. During the forty weeks ended October 5, 2013, the Company repurchased 998 shares of its common stock at an aggregate cost of $77,293, or an average price of $77.47 per share under its stock repurchase program.

The Company repurchased 1 share of its common stock at an aggregate cost of $82, or an average price of $128.71 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock and restricted stock units during the twelve weeks ended October 4, 2014. The Company repurchased 7 shares of its common stock at an aggregate cost of $839, or an average price of $126.53 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock and restricted stock units during the forty weeks ended October 4, 2014.

The Company repurchased 1 share of its common stock at an aggregate cost of $68, or an average price of $81.85 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock and restricted stock units during the twelve weeks ended October 5, 2013. The Company repurchased 17 shares of its common stock at an aggregate cost of $1,344, or an average price of $77.80 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock and restricted stock units during the forty weeks ended October 5, 2013.

10.
Earnings per Share:

Certain of the Company’s shares granted to Team Members in the form of restricted stock and restricted stock units 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 4, 2014 and October 5, 2013, earnings of $392 and $232, respectively, were allocated to the participating securities. For the forty week periods ended October 4, 2014 and October 5, 2013, earnings of $1,282 and $791, 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 2 and 54 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 4, 2014 and October 5, 2013, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive. Share-based awards to purchase approximately 9 and 52 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 4, 2014 and October 5, 2013, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive.



19

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


The following table illustrates the computation of basic and diluted earnings per share for the twelve and forty week periods ended October 4, 2014 and October 5, 2013, respectively: 
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
October 4,
2014
 
October 5,
2013
 
October 4,
2014
 
October 5,
2013
Numerator
 
 
 
 
 
 
 
Net income
$
122,177

 
$
103,830

 
$
409,391

 
$
342,491

Participating securities' share in earnings
(392
)
 
(232
)
 
(1,282
)
 
(791
)
Net income applicable to common shares
$
121,785

 
$
103,598

 
$
408,109

 
$
341,700

Denominator
 
 
 
 
 

 
 
Basic weighted average common shares
72,955

 
72,747

 
72,913

 
72,981

Dilutive impact of share-based awards
472

 
381

 
477

 
482

Diluted weighted average common shares
73,427

 
73,128

 
73,390

 
73,463

 
 
 
 
 
 
 
 
Basic earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.67

 
$
1.42

 
$
5.60

 
$
4.68

 
 
 
 
 
 
 
 
Diluted earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.66

 
$
1.42

 
$
5.56

 
$
4.65


11.
Share-Based Compensation:

The Company grants share-based compensation awards to its Team Members and members of its Board of Directors as provided for under the Company’s 2014 Long-Term Incentive Plan, or 2014 LTIP. Prior to May 14, 2014, the Company granted share-based compensation awards to its Team Members under the 2004 Long-Term Incentive Plan, which expired following the approval of the 2014 LTIP by the Company's shareholders. The Company currently grants share-based compensation in the form of stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and deferred stock units (“DSUs”). The Company also has outstanding restricted stock granted prior to the transition to RSUs in Fiscal 2012.

The Company granted 19 shares of performance-based RSUs, 67 time-based RSUs and 70 performance-based SARs during the forty week period ended October 4, 2014. The majority of these grants represent an off-cycle award made in the first fiscal quarter to certain GPI team members following the acquisition of GPI. The weighted average fair value of the RSUs granted during the forty week period ended October 4, 2014 was $124.81 per share. The weighted average fair value of the SARs granted, using the Black-Scholes option pricing model, was $28.55 per share, using the following weighted average assumptions:
Black-Scholes Option Valuation Assumptions
 
October 4,
2014
 
 
 
Risk-free interest rate (1)
 
1.1
%
Expected dividend yield
 
0.2
%
Expected stock price volatility (2)
 
27.6
%
Expected life of awards (in months) (3)
 
49

    
(1) 
The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate having a term consistent with the expected life of the award.
(2) 
Expected volatility is determined using a blend of historical and implied volatility.
(3) 
The expected life of the Company's awards represents the estimated period of time until exercise and is based on historical experience of previously granted awards.


20

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


See the Company's Annual Report on Form 10-K for the year ended December 28, 2013, for a more detailed discussion regarding the terms of the Company’s share-based compensation awards.

The Company recognizes share-based compensation expense on a straight-line basis net of estimated forfeitures. Forfeitures are estimated based on historical experience. Total share-based compensation expense included in the Company’s consolidated statements of operations was $3,606 for the twelve week period ended October 4, 2014 and the related income tax benefit recognized was $1,322. For the forty weeks ended October 4, 2014, total share-based compensation expense included in the Company's consolidated statements of operations was $15,969 and the related income tax benefit recognized was $5,868. As of October 4, 2014, there was $29,671 of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.2 years.

The aggregate intrinsic value for outstanding awards at October 4, 2014 was approximately $151,431 based on the Company's closing stock price of $135.13 as of the last trading day of the third Fiscal Quarter, 2014. For the forty weeks ended October 4, 2014, the aggregate intrinsic value for awards exercised was $19,866. The weighted-average remaining contractual life for outstanding and exercisable awards was approximately 4.6 and 3.0 years, respectively.

12.
Warranty Liabilities:

The following table presents changes in the Company’s warranty reserves:
 
October 4,
2014
 
December 28,
2013
 
October 5,
2013
 
(40 weeks ended)
 
(52 weeks ended)
 
(40 weeks ended)
Warranty reserve, beginning of period
$
39,512

 
$
38,425

 
$
38,425

Reserves acquired with GPI
4,490

 

 

Additions to warranty reserves
37,581

 
42,380

 
31,280

Reserves utilized
(36,537
)
 
(41,293
)
 
(31,148
)
 
 
 
 
 
 
Warranty reserve, end of period
$
45,046

 
$
39,512

 
$
38,557

 
The Company’s warranty liabilities are included in Accrued expenses in its condensed consolidated balance sheets.
 
13. Condensed Consolidating Financial Statements:

Certain 100% wholly-owned domestic subsidiaries of Advance, including its Material Subsidiaries (as defined in the 2013 Credit Agreement) serve as guarantors of Advance's senior unsecured notes ("Guarantor Subsidiaries"). The subsidiary guarantees related to Advance's senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of Advance to obtain funds from its Guarantor Subsidiaries. Certain of Advance's wholly-owned subsidiaries, including all of its foreign subsidiaries, do not serve as guarantors of Advance's senior unsecured notes ("Non-Guarantor Subsidiaries"). Beginning in January 2014, the Non-Guarantor Subsidiaries, which were previously minor, no longer qualified as minor as defined by SEC regulations. Accordingly, we present below the condensed consolidating financial information for the Guarantor Subsidiaries and Non-Guarantor Subsidiaries. Investments in subsidiaries of the Company are required to be presented under the equity method, even though all such subsidiaries meet the requirements to be consolidated under GAAP.

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, and cash flows of (i) Advance, (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries, and (iv) the eliminations necessary to arrive at consolidated information for the Company. The statement of operations eliminations relate primarily to the sale of inventory from a Non-Guarantor Subsidiary to a Guarantor Subsidiary. The balance sheet eliminations relate primarily to the elimination of intercompany receivables and payables and subsidiary investment accounts.

The following tables present condensed consolidating balance sheets as of October 4, 2014 and condensed consolidating statements of operations, comprehensive income and cash flows for the twelve and forty weeks ended October 4, 2014, and should be read in conjunction with the consolidated financial statements herein.


21

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 4, 2014 and October 5, 2013
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Balance Sheets
As of October 4, 2014
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
9

 
$
71,868

 
$
17,796

 
$
(9
)
 
$
89,664

Receivables, net

 
594,618

 
40,210

 

 
634,828

Inventories, net

 
3,790,168

 
151,381

 

 
3,941,549

Other current assets
2,767

 
88,700

 
8,353

 
(2,588
)
 
97,232

Total current assets
2,776

 
4,545,354

 
217,740

 
(2,597
)
 
4,763,273

Property and equipment, net of accumulated depreciation
2

 
1,413,808

 
10,759

 

 
1,424,569

Assets held for sale

 
615