XNYS:AAP Advance Auto Parts Inc Quarterly Report 10-Q Filing - 7/14/2012

Effective Date 7/14/2012

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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 July 14, 2012
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 August 17, 2012, the registrant had outstanding 73,327,586 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
July 14, 2012, December 31, 2011 and July 16, 2011
(in thousands, except per share data)
(unaudited)

 
July 14,
2012
 
December 31,
2011
 
July 16,
2011
Assets
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
448,594

 
$
57,901

 
$
68,820

Receivables, net
159,349

 
140,007

 
122,188

Inventories, net
2,096,341

 
2,043,158

 
2,091,913

Other current assets
60,883

 
52,754

 
59,245

Total current assets
2,765,167

 
2,293,820

 
2,342,166

Property and equipment, net of accumulated depreciation of $1,045,202, $983,622 and $965,442
1,263,680

 
1,223,099

 
1,172,132

Assets held for sale
788

 
615

 
707

Goodwill
76,389

 
76,389

 
34,387

Intangible assets, net
29,468

 
31,380

 
24,839

Other assets, net
33,654

 
30,451

 
29,237

 
$
4,169,146

 
$
3,655,754

 
$
3,603,468

Liabilities and Stockholders' Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Current portion of long-term debt
$
760

 
$
848

 
$
991

Accounts payable
1,738,101

 
1,653,183

 
1,570,320

Accrued expenses
417,663

 
385,746

 
396,187

Other current liabilities
135,517

 
148,098

 
118,537

Total current liabilities
2,292,041

 
2,187,875

 
2,086,035

Long-term debt
599,696

 
415,136

 
565,420

Other long-term liabilities
218,308

 
204,829

 
187,735

Commitments and contingencies
 

 
 

 
 

Stockholders' equity:
 

 
 

 
 

Preferred stock, nonvoting, $0.0001 par value

 

 

Common stock, voting, $0.0001 par value
7

 
11

 
11

Additional paid-in capital
512,202

 
500,237

 
479,055

Treasury stock, at cost
(25,042
)
 
(1,644,767
)
 
(1,542,794
)
Accumulated other comprehensive income
2,796

 
2,804

 
1,614

Retained earnings
569,138

 
1,989,629

 
1,826,392

Total stockholders' equity
1,059,101

 
847,914

 
764,278

 
$
4,169,146

 
$
3,655,754

 
$
3,603,468


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 Twenty-Eight Week Periods Ended
July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)
 
Twelve Week Periods Ended
 
Twenty-Eight Week Periods Ended
 
July 14,
2012
 
July 16,
2011
 
July 14,
2012
 
July 16,
2011
Net sales
$
1,460,983

 
$
1,479,839

 
$
3,418,275

 
$
3,377,902

Cost of sales, including purchasing and warehousing costs
732,125

 
743,991

 
1,708,744

 
1,683,853

Gross profit
728,858

 
735,848

 
1,709,531

 
1,694,049

Selling, general and administrative expenses
559,663

 
546,921

 
1,315,772

 
1,319,145

Operating income
169,195

 
188,927

 
393,759

 
374,904

Other, net:
 

 
 

 
 
 
 
Interest expense
(7,947
)
 
(8,007
)
 
(17,801
)
 
(17,726
)
Other (expense) income, net
(55
)
 
(212
)
 
447

 
(157
)
Total other, net
(8,002
)
 
(8,219
)
 
(17,354
)
 
(17,883
)
Income before provision for income taxes
161,193

 
180,708

 
376,405

 
357,021

Provision for income taxes
61,587

 
67,601

 
143,293

 
134,331

Net income
$
99,606

 
$
113,107

 
$
233,112

 
$
222,690

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.36

 
$
1.48

 
$
3.19

 
$
2.85

Diluted earnings per share
$
1.34

 
$
1.46

 
$
3.14

 
$
2.79

 
 
 
 
 
 
 
 
Average common shares outstanding
73,150

 
75,979

 
73,003

 
77,973

Average common shares outstanding - assuming dilution
74,084

 
77,426

 
74,157

 
79,484


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Twelve and Twenty-Eight Week Periods Ended
July 14, 2012 and July 16, 2011
(in thousands)
(unaudited)
 
Twelve Week Periods Ended
 
Twenty-Eight Week Periods Ended
 
July 14,
2012
 
July 16,
2011
 
July 14,
2012
 
July 16,
2011
Net income
$
99,606

 
$
113,107

 
$
233,112

 
$
222,690

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs, net of $72, $67, $169 and $157 tax
(113
)
 
(105
)
 
(262
)
 
(245
)
Unrealized gain on hedge arrangements, net of $163 tax

 

 
254

 

Amortization of unrecognized losses on interest rate swaps, net of $0, $1,141, $0 and $2,515 tax

 
1,340

 

 
3,456

Other comprehensive income (loss)
(113
)
 
1,235

 
(8
)
 
3,211

Comprehensive income
$
99,493

 
$
114,342

 
$
233,104

 
$
225,901


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 Twenty-Eight Week Periods Ended
July 14, 2012 and July 16, 2011
(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 31, 2011

 
$

 
106,537

 
$
11

 
$
500,237

 
33,738

 
$
(1,644,767
)
 
$
2,804

 
$
1,989,629

 
$
847,914

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
233,112

 
233,112

Changes in net unrecognized other postretirement benefit costs, net of $169 tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(262
)
 
 

 
(262
)
Unrealized gain on hedge arrangement, net of $163 tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
254

 
 
 
254

Issuance of shares upon the exercise of stock options
 

 
 

 
824

 
 

 
5,160

 
 

 
 

 
 

 
 

 
5,160

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(24,214
)
 
 
 
 
 
 
 
 
 
(24,214
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
20,639

 
 

 
 

 
 

 
 

 
20,639

Issuance of restricted stock, net of forfeitures
 

 
 

 
8

 
 

 
 

 
 

 
 

 
 

 
 

 

Amortization of restricted stock balance
 

 
 

 
 

 
 

 
3,798

 
 

 
 

 
 

 
 

 
3,798

Share-based compensation
 

 
 

 
 

 
 

 
5,482

 
 

 
 

 
 

 
 

 
5,482

Stock issued under employee stock purchase plan
 

 
 

 
15

 
 

 
1,072

 
 

 
 

 
 

 
 

 
1,072

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
321

 
(25,042
)
 
 

 
 

 
(25,042
)
Retirement of treasury stock
 
 
 
 
(33,738
)
 
(4
)
 
 
 
(33,738
)
 
1,644,767

 
 
 
(1,644,763
)
 

Cash dividends
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(8,840
)
 
(8,840
)
Other
 

 
 

 
 

 
 

 
28

 
 

 
 

 
 

 
 

 
28

Balance, July 14, 2012

 
$

 
73,646

 
$
7

 
$
512,202

 
321

 
$
(25,042
)
 
$
2,796

 
$
569,138

 
$
1,059,101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2011

 
$

 
105,682

 
$
11

 
$
456,645

 
23,726

 
$
(1,028,612
)
 
$
(1,597
)
 
$
1,612,927

 
$
1,039,374

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
222,690

 
222,690

Changes in net unrecognized other postretirement benefit costs, net of $157 tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(245
)
 
 

 
(245
)
Amortization of unrecognized losses on interest rate swaps, net of $2,515 tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
3,456

 
 

 
3,456

Issuance of shares upon the exercise of stock options
 

 
 

 
378

 

 
9,295

 
 

 
 

 
 

 
 

 
9,295

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(2,841
)
 
 
 
 
 
 
 
 
 
(2,841
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
4,745

 
 

 
 

 
 

 
 

 
4,745

Issuance of restricted stock, net of forfeitures
 
 
 
 
2

 
 
 
 
 
 
 
 
 
 
 
 
 

Amortization of restricted stock balance
 

 
 

 
 

 
 

 
3,756

 
 

 
 

 
 

 
 

 
3,756

Share-based compensation
 

 
 

 
 

 
 

 
6,236

 
 

 
 

 
 

 
 

 
6,236

Stock issued under employee stock purchase plan
 

 
 

 
19

 
 

 
1,145

 
 

 
 

 
 

 
 

 
1,145

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
8,283

 
(514,182
)
 
 

 
 

 
(514,182
)
Cash dividends
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(9,225
)
 
(9,225
)
Other
 

 
 

 
 

 
 

 
74

 
 

 
 

 
 

 
 

 
74

Balance, July 16, 2011

 
$

 
106,081

 
$
11

 
$
479,055

 
32,009

 
$
(1,542,794
)
 
$
1,614

 
$
1,826,392

 
$
764,278


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 Twenty-Eight Week Periods Ended
July 14, 2012 and July 16, 2011
(in thousands)
(unaudited)
 
Twenty-Eight Week Periods Ended
 
July 14,
2012
 
July 16,
2011
Cash flows from operating activities:
 
 
 
Net income
$
233,112

 
$
222,690

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
98,527

 
92,973

Share-based compensation
9,280

 
9,992

Loss on property and equipment, net
1,385

 
2,179

Other
847

 
495

Provision for deferred income taxes
1,526

 
25,962

Excess tax benefit from share-based compensation
(20,685
)
 
(4,780
)
Net (increase) decrease in:
 
 
 
Receivables, net
(19,342
)
 
2,057

Inventories, net
(53,183
)
 
(228,043
)
Other assets
(7,483
)
 
17,162

Net increase in:
 
 
 
Accounts payable
84,918

 
278,207

Accrued expenses
75,037

 
41,922

Other liabilities
7,444

 
8,734

Net cash provided by operating activities
411,383

 
469,550

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(146,281
)
 
(151,595
)
Proceeds from sales of property and equipment
268

 
1,028

Net cash used in investing activities
(146,013
)
 
(150,567
)
Cash flows from financing activities:
 

 
 

Decrease in bank overdrafts
(16,181
)
 
(7,820
)
Decrease in financed vendor accounts payable

 
(31,648
)
Issuance of senior unsecured notes
299,904

 

Payment of debt related costs
(2,648
)
 
(3,561
)
Borrowings under credit facilities
58,500

 
1,076,400

Payments on credit facilities
(173,500
)
 
(811,400
)
Dividends paid
(13,196
)
 
(14,155
)
Proceeds from the issuance of common stock, primarily exercise of stock options
6,260

 
10,514

Tax withholdings related to the exercise of stock appreciation rights
(24,214
)
 
(2,841
)
Excess tax benefit from share-based compensation
20,685

 
4,780

Repurchase of common stock
(25,042
)
 
(529,176
)
Contingent consideration related to previous business acquisition
(4,755
)
 

Other
(490
)
 
(465
)
Net cash provided by (used in) financing activities
125,323

 
(309,372
)
Net increase in cash and cash equivalents
390,693

 
9,611

Cash and cash equivalents, beginning of period
57,901

 
59,209

Cash and cash equivalents, end of period
$
448,594

 
$
68,820

 
 
 
 

4


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Twenty-Eight Week Periods Ended
July 14, 2012 and July 16, 2011
(in thousands)
(unaudited)
 
Twenty-Eight Week Periods Ended
 
July 14,
2012
 
July 16,
2011
Supplemental cash flow information:
 
 
 
Interest paid
$
11,065

 
$
19,604

Income tax payments
72,310

 
49,217

Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
29,012

 
16,158

Changes in other comprehensive income (loss)
(8
)
 
3,211

Retirement of treasury stock
1,644,767

 


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 Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(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., its wholly owned subsidiary, Advance Stores Company, Incorporated ("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. 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 31, 2011, or Fiscal 2011.

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 2011 (filed with the Securities and Exchange Commission, or SEC, on February 28, 2012).

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 while the remaining three quarters contain 12 weeks each.

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 July 2012, the Financial Accounting Standards Board, or FASB, issued ASU No. 2012-02 “Intangible-Goodwill and Other – Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 modifies the requirement to test intangible assets that are not subject to amortization based on events or changes in circumstances that might indicate that the asset is impaired now requiring the test only if it is more likely than not that the asset is impaired. Furthermore, ASU 2012-02 provides entities the option of performing a qualitative assessment to determine if it is more likely than not that the fair value of an intangible asset is less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In September 2011, the FASB, issued ASU No. 2011-08 “Intangible-Goodwill and Other – Testing Goodwill for Impairment.” ASU 2011-08 provides entities the option of performing a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a two-step quantitative goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 had no impact on the Company’s consolidated financial condition, results of operations or cash flows.


6

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income – Presentation of Comprehensive Income.” ASU 2011-05 requires comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update should be applied retrospectively and is effective for interim and annual reporting periods beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012. The adoption of ASU 2011-05 is for presentation purposes only and had no material impact on the Company’s condensed consolidated financial statements.

 
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 July 14, 2012, December 31, 2011 and July 16, 2011. 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 2012 and prior years. As a result of utilizing LIFO, the Company recorded a reduction to cost of sales of $9,294 for the twenty-eight weeks ended July 14, 2012. The Company's overall costs to acquire inventory for the same or similar products have generally decreased as the Company has been able to leverage its continued growth, execution of merchandise strategies and realization of supply chain efficiencies. As a result of utilizing LIFO, the Company recorded an increase to cost of sales of $9,111 for the twenty-eight weeks ended July 16, 2011 due to an increase in supply chain costs and inflationary pressures affecting certain product categories.

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 July 14, 2012, December 31, 2011 and July 16, 2011 were as follows:

 
July 14,
2012
 
December 31,
2011
 
July 16,
2011
Inventories at FIFO, net
$
1,984,944

 
$
1,941,055

 
$
1,974,213

Adjustments to state inventories at LIFO
111,397

 
102,103

 
117,700

Inventories at LIFO, net
$
2,096,341

 
$
2,043,158

 
$
2,091,913


3.
Goodwill and Intangible Assets:

Goodwill

The Company has goodwill recorded in both the Advance Auto Parts ("AAP") and Autopart International ("AI") segments. The following table reflects the carrying amount of goodwill pertaining to the Company's two segments and the changes in goodwill carrying amounts. 

7

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


 
 
AAP Segment
 
AI Segment
 
Total
Balance at December 31, 2011
 
$
58,095

 
$
18,294

 
$
76,389

Fiscal 2012 activity
 

 

 

Balance at July 14, 2012
 
$
58,095

 
$
18,294

 
$
76,389

 
 
 
 
 
 
 
Balance at January 1, 2011
 
$
16,093

 
$
18,294

 
$
34,387

Fiscal 2011 activity
 

 

 

Balance at July 16, 2011
 
$
16,093

 
$
18,294

 
$
34,387


Intangible Assets Other Than Goodwill

The gross and net carrying amounts of acquired intangible assets as of July 14, 2012, December 31, 2011 and July 16, 2011 are comprised of the following:
 
 
Acquired intangible assets
 
 
 
Subject to Amortization
 
Not Subject to Amortization
 
Total Intangible Assets
(excluding goodwill)
 
Customer
Relationships
 
Acquired Technology
 
Other
 
Trademark and
Tradenames
 
Gross:
 
 
 
 
 
 
 
 
 
Gross carrying amount at
    December 31, 2011
$
9,800

 
$
7,750

 
$
885

 
$
20,550

 
$
38,985

Additions

 

 

 

 

Gross carrying amount at
    July 14, 2012
$
9,800

 
$
7,750

 
$
885

 
$
20,550

 
$
38,985

 
 
 
 
 
 
 
 
 
 
Gross carrying amount at
    January 1, 2011
$
9,800

 
$

 
$
885

 
$
20,550

 
$
31,235

Additions

 

 

 

 

Gross carrying amount at
    July 16, 2011
$
9,800

 
$

 
$
885

 
$
20,550

 
$
31,235

 
 
 
 
 
 
 
 
 
 
Net:
 

 
 
 
 

 
 

 
 

Net carrying amount at
    December 31, 2011
$
3,618

 
$
6,987

 
$
225

 
$
20,550

 
$
31,380

Additions

 

 

 

 

2012 amortization
517

 
1,391

 
4

 

 
1,912

Net book value at July 14, 2012
$
3,101

 
$
5,596

 
$
221

 
$
20,550

 
$
29,468

 
 
 
 
 
 
 
 
 
 
Net carrying amount at
    January 1, 2011
$
4,578

 
$

 
$
232

 
$
20,550

 
$
25,360

Additions

 

 

 

 

2011 amortization
517

 

 
4

 

 
521

Net book value at July 16, 2011
$
4,061

 
$

 
$
228

 
$
20,550

 
$
24,839

 

8

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(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 July 14, 2012:

Fiscal Year
 
Amount
Remainder of 2012
 
$
1,638

2013
 
3,550

2014
 
2,788

2015
 
751

2016
 
7

Thereafter
 
184


4.
Long-term Debt:

Long-term debt consists of the following:
 
July 14,
2012
 
December 31,
2011
 
July 16,
2011
Revolving facility at variable interest rates (1.75%, 1.78% and 1.79% at July 14, 2012, December 31, 2011 and July 16, 2011, respectively) due May 27, 2016
$

 
$
115,000

 
$
265,000

5.75% Senior Unsecured Notes (net of unamortized discount of $1,023, $1,078 and $1,124 at July 14, 2012, December 31, 2011 and July 16, 2011, respectively) due May 1, 2020
298,977

 
298,922

 
298,876

4.50% Senior Unsecured Notes (net of unamortized discount of $92 at July 14, 2012) due January 15, 2022
299,908

 

 

Other
1,571

 
2,062

 
2,535

 
600,456

 
415,984

 
566,411

Less: Current portion of long-term debt
(760
)
 
(848
)
 
(991
)
Long-term debt, excluding current portion
$
599,696

 
$
415,136

 
$
565,420

 
Bank Debt

The Company has a $750,000 unsecured five-year revolving credit facility with Stores serving as the borrower. The revolving credit facility also provides for the issuance of letters of credit with a sub-limit of $300,000, and swingline loans in an amount not to exceed $50,000. The Company may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not exceeding $250,000 (up to a total commitment of $1,000,000). 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 May 27, 2016.

As of July 14, 2012, the Company had no borrowings outstanding under its revolving credit facility, but had letters of credit outstanding of $92,732, which reduced the availability under the revolving credit facility to $657,268. The letters of credit generally have a term of one year or less and serve as collateral for the Company's self-insurance policies and routine purchases of imported merchandise.

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 1.5% and 1.5% 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 0.25% per annum. Under the terms of the revolving credit facility, the interest rate and facility fee are based on the Company’s credit rating.

9

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)



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 its covenants in place at July 14, 2012 and December 31, 2011, respectively. The Company’s revolving credit facility also provides for customary events of default, covenant defaults and cross-defaults to its other material indebtedness.

Senior Unsecured Notes

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"). 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. The Company’s 4.50% senior unsecured notes were issued in January 2012 at 99.968% of the principal amount of $300,000 and are due January 15, 2022 (the "2022 Notes" or collectively with 2020 Notes, "the 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. 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 and supplemental indentures (collectively the “Indenture”) among the Company, the subsidiary guarantors 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), 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 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

Certain domestic subsidiaries of Stores, including its Material Subsidiaries (as defined in the revolving credit facility), serve as guarantors of the Notes and revolving credit facility with Advance also serving as a guarantor of the revolving credit facility. The subsidiary guarantees related to the Company’s Notes and revolving credit facility 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 Notes and revolving credit facility are minor as defined by SEC regulations.


10

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


5.
Derivative Instruments and Hedging Activities:

From September 2011 through January 2012, the Company executed a series of forward treasury rate locks in anticipation of the issuance of the 2022 Notes. The treasury rate locks, which were derivative instruments, were designated as cash flow hedges to offset the Company's exposure to increases in the underlying U.S. Treasury benchmark rate. This rate was used to establish the fixed interest rate for 2022 Notes which was comprised of the underlying U.S. Treasury benchmark rate, plus a credit spread premium. Upon issuance of the 2022 Notes, the cumulative change in fair market value of the treasury rate locks was not significant due to the narrow margin between the lock rate and the underlying treasury rate.

The Company's previously outstanding interest rate swaps matured on October 5, 2011. The Company had entered into these interest rate swaps 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 2020 Notes. Accordingly, the Company recorded all subsequent changes in the fair value of the interest rate swaps through earnings and amortized to interest expense the remaining balance of previously recorded unrecognized loss in accumulated other comprehensive loss over the remaining life of the swaps.

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 July 14, 2012, December 31, 2011 and July 16, 2011:
 
 
Balance Sheet
Location
 
Fair Value as of
July 14,
2012
 
Fair Value as of
December 31,
2011
 
Fair Value as of
July 16,
2011
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Treasury rate locks
Other current assets
 
$

 
$
4,986

 
$

Interest rate swaps
Accrued expenses
 

 

 
2,888

 
The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the twelve and twenty-eight weeks ended July 14, 2012 and July 16, 2011, 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 Twelve Weeks Ended July 14, 2012
 
$

 
Interest expense
 
$

 
Other (expense)
income, net
 
$

For the Twelve Weeks Ended July 16, 2011
 
$

 
Interest expense
 
$
(1,340
)
 
Other (expense) income, net
 
$

For the Twenty-Eight Weeks Ended July 14, 2012
 
$
254

 
Interest expense
 
$
108

 
Other (expense) income, net
 
$
66

For the Twenty-Eight Weeks Ended July 16, 2011
 
$

 
Interest expense
 
$
(3,456
)
 
Other (expense) income, net
 
$
(200
)

11

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


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.
 
The following table sets forth the Company’s financial liabilities that were measured at fair value on a recurring basis as of July 14, 2012, December 31, 2011 and July 16, 2011:
 
 
 
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 July 14, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration related to previous business acquisitions
$
23,021

 
$

 
$

 
$
23,021

 
 
 
 
 
 
 
 
As of December 31, 2011
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Treasury rate locks
$
4,986

 
$

 
$
4,986

 
$

Contingent consideration related to previous business acquisitions
27,776

 

 

 
27,776

 
 
 
 
 
 
 
 
As of July 16, 2011
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Interest rate swaps
$
2,888

 
$

 
$
2,888

 
$

 
The fair values of the Company’s treasury rate locks and 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 fair value of the contingent consideration, which is recorded in Accrued expenses and Other long-term liabilities, 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 second quarter of 2012, contingent consideration decreased primarily due to a payment of $4,755 as result of the achievement of a performance condition related to a previous acquisition.

12

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


The carrying amount of the Company’s cash and cash equivalents, accounts receivable, bank overdrafts, 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 July 14, 2012, December 31, 2011 and July 16, 2011, the fair value of the Company’s long-term debt with a carrying value of $599,696, $415,136 and $565,420, respectively, was approximately $660,000, $446,000 and $594,000, 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 July 14, 2012, the Company had no significant non-financial assets or liabilities that had been adjusted to fair value subsequent to initial recognition.
 
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. The Company's $500,000 stock repurchase program in place as of July 14, 2012 was authorized by its Board of Directors on May 14, 2012.

During the twelve and twenty-eight weeks ended July 14, 2012, the Company repurchased 257 shares of its common stock at an aggregate cost of $19,589, or an average price of $76.18 per share under its stock repurchase program. The Company had $492,385 remaining under its stock repurchase program as of July 14, 2012. The Company repurchased 4 shares of its common stock at an aggregate cost of $279, or an average price of $73.33 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the twelve weeks ended July 14, 2012. The Company repurchased 64 shares of its common stock at an aggregate cost of $5,453, or an average price of $84.99 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the twenty-eight weeks ended July 14, 2012. The Company also retired 33,738 shares of treasury stock during the twenty-eight weeks ended July 14, 2012.

During the twelve weeks ended July 16, 2011, the Company repurchased 3,974 shares of its common stock at an aggregate cost of $239,698, or an average price of $60.31 per share under its $500,000 stock repurchase program authorized by its Board of Directors on February 8, 2011. During the twenty-eight weeks ended July 16, 2011, the Company repurchased 8,211 shares of its common stock at an aggregate cost of $509,682, or an average price of $62.07 per share. Additionally, the Company repurchased 2 shares of its common stock at an aggregate cost of $98 and 72 shares of its common stock at an aggregate cost of $4,500, in connection with the net settlement of shares issued as a result of the vesting of restricted stock, during the twelve and twenty-eight weeks ended July 16, 2011, respectively.

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 twelve week periods ended July 14, 2012 and July 16, 2011, earnings of $237 and $292, respectively, were allocated to the participating securities. For the twenty-eight week periods ended July 14, 2012 and July 16, 2011, earnings of $557 and $645, 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 211 and 51 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 July 14, 2012 and July 16, 2011, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive. Share-based awards to purchase approximately 224 and 49 shares of common stock that had an exercise price in excess of the average market price of the common stock during the twenty-eight week periods ended July 14, 2012 and July 16, 2011, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive.


13

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


The following table illustrates the computation of basic and diluted earnings per share for the twelve and twenty-eight week periods ended July 14, 2012 and July 16, 2011, respectively:
 
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
 
July 14,
2012
 
July 16,
2011
 
July 14,
2012
 
July 16,
2011
Numerator
 
 
 
 
 
 
 
Net income applicable to common shares
$
99,606

 
$
113,107

 
$
233,112

 
$
222,690

Participating securities' share in earnings
(237
)
 
(292
)
 
(557
)
 
(645
)
Net income applicable to common shares
$
99,369

 
$
112,815

 
$
232,555

 
$
222,045

Denominator
 

 
 

 
 
 
 
Basic weighted average common shares
73,150

 
75,979

 
73,003

 
77,973

Dilutive impact of share-based awards
934

 
1,447

 
1,154

 
1,511

Diluted weighted average common shares
74,084

 
77,426

 
74,157

 
79,484

 
 
 
 
 
 
 
 
Basic earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.36

 
$
1.48

 
$
3.19

 
$
2.85

 
 
 
 
 
 
 
 
Diluted earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.34

 
$
1.46

 
$
3.14

 
$
2.79

 
9.
Warranty Liabilities:

The following table presents changes in the Company’s warranty reserves:
 
July 14,
2012
 
December 31,
2011
 
July 16,
2011
 
(28 weeks ended)
 
(52 weeks ended)
 
(28 weeks ended)
Warranty reserve, beginning of period
$
38,847

 
$
36,352

 
$
36,352

Additions to warranty reserves
19,337

 
43,013

 
18,454

Reserves utilized
(20,770
)
 
(40,518
)
 
(17,929
)
 
 
 
 
 
 
Warranty reserve, end of period
$
37,414

 
$
38,847

 
$
36,877

 
The Company’s warranty liabilities are included in Accrued expenses in its condensed consolidated balance sheets.
 
10.
Segment and Related Information:

The Company has the following two reportable segments: AAP and AI. As of July 14, 2012, the AAP segment is comprised of 3,489 stores in the Northeastern, Southeastern and Midwestern areas of the United States (included in the Southeastern area are 26 stores in Puerto Rico and the Virgin Islands.) These stores, which operate under the trade names “Advance Auto Parts,” “Advance Discount Auto Parts” and “Western Auto,” offer a broad selection of brand name and proprietary automotive replacement parts, accessories and maintenance items for domestic and imported cars and light trucks. We aggregate the financial results of AAP's geographic areas, which are individually considered operating segments, due to the economic similarities of those areas.


14

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Twenty-Eight Week Periods Ended July 14, 2012 and July 16, 2011
(in thousands, except per share data)
(unaudited)


Included in our geographic areas are sales generated from our e-commerce platforms. Our e-commerce platforms primarily consist of our online website and Commercial ordering platforms as part of our integrated operating approach of serving our DIY and Commercial customers. Our online website allows our DIY customers to pick up merchandise at a conveniently located store location or have their purchases shipped directly to them. The majority of our online sales are picked up at store locations. Through our online ordering platform, Commercial customers can conveniently place orders with a designated store location.

The AI segment consists solely of the operations of Autopart International, Inc., which mainly operates stores under the “Autopart International” trade name and serves the Commercial market. As of July 14, 2012, AI operated 203 stores primarily located in the Northeastern and Mid-Atlantic regions of the United States and Florida.

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 generally the same as those described in the Annual Report on Form 10-K for the year ended December 31, 2011.

The following table summarizes financial information for each of the Company's business segments for the twelve and twenty-eight weeks ended July 14, 2012 and July 16, 2011, respectively.
 
Twelve Week Periods Ended
 
Twenty-Eight Weeks Ended
 
July 14,
2012
 
July 16,
2011
 
July 14,
2012
 
July 16,
2011
Net sales
 
 
 
 
 
 
 
AAP
$
1,391,467

 
$
1,409,284

 
$
3,259,897

 
$
3,223,641

AI
73,013

 
74,320

 
166,608

 
162,855

Eliminations (1)
(3,497
)
 
(3,765
)
 
(8,230
)
 
(8,594
)
Total net sales
$
1,460,983

 
$
1,479,839

 
$
3,418,275

 
$
3,377,902

 
 
 
 
 
 
 
 
Income before provision for income taxes
 
 
 
 
 
 
 
AAP
$
156,647

 
$
175,775

 
$
367,996

 
$
350,443

AI
4,546

 
4,933

 
8,409

 
6,578

Total income before provision for income taxes
$
161,193

 
$
180,708

 
$
376,405

 
$
357,021

 
 
 
 
 
 
 
 
Provision for income taxes
 
 
 
 
 
 
 
AAP
$
59,779

 
$
65,558

 
$
139,914

 
$
131,634

AI
1,808

 
2,043

 
3,379

 
2,697

Total provision for income taxes
$
61,587

 
$
67,601

 
$
143,293

 
$
134,331

 
 
 
 
 
 
 
 
Segment assets
 
 
 
 
 
 
 
AAP
$
3,906,331

 
$
3,348,447

 
$
3,906,331

 
$
3,348,447

AI
262,815

 
255,021

 
262,815

 
255,021

Total segment assets
$
4,169,146

 
$
3,603,468

 
$
4,169,146

 
$
3,603,468

 
(1) 
For the twelve weeks ended July 14, 2012, eliminations represented net sales of $2,294 from AAP to AI and $1,203 from AI to AAP. For the twelve weeks ended July 16, 2011, eliminations represented net sales of $1,962 from AAP to AI and $1,803 from AI to AAP. For the twenty-eight weeks ended July 14, 2012, eliminations represented net sales of $5,191 from AAP to AI and $3,039 from AI to AAP. For the twenty-eight weeks ended July 16, 2011, eliminations represented net sales of $4,707 from AAP to AI and $3,887 from AI to AAP.

15


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 December 31, 2011 (filed with the Securities and Exchange Commission, or SEC, on February 28, 2012), which we refer to as our 2011 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 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;
security breach or other cyber security incident;
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.


16


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 products from our store locations to our Commercial customers’ places of business, including national garage chains, independent garages, service stations and auto dealers. At July 14, 2012, we operated a total of 3,692 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 July 14, 2012, we operated 3,489 stores in the AAP segment. Our AAP stores offer a broad selection of brand name and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars and light trucks. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. Our online website allows our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business. Our Commercial customers can conveniently place their orders online.

At July 14, 2012, 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. For additional information regarding our segments, see Note 10, Segment and Related Information, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Management Overview

We generated earnings per diluted share, or diluted EPS, of $1.34 during our twelve weeks ended July 14, 2012 (“second quarter of Fiscal 2012”) compared to $1.46 for the comparable period of Fiscal 2011. The decrease in our diluted EPS was primarily due to a decrease in our operating income partially offset by the repurchase of shares of our common stock during the last four quarters. We disclosed last quarter that our operating income would likely be constrained during the second quarter of Fiscal 2012 due to the deceleration in sales we experienced towards the end of the first quarter which continued throughout most of the second quarter. We faced weak consumer demand in both DIY and Commercial with the most significant slowdown occurring in our cold weather markets, mainly in the Northeast and Great Lakes regions of the United States. We believe the unusually mild winter weather in these markets during our first quarter resulted in a pull forward of business from the second quarter into the first quarter.

In addition to the weather impact on our sales, the current economy affected our sales consistent with many other retailers as consumers faced high unemployment, a recent drop in consumer confidence and high gas prices. We increased our promotional activity during the quarter in response to the difficult sales environment. While price promotions negatively impacted our top line during the second quarter, we believe they will positively contribute to our growth in the future through higher volume. Despite our current performance, we remain encouraged by the long-term dynamics of the automotive aftermarket industry, initiatives that are underway in support of our strategies and the positive results we are seeing in certain of our Western markets.

Although our operating income for the second quarter of Fiscal 2012 declined over the comparable period of last year, the combination of our operating income and working capital management for the twenty-eight weeks ended July 14, 2012 drove significant operating cash flow through the second quarter of Fiscal 2012. We currently have a significant amount of cash on-hand to invest in capital improvements and initiatives to support our strategies.  As discussed later in the Business Update, we remain committed to investing in our two key strategies.


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Summary of Second Quarter Financial Results

A high-level summary of our financial results for the second quarter of Fiscal 2012 is included below:
 
Net sales during the second quarter of Fiscal 2012 were $1,461.0 million, a decrease of 1.3% as compared to the second quarter of Fiscal 2011, driven by a 2.7% decrease in comparable store sales partially offset by the addition of 65 net new stores over the past 12 months.
Our operating income for the second quarter of Fiscal 2012 was $169.2 million, a decrease of $19.7 million over the comparable period of Fiscal 2011, and as a percentage of total sales was 11.6%, a decrease of 119 basis points, due to higher SG&A partially offset by a slight improvement in gross profit rate.
Our inventory balance as of July 14, 2012 increased $4.4 million, or 0.2%, over the comparable period last year.
We generated operating cash flow of $411.4 million during the the twenty-eight weeks ended July 14, 2012, a decrease of 12.4% over the comparable period in Fiscal 2011, primarily due to changes in our working capital and provision for deferred income taxes, partially offset by an increase in our net income.

Refer to the Results of Operations and Liquidity sections for further details of our income statement and cash flow results, respectively.

Business and Industry Update

Our two key strategies, Service Leadership and Superior Availability, remain unchanged in Fiscal 2012. Superior Availability is aimed at product availability and maximizing the speed, reliability and efficiency of our supply chain. Service Leadership leverages our product availability in addition to more consistent execution of customer-facing initiatives to strengthen our integrated operating approach of serving our DIY and Commercial customers whether in our stores or on-line. Through these two key strategies, we believe we can continue to build on the initiatives discussed below and produce favorable financial results over the long term. Sales to Commercial customers remain the biggest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, increased to 38% for the second quarter of Fiscal 2012 compared to 37% for the same period in Fiscal 2012.

A few of the priorities under under our strategies include:

Improving in-market availability through the continued expansion of our HUB network and completion of store inventory upgrades;
The opening of our new Remington, Indiana distribution during the third quarter of Fiscal 2012, which will provide needed capacity and upgraded supply chain technology;
Our continued efforts to enhance e-commerce offerings; and
The in-sourcing of our Commercial credit function and addition of other customer offerings to support the continued investment in our Commercial business.

The automotive aftermarket industry is influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and spending habits, and competition. While we feel that the difficult conditions affecting the macroeconomic environment continue to constrain consumer spending, we remain confident that the long-term dynamics of the automotive aftermarket are positive.

Favorable industry dynamics include:
 
increase in number and average age of vehicles;
long-term expectation that miles driven will increase based on historical trends; and
fragmented commercial market.
 
Conversely, the factors negatively affecting the automotive aftermarket industry include:
 
high gas prices and unemployment rates and low consumer confidence;
increase in new car sales; and
overall reduction in discretionary spending on elective maintenance and other accessories.
 

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While we believe the deceleration in our sales will not be a long-term trend given the overall positive long-term industry dynamics, we do anticipate constrained sales for the remainder of Fiscal 2012 based on the current trend of lower customer demand. Despite the lower sales, we are committed to achieving our long-term sales growth and profitability goals by remaining focused on our Commercial sales growth while balancing support and discretionary expenses with the additional cost of investments in our key strategies.

Consolidated Operating Results and Key Statistics and Metrics

The following table highlights certain consolidated operating results and key statistics and metrics for the twelve and twenty-eight weeks ended July 14, 2012 and July 16, 2011, respectively, and the fiscal years ended December 31, 2011 and January 1, 2011. We use these key statistics and metrics to measure the financial progress of our key strategies.
 
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
 
 
 
 
 
July 14, 2012
 
July 16, 2011
 
July 14, 2012
 
July 16, 2011
 
FY 2011
 
FY 2010
Operating Results:
 
 
 
 
 
 
 
 
 
 
 
Total net sales (in 000s)
$
1,460,983

 
$
1,479,839

 
$
3,418,275

 
$
3,377,902

 
$
6,170,462

 
$
5,925,203

Comparable store sales growth (1)
(2.7
%)
 
2.5
%
 
0.0
%
 
1.9
%
 
2.2
%
 
8.0
%
Gross profit
49.9
%
 
49.7
%
 
50.0
%
 
50.2
%
 
50.3
%
 
50.0
%
SG&A
38.3
%
 
37.0
%
 
38.5
%
 
39.1
%
 
39.0
%
 
40.1
%
Operating profit
11.6
%
 
12.8
%
 
11.5
%
 
11.1
%
 
10.8
%
 
9.9
%
Diluted earnings per share
$
1.34

 
$
1.46

 
$
3.14

 
$
2.79

 
$
5.11

 
$
3.95

 
 
 
 
 
 
 
 
 
 
 
 
Key Statistics and Metrics:
 

 
 

 
 
 
 
 
 

 
 

Number of stores, end of period
3,692

 
3,627

 
3,692

 
3,627

 
3,662

 
3,563

Total store square footage, end of period (in 000s)
26,927

 
26,400

 
26,927

 
26,400

 
26,663

 
25,950

Total Team Members, end of period
53,464

 
52,141

 
53,464

 
52,141

 
52,002

 
51,017

Average net sales per store (in 000s)(2)(3)
$
1,697

 
$
1,700

 
$
1,697

 
$
1,700

 
$
1,708

 
$
1,697

Operating income per store (in 000s)(2)(4)
$
187

 
$
170

 
$
187