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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2011
OR
¨ | 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 333-124878
American Tire Distributors Holdings, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation | 59-3796143 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
12200 Herbert Wayne Court
Suite 150
Huntersville, North Carolina 28078
(Address of principal executive office)
(704) 992-2000
(Registrant’s telephone number, including area code)
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 ¨
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 Regulation 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 ¨
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of common shares outstanding at November 2, 2011:1,000
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AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
FORM 10-Q
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American Tire Distributors Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
Successor | ||||||||
In thousands, except share amounts | October 1, 2011 | January 1, 2011 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 14,565 | $ | 11,971 | ||||
Restricted cash | 1,893 | 250 | ||||||
Accounts receivable, net | 296,905 | 213,928 | ||||||
Inventories | 698,108 | 466,433 | ||||||
Deferred income taxes | 12,766 | 13,839 | ||||||
Income tax receivable | 10,993 | 9,646 | ||||||
Assets held for sale | 5,977 | 203 | ||||||
Other current assets | 12,416 | 11,488 | ||||||
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Total current assets | 1,053,623 | 727,758 | ||||||
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Property and equipment, net | 92,259 | 89,553 | ||||||
Goodwill | 456,702 | 431,065 | ||||||
Other intangible assets, net | 752,625 | 754,387 | ||||||
Other assets | 57,472 | 54,585 | ||||||
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Total assets | $ | 2,412,681 | $ | 2,057,348 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 515,189 | $ | 430,979 | ||||
Accrued expenses | 60,514 | 25,791 | ||||||
Current maturities of long-term debt | 99 | 656 | ||||||
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Total current liabilities | 575,802 | 457,426 | ||||||
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Long-term debt | 888,430 | 651,888 | ||||||
Deferred income taxes | 282,872 | 283,169 | ||||||
Other liabilities | 11,999 | 13,419 | ||||||
Commitments and contingencies (See Note 13) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, par value $.01 per share; 1,000 shares authorized, issued and outstanding | — | — | ||||||
Additional paid-in capital | 690,485 | 687,537 | ||||||
Accumulated (deficit) earnings | (36,898 | ) | (36,312 | ) | ||||
Accumulated other comprehensive income (loss) | (9 | ) | 221 | |||||
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Total stockholders’ equity | 653,578 | 651,446 | ||||||
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Total liabilities and stockholders’ equity | $ | 2,412,681 | $ | 2,057,348 | ||||
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See accompanying notes to condensed consolidated financial statements.
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American Tire Distributors Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Successor | Predecessor | |||||||||||||||||||
In thousands | Quarter Ended October 1, 2011 | Nine Months Ended October 1, 2011 | Quarter Ended October 2, 2010 | Four Months Ended October 2, 2010 | Five Months Ended May 28, 2010 | |||||||||||||||
Net sales | $ | 830,966 | $ | 2,234,275 | $ | 647,317 | $ | 885,596 | $ | 934,925 | ||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | 697,854 | 1,860,275 | 557,113 | 790,259 | 775,678 | |||||||||||||||
Selling, general and administrative expenses | 111,694 | 320,073 | 94,274 | 125,997 | 135,146 | |||||||||||||||
Transaction expenses | 1,183 | 2,830 | 750 | 985 | 42,608 | |||||||||||||||
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Operating income (loss) | 20,235 | 51,097 | (4,820 | ) | (31,645 | ) | (18,507 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest expense | (17,231 | ) | (50,756 | ) | (16,183 | ) | (21,462 | ) | (32,669 | ) | ||||||||||
Other, net | (434 | ) | (1,303 | ) | (243 | ) | (482 | ) | (127 | ) | ||||||||||
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Income (loss) from operations before income taxes | 2,570 | (962 | ) | (21,246 | ) | (53,589 | ) | (51,303 | ) | |||||||||||
Income tax provision (benefit) | 1,090 | (376 | ) | (2,365 | ) | (17,083 | ) | (15,227 | ) | |||||||||||
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Net income (loss) | $ | 1,480 | $ | (586 | ) | $ | (18,881 | ) | $ | (36,506 | ) | $ | (36,076 | ) |
See accompanying notes to condensed consolidated financial statements.
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American Tire Distributors Holdings, Inc.
Condensed Consolidated Statement of Stockholders’ Equity and Other Comprehensive Income (Loss)
(Unaudited)
In thousands, except share amounts | Total Stockholders’ Equity | Common Stock | Additional Paid-In Capital | Accumulated Earnings (Deficit) | Accumulated Other Comprehensive (Loss) Income | Comprehensive Income (Loss) | ||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Successor balance, January 1, 2011 | $ | 651,446 | 1,000 | $ | — | $ | 687,537 | $ | (36,312 | ) | $ | 221 | ||||||||||||||||
Net income (loss) | (586 | ) | — | — | — | (586 | ) | — | $ | (586 | ) | |||||||||||||||||
Unrealized gain (loss) on rabbi trust assets, net of tax of $0.1 million | (230 | ) | — | — | — | — | (230 | ) | (230 | ) | ||||||||||||||||||
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Total comprehensive income (loss) | $ | (816 | ) | |||||||||||||||||||||||||
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Equity contributions | 500 | — | — | 500 | — | — | ||||||||||||||||||||||
Repurchase of common stock | (200 | ) | — | — | (200 | ) | — | — | ||||||||||||||||||||
Stock-based compensation expense | 2,648 | — | — | 2,648 | — | — | ||||||||||||||||||||||
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Successor balance, October 1, 2011 | $ | 653,578 | 1,000 | $ | — | $ | 690,485 | $ | (36,898 | ) | $ | (9 | ) | |||||||||||||||
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See accompanying notes to condensed consolidated financial statements.
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American Tire Distributors Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Successor | Predecessor | |||||||||||
In thousands | Nine Months Ended October 1, 2011 | Four Months Ended October 2, 2010 | Five Months Ended May 28, 2010 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | (586 | ) | $ | (36,506 | ) | $ | (36,076 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization of intangibles | 57,799 | 23,057 | 14,707 | |||||||||
Amortization of other assets | 3,543 | 1,723 | 9,983 | |||||||||
Benefit for deferred income taxes | (15,530 | ) | (31,913 | ) | (3,846 | ) | ||||||
Accretion of 8% cumulative preferred stock | — | — | 2,537 | |||||||||
Accrued dividends on 8% cumulative preferred stock | — | — | 966 | |||||||||
Provision for doubtful accounts | 1,653 | 1,059 | 608 | |||||||||
Inventory step-up amortization | — | 58,797 | — | |||||||||
Stock-based compensation | 2,648 | 2,103 | 5,892 | |||||||||
Other, net | 946 | 496 | 2,357 | |||||||||
Change in operating assets and liabilities: | ||||||||||||
Accounts receivable | (75,067 | ) | (18,515 | ) | (19,280 | ) | ||||||
Inventories | (208,343 | ) | (5,422 | ) | (37,751 | ) | ||||||
Income tax receivable | (1,347 | ) | 6,743 | (8,263 | ) | |||||||
Other current assets | (1,062 | ) | 2,318 | 972 | ||||||||
Accounts payable and accrued expenses | 73,651 | (12,578 | ) | 96,375 | ||||||||
Other, net | (1,629 | ) | (16,940 | ) | (1,075 | ) | ||||||
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Net cash provided by (used in) operating activities | (163,324 | ) | (25,578 | ) | 28,106 | |||||||
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Cash flows from investing activities: | ||||||||||||
Acquisitions, net of cash acquired | (59,059 | ) | — | — | ||||||||
Purchase of property and equipment | (18,862 | ) | (6,286 | ) | (6,424 | ) | ||||||
Purchase of assets held for sale | (2,281 | ) | (608 | ) | (1,498 | ) | ||||||
Proceeds from sale of property and equipment | 70 | 52 | 214 | |||||||||
Proceeds from sale of assets held for sale | 1,174 | 760 | 185 | |||||||||
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Net cash provided by (used in) investing activities | (78,958 | ) | (6,082 | ) | (7,523 | ) | ||||||
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Cash flows from financing activities: | ||||||||||||
Borrowings from revolving credit facility | 2,088,278 | 1,361,299 | 828,727 | |||||||||
Repayments of revolving credit facility | (1,852,239 | ) | (1,355,729 | ) | (822,005 | ) | ||||||
Outstanding checks | 15,488 | (5,661 | ) | (15,369 | ) | |||||||
Payments of other long-term debt | (771 | ) | (627 | ) | (721 | ) | ||||||
Payments of deferred financing costs | (5,880 | ) | (24,958 | ) | — | |||||||
Payment for termination of interest rate swap agreements | — | (2,804 | ) | — | ||||||||
Payment of seller fees on behalf of Buyer | — | (16,792 | ) | — | ||||||||
8% cumulative preferred stock redemption | — | (30,102 | ) | — | ||||||||
Proceeds from issuance of long-term debt | — | 446,900 | — | |||||||||
Payments of Predecessor senior notes | — | (340,131 | ) | (6,263 | ) | |||||||
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Net cash provided by (used in) financing activities | 244,876 | 31,395 | (15,631 | ) | ||||||||
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Net increase (decrease) in cash and cash equivalents | 2,594 | (265 | ) | 4,952 | ||||||||
Cash and cash equivalents—beginning of period | 11,971 | 12,242 | 7,290 | |||||||||
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Cash and cash equivalents—end of period | $ | 14,565 | $ | 11,977 | $ | 12,242 | ||||||
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Supplemental disclosures of cash flow information: | ||||||||||||
Cash payments for interest | $ | 34,020 | $ | 3,816 | $ | 26,188 | ||||||
Cash payments for taxes, net | $ | 1,358 | $ | 3,152 | $ | 1,122 | ||||||
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See accompanying notes to condensed consolidated financial statements.
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American Tire Distributors Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Business:
American Tire Distributors Holdings, Inc. (also referred to herein as “Holdings”) is a Delaware corporation that owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (“ATDI”), a Delaware corporation. Holdings has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its subsidiaries constitute the operations of Holdings presented under accounting principles generally accepted in the United States. ATDI has one operating and reportable segment, and is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools. Unless the context otherwise requires, “Company” herein refers to Holdings and its consolidated subsidiaries.
2. Basis of Presentation:
The accompanying condensed consolidated financial statements reflect the consolidated operations of the Company and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) as defined by the Financial Accounting Standards Board (“FASB”) within the FASB Accounting Standards Codification (“FASB ASC”). In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated unaudited results for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the American Tire Distributors Holdings, Inc. Annual Report on Form 10-K for the year ended January 1, 2011.
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by affiliates of TPG Capital, L.P. (“TPG”) for an aggregate purchase price valued at $1,287.5 million. As a result, the Company became a wholly-owned subsidiary of TPG (the “Merger”). Although the Company continues to operate as the same legal entity subsequent to the acquisition, periods prior to May 28, 2010 reflect the financial position, results of operations, and changes in financial position of the Company prior to the Merger (the “Predecessor”) and periods after May 28, 2010 reflect the financial position, results of operations, and changes in financial position of the Company after the Merger (the “Successor”).
Under the guidance provided by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Under push-down accounting, certain transactions incurred by the acquirer, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of common stock of the Company has been pushed down from TPG to the Company. In addition, the Merger was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, periods prior to the Merger are not comparable to subsequent periods due to the difference in the basis of presentation of purchase accounting as compared to historical cost.
The Company’s fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarter and nine months ended October 1, 2011 for the Successor contain operating results for 13 weeks and 39 weeks, respectively. The quarter and the four months ended October 2, 2010 for the Successor contain operating results for 13 weeks and 18 weeks, respectively. The five months ended May 28, 2010 for the Predecessor contains operating results for 21 weeks.
3. Acquisitions:
Acquisition of Holdings
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by affiliates of TPG for an aggregate purchase price of $1,287.5 million in cash, less the amount of the Company’s funded indebtedness, transaction expenses, aggregate redemption payments with respect to the Company’s outstanding preferred stock, certain holdback amounts plus the amount of estimated cash, plus or minus certain working capital adjustments. The Merger was
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financed by $635.0 million in aggregate principle of debt financing as well as common equity capital. In addition, the Company tendered its existing outstanding debt which was subsequently purchased and retired.
The fair value of consideration transferred was as follows:
In thousands | May 28, 2010 | |||
Aggregate purchase price | $ | 1,287,500 | ||
Redemption of Funded Indebtedness | (529,176 | ) | ||
Redemption of Preferred Stock | (30,102 | ) | ||
Termination of Interest Rate Swaps | (2,804 | ) | ||
Transaction fees | (66,234 | ) | ||
Holdback amount | (13,000 | ) | ||
Cash on hand | 7,273 | |||
Working capital adjustments | (7,000 | ) | ||
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Total fair value of consideration paid | $ | 646,457 | ||
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The Merger was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of merger. The allocation of the purchase price is as follows:
In thousands | May 28, 2010 | |||
Cash | $ | 12,242 | ||
Restricted cash | 9,750 | |||
Accounts receivable | 207,561 | |||
Inventory | 485,448 | |||
Other current assets | 20,489 | |||
Property and equipment | 91,150 | |||
Intangible assets | 781,324 | |||
Other assets | 48,100 | |||
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Total assets acquired | 1,656,064 | |||
Debt | 612,638 | |||
Accounts payable | 422,245 | |||
Accrued and other liabilities | 108,456 | |||
Deferred income taxes | 296,549 | |||
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Total liabilities assumed | 1,439,888 | |||
Net assets acquired | 216,176 | |||
Goodwill | 430,281 | |||
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Purchase price allocation | $ | 646,457 | ||
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The following unaudited pro forma supplementary data for the five months ended May 28, 2010 gives effect to the Merger as if it had occurred on January 3, 2010 (the first day of the Company’s 2010 fiscal year).
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Pro Forma | ||||
In thousands | Five Months Ended May 28, 2010 | |||
Net sales | $ | 934,925 | ||
Net (loss) income | (17,505 | ) |
The pro forma supplementary data for the five months ended May 28, 2010 includes $15.9 million as an adjustment to historical amortization expense as a result of the valuation of $531.4 million allocated to amortizable intangible assets acquired in the Merger, primarily associated with a customer relationship intangible asset. In addition, the Company has included a reduction in non-recurring transaction expenses related to the Merger of $40.2 million.
The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company’s results of operations had the Merger been consummated on the date assumed and does not project the Company’s results of operations for any future date.
Acquisition of North Central Tire
On April 15, 2011, the Company entered into a Stock Purchase Agreement with the Bowlus Service Company d/b/a North Central Tire (“NCT”) to acquire 100% of the outstanding capital stock of NCT. NCT owned and operated three distribution centers in Canton, Ohio, Cincinnati, Ohio and Rochester, New York, serving over 2,700 customers. The acquisition was completed on April 29, 2011 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of NCT is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805 –Business Combinations. As a result, the information is not presented.
The acquisition of NCT was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. This allocation is final except for certain accrued liabilities, which the Company anticipates finalizing by fiscal year end. A majority of the net assets acquired relates to a customer list intangible asset, which had an acquisition date fair value of $38.2 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $25.5 million. The premium in the purchase price paid for the acquisition of NCT reflects the anticipated realization of significant operational and cost synergies. The purchase of NCT will expand the Company’s market position in Ohio and Western New York.
4. Inventories:
Inventories consist primarily of automotive tires, custom wheels, tire supplies and tools and are valued at the lower of cost, determined on the first-in, first-out (“FIFO”) method, or fair market value. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. A majority of the Company’s tire vendors allow for the return of tire products, subject to certain limitations, specified in supply arrangements with the vendors. In addition, the Company’s inventory is collateral under the ABL Facility. See Note 8 for further information.
5. Assets Held for Sale:
In accordance with current accounting standards, the Company classifies assets as held for sale in the period in which all held for sale criteria is met. Assets held for sale are reported at the lower of their carrying amount or fair value less cost to sell and are no longer depreciated. At October 1, 2011, assets held for sale totaled $6.0 million, of which $1.0 million were residential properties that were acquired as part of employee relocation packages. The Company is actively marketing these properties and anticipates that they will be sold within a twelve-month period from the date in which they are classified as held for sale.
During the first quarter of 2011, the Company classified a distribution center and former headquarters for Am-Pac Tire Dist., Inc. located in Simi Valley, CA as held for sale. The building had a fair value of $5.0 million and was previously used as a warehouse within the Company’s distribution operations. The distribution operations have been consolidated into other ATDI facilities that are currently being leased. The Company is actively marketing this property and anticipates that the property will be sold within a twelve-month period from the date in which it was classified as held for sale.
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6. Goodwill:
The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, adjustments may be recorded. Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.
The changes in the carrying amount of goodwill are as follows:
In thousands | ||||
Balance, January 1, 2011 | $ | 431,065 | ||
Acquisitions | 25,511 | |||
Purchase accounting adjustments | 126 | |||
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Balance, October 1, 2011 | $ | 456,702 | ||
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At October 1, 2011, the Company has recorded goodwill of $456.7 million, of which approximately $21 million of net goodwill is deductible for income tax purposes in future periods. The balance primarily relates to the Merger on May 28, 2010, in which $430.3 million was recorded as goodwill. In addition, the Company completed the purchase of substantially all of the assets of Lisac’s of Washington, Inc and 100% of the capital stock of Tire Wholesalers, Inc. during 2010. The aggregate purchase price of these two businesses was funded through the Company’s ABL facility. As a result of the acquisition, the Company recorded $0.9 million as goodwill.
On April 15, 2011, the Company entered into a Stock Purchase Agreement to acquire 100% of the outstanding capital stock of NCT. The acquisition was completed on April 29, 2011 and was funded through the Company’s ABL Facility. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $25.5 million as goodwill. See Note 3 for additional information.
7. Intangible Assets:
Indefinite-lived intangible assets are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. All other intangible assets with finite lives are being amortized on a straight-line or accelerated basis over periods ranging from one to nineteen years.
The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at October 1, 2011 and January 1, 2011:
In thousands | October 1, 2011 | January 1, 2011 | ||||||
Customer list | $ | 572,209 | $ | 533,998 | ||||
Noncompete agreement | 6,320 | 365 | ||||||
Tradenames | 3,168 | 3,168 | ||||||
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Total gross finite-lived intangible assets | 581,697 | 537,531 | ||||||
Accumulated amortization | (78,965 | ) | (33,037 | ) | ||||
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Total net finite-lived intangible assets | 502,732 | 504,494 | ||||||
Tradenames (indefinite-lived) | 249,893 | 249,893 | ||||||
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Total | $ | 752,625 | $ | 754,387 | ||||
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Intangible asset amortization expense was $15.8 million and $45.9 million for the quarter and nine months ended October 1, 2011, respectively. As a result of the acquisition of NCT on April 29, 2011, the Company allocated $38.2 million to a finite lived intangible assets associated with a customer list and $5.2 million to non-compete agreement. The intangible assets had a useful life of 19 years and 5 years, respectively.
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Estimated amortization expense on existing intangible assets is expected to approximate $16 million for the remaining three months in 2011 and approximately $64 million in 2012, $60 million in 2013, $57 million in 2014 and $48 million in 2015. The Successor recorded $14.1 million and $18.8 million of intangible asset amortization expense for the quarter and four months ended October 2, 2010. The Predecessor recorded $7.7 million of intangible asset amortization expense for the five months ended May 28, 2010.
8. Long-term Debt:
The following table presents the Company’s long-term debt at October 1, 2011 and at January 1, 2011:
October 1, | January 1, | |||||||
In thousands | 2011 | 2011 | ||||||
ABL Facility | $ | 426,309 | $ | 190,271 | ||||
Senior Subordinated Notes | 200,000 | 200,000 | ||||||
Senior Secured Notes | 247,337 | 247,084 | ||||||
Capital lease obligations | 14,126 | 14,290 | ||||||
Other | 757 | 899 | ||||||
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Total debt | 888,529 | 652,544 | ||||||
Less—Current maturities | (99 | ) | (656 | ) | ||||
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Long-term debt | $ | 888,430 | $ | 651,888 | ||||
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The fair value of the Company’s long-term senior notes was $445.5 million at October 1, 2011 and $470.6 million at January 1, 2011. The fair value of the Senior Secured Notes is based upon quoted market values. However, the Company uses quoted prices for similar liabilities in order to fair value the Senior Subordinated Notes.
ABL Facility
In connection with the acquisition of Holdings on May 28, 2010, ATDI entered into the Fifth Amended and Restated Credit Agreement, as subsequently amended (“ABL Facility”). The agreement provided for a senior secured asset-backed revolving credit facility of up to $450.0 million (of which up to $50.0 million could have been utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default was then existing or would arise therefrom, the Company had the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to mature on November 28, 2014.
On June 6, 2011, the Company entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. The Company maintains the option to request that the ABL Facility be increased by an amount not to exceed $200 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. At October 1, 2011, the Company had $426.3 million outstanding under the facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $8.0 million, leaving $215.7 million available for additional borrowings.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of October 1, 2011 or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of October 1, 2011. The applicable margins under the ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
The borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
• | 85% of eligible accounts receivable; plus |
• | The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory and (b) 85% of the net orderly liquidation value of eligible tire inventory; plus |
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• | The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory and (b) 85% of the net orderly liquidation value of eligible non-tire inventory. |
All obligations under the ABL Facility are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The ABL Facility contains customary covenants, including covenants that restricts the Company’s ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates or change the Company’s fiscal year. If the amount available for additional borrowing under the ABL Facility is less than the greater of (a) 12.5% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the borrowing base and (b) $25.0 million, then the Company would be subject to an additional covenant requiring them to meet a fixed charge coverage ratio of 1.0 to 1.0. As of October 1, 2011, the Company’s additional borrowing availability under the ABL Facility was above the required amount and the Company was therefore not subject to the additional covenants.
Senior Subordinated Notes
On May 28, 2010, ATDI issued Senior Subordinated Notes due June 1, 2018 (“Senior Subordinated Notes”) in an aggregate principal amount of $200.0 million. The Senior Subordinated Notes bear interest at a fixed rate of 11.50% per annum. Interest on the Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Subordinated Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Subordinated Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 104.0% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016.
Prior to June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes issued at a redemption price equal to 111.5% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that:
(1) | at least 50% of the aggregate principal amount of the Senior Subordinated Notes remains outstanding immediately after the occurrence of such redemption; and |
(2) | each such redemption occurs within 120 days of the date of the closing of the related equity offering. |
In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Subordinated Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a “make-whole” price based on the price of a U.S. treasury security plus 50 basis points) as of, and accrued and unpaid interest, to, but not including, the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.
The Senior Subordinated Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions.
The indenture governing the Senior Subordinated Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur other contingent obligations; incur certain liens without securing the Senior Subordinated Notes; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.
Senior Secured Notes
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On May 28, 2010, ATDI issued Senior Secured Notes (“Senior Secured Notes”) due June 1, 2017 in an aggregate principal amount at maturity of $250.0 million. The Senior Secured Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $240.7 million after debt issuance costs (which represents a non-cash financing activity of $9.3 million). The Senior Secured Notes will accrete based on an effective interest rate of 10% to an aggregate accreted value of $250.0 million, the full principal amount at maturity. The Senior Secured Notes bear interest at a fixed rate of 9.75% per annum. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Secured Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Secured Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 107.313% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount if the redemption date occurs between June 1, 2016 and May 31, 2017.
Until June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Secured Notes issued at a redemption price equal to 109.75% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds from one or more equity offerings to the extent that such net cash proceeds are received by or contributed to ATDI; provided that:
(1) | at least 50% of the sum of the aggregate principal amount of the Senior Secured Notes remains outstanding immediately after the occurrence of such redemption; and |
(2) | each such redemption occurs within 120 days of the date of the closing of the related equity offering. |
In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Secured Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a “make-whole” price based on the price of a U.S. treasury security plus 50 basis points) as of, plus accrued and unpaid interest, to, but not including, the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.
The Senior Secured Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions. The Senior Secured Notes are also collateralized by a second-priority lien on accounts receivable and related assets and a first-priority lien on substantially all other assets (other than inventory), in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The indenture governing the Senior Secured Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur other contingent obligations; incur certain liens; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.
9. Derivative Instruments:
In the normal course of business, the Company is exposed to the risk associated with exposure to fluctuations in interest rates on our variable rate debt. These fluctuations can increase the cost of financing, investing and operating the business. The Company has used derivative financial instruments to help manage this risk and reduce the impacts of these exposures and not for trading or other speculative purposes. All derivatives are recognized on the condensed consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of contracts that qualify for hedge accounting treatment are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in the statement of operations at the time earnings are affected by the hedged transaction. For other derivatives, changes in the fair value of the contract are recognized immediately in the statement of operations.
On September 23, 2011, the Company entered into two interest rate swap agreements (“3Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100 million, of which $50.0 million is at a fixed rate of 0.74% and will expire in September 2014 and $50.0 million is at a fixed rate of 1.0% and will expire in September 2015. The counterparty to each swap is a major financial institution. The 3Q 2011 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in the condensed consolidated statement of operations.
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On February 24, 2011, the Company entered into two interest rate swap agreements (“1Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $75.0 million, of which $25.0 million is at a fixed interest rate of 0.585% and will expire in February 2012 and $50.0 million is at a fixed interest rate of 1.105% and will expire in February 2013. The counterparty to each swap is a major financial institution. The 1Q 2011 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in the condensed consolidated statement of operations.
The following table presents the fair values of the Company’s derivative instruments included within the condensed consolidated balance sheet as of October 1, 2011 and January 1, 2011:
Liability Derivatives | ||||||||||||
Balance Sheet Location | October 1, 2011 | January 1, 2011 | ||||||||||
In thousands | ||||||||||||
Derivatives not designated as hedges: | ||||||||||||
1Q 2011 swaps—$75 million notional | Accrued expenses | $ | 509 | $ | — | |||||||
3Q 2011 swaps—$100 million notional | Accrued expenses | 426 | — | |||||||||
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Total | $ | 935 | $ | — | ||||||||
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The pre-tax effect of the Company’s derivative instruments on the condensed consolidated statement of operations for the Successor and the Predecessor periods was as follows:
(Gain) Loss Recognized in Interest Expense | ||||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||
Quarter Ended October 1, 2011 | Nine Months Ended October 1, 2011 | Quarter Ended October 2, 2010 | Four Months Ended October 2, 2010 | Five Months Ended May 28, 2010 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Derivatives not designated as hedges: | ||||||||||||||||||||
1Q 2011 swaps—$75 million notional | $ | (46 | ) | $ | 509 | $ | — | $ | — | $ | — | |||||||||
3Q 2011 swaps—$100 million notional | 426 | 426 | — | — | — | |||||||||||||||
2Q 2009 swap—$100 million notional | — | — | — | — | 68 | |||||||||||||||
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Total | $ | 380 | $ | 935 | $ | — | $ | — | $ | 68 | ||||||||||
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On June 4, 2009, the Predecessor entered into an interest rate swap agreement (the “2Q 2009 Swap”) to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. It covered a notional amount of $100.0 million of the Predecessor’s variable rate indebtedness at a fixed interest rate of 1.45% and was set to expire on June 8, 2011. The counterparty of the swap was a major financial institution. The 2Q 2009 Swap did not meet the criteria to qualify for hedge accounting treatment; therefore, changes in fair value were recognized in the condensed consolidated statement of operations. On May 28, 2010, in connection with the Merger, the Company terminated the 2Q 2009 Swap agreement for $0.9 million.
10. Fair Value of Financial Instruments:
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
• | Level 1 Inputs—Inputs based on quoted prices in active markets for identical assets or liabilities. |
• | Level 2 Inputs—Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
• | Level 3 Inputs —Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities. |
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The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents the fair value and hierarchy levels for the Successor’s assets and liabilities, which are measured at fair value on a recurring basis as of October 1, 2011:
Fair Value Measurements | ||||||||||||||||
In thousands | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Benefit trust assets | $ | 2,108 | $ | 2,108 | $ | — | $ | — | ||||||||
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Total | $ | 2,108 | $ | 2,108 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative instruments | $ | 935 | $ | — | $ | 935 | $ | — | ||||||||
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Total | $ | 935 | $ | — | $ | 935 | $ | — | ||||||||
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ASC 820 –Fair Value Measurements and Disclosuresdefines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines fair value of its financial assets and liabilities using the following methodologies:
• | Benefit trust assets – These assets include money market and mutual funds that are the underlying for deferred compensation plan assets, held in a rabbi trust. The fair value of the assets is based on observable market prices quoted in readily accessible and observable markets. |
• | Derivative instruments—These instruments consist of interest rate swaps. The fair value is based upon quoted prices for similar instruments from a financial institution that is counterparty to the transaction. |
The methodologies used by the Company to determine the fair value of its financial assets and liabilities at October 1, 2011 are the same as those used at January 1, 2011. As a result, there have been no transfers between Level 1 and Level 2 categories.
11. Stock-Based Compensation:
The Company accounts for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Company’s stock-based compensation plans include programs for stock options and restricted stock units.
Stock Options
In August 2010, the Company’s indirect parent company adopted a Management Equity Incentive Plan (the “2010 Plan”), pursuant to which the indirect parent company will grant options to selected employees and directors of the Company. The 2010 Plan provides that a maximum of 48.6 million shares of common stock of the indirect parent company are issuable pursuant to the exercise of options. During 2010, the Company’s indirect parent company granted options under the 2010 Plan to certain eligible participants to purchase 44.5 million shares of common stock of the indirect parent company.
Changes in options outstanding under the 2010 Plan are as follows:
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Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding—January 1, 2011 | 44,448,000 | $ | 1.00 | |||||
Granted | 1,900,000 | 1.00 | ||||||
Cancelled | (1,749,600 | ) | 1.00 | |||||
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Outstanding—October 1, 2011 | 44,598,400 | $ | 1.00 | |||||
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Exercisable—October 1, 2011 | 8,380,800 | $ | 1.00 | |||||
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Options granted under the 2010 Plan expire no later than 10 years from the date of grant and vest based on the passage of time and/or the achievement of certain performance targets in equal installments over three or five years. The fair value of each of the Company’s time-based stock option awards is expensed on a straight-line basis over the required service period, which is generally the three or five-year vesting period of the options. However, for options granted with performance target requirements, compensation expense is recognized when it is probable that the performance target will be achieved.
The weighted average fair value of the stock options granted during the nine months ending October 1, 2011 was $0.44 using the Black-Scholes option pricing model. The following weighted average assumptions were used:
Risk-free interest rate | 2.41 | % | ||
Dividend yield | — | |||
Expected life | 6.4 years | |||
Volatility | 40.75 | % | ||
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As the Company does not have sufficient historical volatility data for Holdings own common stock, the stock price volatility utilized in the fair value calculation is based on the Company’s peer group in the industry in which it does business. The risk-free interest rate is based on the yield-curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Because the Company does not have relevant data available regarding the expected life of the award, the expected life of the award is derived from the Simplified Method as allowed under SAB Topic 14.
Restricted Stock Units (RSUs)
In October 2010, the Company’s indirect parent company adopted the Non-Employee Director Restricted Stock Plan (the “2010 RSU Plan”), pursuant to which the indirect parent company will grant restricted stock units to non-employee directors of the Company. The 2010 RSU Plan provides that a maximum of 0.8 million shares of common stock of the indirect parent may be granted to non-employee directors of the Company. During 2010, the Company’s indirect parent company granted RSUs under the 2010 RSU Plan to certain board members of the Company to purchase 150,000 shares of common stock of the indirect parent company.
The following table summarizes RSU activity under the 2010 RSU Plan for the nine months ending October 1, 2011:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding and unvested — January 1, 2011 | 150,000 | $ | 1.00 | |||||
Granted | 100,000 | 1.00 | ||||||
Vested | — | — | ||||||
Cancelled | — | — | ||||||
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Outstanding and unvested — October 1, 2011 | 250,000 | $ | 1.00 | |||||
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The fair value of each of the RSU awards is measured as the grant-date price of the common stock and is expensed on a straight-line basis over a two year vesting period.
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Compensation Expense
Stock-based compensation expense is included in selling, general and administrative expenses within the condensed consolidated statement of operations. The following table summarizes the expense recognized:
Successor | Predecessor | |||||||||||||||||||
In thousands | Quarter Ended October 1, 2011 | Nine Months Ended October 1, 2011 | Quarter Ended October 2, 2010 | Four Months Ended October 2, 2010 | Five Months Ended May 28, 2010 | |||||||||||||||
Stock Options | $ | 1,431 | $ | 2,565 | $ | 2,103 | $ | 2,103 | $ | 5,892 | ||||||||||
Restricted Stock Units | 31 | 83 | — | — | — | |||||||||||||||
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Total | $ | 1,462 | $ | 2,648 | $ | 2,103 | $ | 2,103 | $ | 5,892 | ||||||||||
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During 2005, the Predecessor adopted the 2005 Management Stock Incentive Plan, which authorized the issuance of up to 190,857 shares of voting common stock. Options granted under the plan generally vested based on performance targets or the occurrence of specified events, such as an initial public offering or company sale. At January 2, 2010, the Company had 149,015 options outstanding and 67,468 exercisable.
In March 2010, the Board of Directors of the Company approved the discretionary vesting of certain previously unvested stock options. The discretionary vesting was evaluated in conjunction with the accounting standard for modification of stock options and resulted in a non-cash charge to compensation expense of $5.9 million in the first quarter of 2010. No additional options were granted during this period. At May 28, 2010, prior to the Merger, the Company had 144,719 options outstanding and 108,785 exercisable.
As a result of the Merger, all of the Company’s stock options that were already vested under the 2005 Management Stock Incentive Plan were converted into the right to receive the excess of $596.65 per share over the exercise price of each of the options. As a consequence, subsequent to the May 28, 2010 transaction date, all options to purchase previously existing common stock ceased to exist and the existing stock option plan was terminated.
12. Income Taxes:
The effective tax rate for the quarter and nine months ended October 1, 2011 and the quarter and four months ended October 2, 2010 for the Successor and the five months ended May 28, 2010 for the Predecessor are based on an annual estimated effective tax rate which takes into account year-to-date amounts and projected results for the full year. The effective tax rate of 42.4% and 39.1% for the Successor quarter and nine months ended October 1, 2011, respectively, is slightly higher than the Company’s statutory tax rate primarily due to higher state income taxes, a result based on the Company’s legal entity tax structure. The final effective tax rate for fiscal 2011 will depend on the actual amount of pre-tax income (loss) generated by the Company by tax jurisdiction for the full year.
At October 1, 2011, the Company has a net deferred tax liability of $270.1 million, of which, $12.8 million was recorded as a current deferred tax asset and $282.9 million was recorded as a non-current deferred tax liability. As part of the Merger, the Predecessor generated substantial tax deductions relating to the exercise of stock options and payments made for transaction bonuses and transaction expenses. At October 1, 2011, the balance of this acquired non-current deferred tax asset is $15.5 million, which represents the anticipated tax benefits that the Company expects to achieve in future years from such deductions. The remaining net deferred tax liability primarily relates to the expected future tax liability associated with the non-deductible, identified, intangible assets that were recorded during the purchase price allocation less existing tax deductible intangibles, assuming an effective tax rate of 39.3%. In addition, the Company also has an income tax receivable of $11.0 million at October 1, 2011, which primarily relates to deductions that can be carried back two years for federal and state income tax purposes.
At October 1, 2011, the Successor had unrecognized tax benefits of $3.5 million, of which $2.2 million is included within accrued expenses and $1.3 million is included within other liabilities within the accompanying condensed consolidated balance sheet. The total amount of unrecognized tax benefits that, if recognized, would affect the Successor’s effective tax rate is $1.4 million as of October 1, 2011. In addition, $2.1 million related to temporary timing differences. During the nine months ended October 1, 2011, the Company increased its tax positions by $1.3 million related to the current year.
The Company files federal income tax returns, as well as multiple state jurisdiction tax returns. The tax years 2008 – 2010 remain open to examination by the taxing jurisdictions to which the Company is subject. The Company records interest and
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penalties associated with the uncertain tax positions as a component of its income tax provision. During the next 12 months, management does not believe that it is reasonably possible that any of the unrecognized tax benefits may significantly decrease.
While the Company believes that it has adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than the Company’s accrued position. Accordingly, additional provisions of federal and state-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
13. Commitments and Contingencies:
Guaranteed Lease Obligations
The Company remains liable as a guarantor on certain leases related to Winston Tire Company. As of October 1, 2011, the Company’s total obligations, as guarantor on these leases, are approximately $3.9 million extending over eight years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractual assigned or subleased rentals of approximately $3.5 million. A provision has been made for the net present value of the estimated shortfall.
Legal and Tax Proceedings
The Company is involved from time to time in various lawsuits, including class action lawsuits as well as various audits and reviews regarding its federal, state and local tax filings, arising out of the ordinary conduct of its business. Management does not expect that any of these matters will have a material adverse effect on the Company’s business or financial condition. As to tax filings, the Company believes that the various tax filings have been made in a timely fashion and in accordance with applicable federal, state and local tax code requirements. Additionally, the Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with FASB authoritative guidance. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in accordance with the accounting standards for income taxes. See Note 12 for further description of the accounting standards for income taxes and the related impacts.
14. Subsidiary Guarantor Financial Information:
The following condensed consolidating financial statements are presented pursuant to Rule 3-10 of Regulation S-X and reflect the financial position, results of operations, and cash flows of the Predecessor for periods prior to May 28, 2010 and the financial position, results of operations, and cash flows of the Successor for periods after May 28, 2010.
As a result of the Merger on May 28, 2010, the Company repurchased and cancelled all of the Predecessor’s outstanding 10.75% Senior Notes, Floating Rate Notes, and 13% Senior Discount Notes. In addition, ATDI issued $250.0 million in aggregate principal amount of its Senior Secured Notes and $200.0 million in aggregate principal amount of its Senior Subordinated Notes. The Senior Secured Notes and the Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, by Holdings, Am-Pac Tire Dist., Inc. (“Am-Pac”) and Tire Wholesalers. ATDI, Am-Pac and Tire Wholesalers are also borrowers and primary obligors under the ABL Facility, which is guaranteed by Holdings. Tire Pros Francorp is not a guarantor of the Senior Secured Notes, the Senior Subordinated Notes or the ABL Facility.
Accordingly, the Company updated the guarantor structure as of May 28, 2010 which resulted in the following column headings:
• | Parent Company (Holdings), |
• | Subsidiary Issuer (ATDI), |
• | Subsidiary Guarantor (Am-Pac and Tire Wholesalers) and |
• | Non-Guarantor Subsidiary (Tire Pros FranCorp). |
ATDI is a direct wholly-owned subsidiary of Holdings and Am-Pac, Tire Wholesalers and Tire Pros FranCorp are indirect wholly-owned subsidiaries of Holdings. As a result of the Merger, all periods presented have been retroactively adjusted to reflect the post-merger guarantor structure.
As allowed under our indenture agreements, during the quarter ended October 1, 2011, the Company merged a subsidiary guarantor (NCT) into the subsidiary issuer (ATDI). As a result of this merger, all periods presented have been retroactively adjusted to reflect the post-merger guarantor structure.
The condensed consolidating financial information for the Company is as follows:
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Successor As of October 1, 2011 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantor | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 13,785 | $ | — | $ | 780 | $ | — | $ | 14,565 | ||||||||||||
Restricted cash | — | 1,893 | — | — | — | 1,893 | ||||||||||||||||||
Accounts receivable, net | — | 294,710 | 2,190 | 5 | — | 296,905 | ||||||||||||||||||
Inventories | — | 698,108 | — | — | — | 698,108 | ||||||||||||||||||
Assets held for sale | — | 5,959 | 18 | — | — | 5,977 | ||||||||||||||||||
Income tax receivable | — | 10,993 | — | — | — | 10,993 | ||||||||||||||||||
Intercompany receivables | — | 3,764 | 57,690 | — | (61,454 | ) | — | |||||||||||||||||
Other current assets | — | 19,796 | 5,008 | 378 | — | 25,182 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | — | 1,049,008 | 64,906 | 1,163 | (61,454 | ) | 1,053,623 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Property and equipment, net | — | 91,535 | 708 | 16 | — | 92,259 | ||||||||||||||||||
Goodwill and other intangible assets, net | 448,080 | 758,199 | 1,913 | 1,135 | — | 1,209,327 | ||||||||||||||||||
Investment in subsidiaries | 249,973 | 56,820 | — | — | (306,793 | ) | — | |||||||||||||||||
Other assets | 8,692 | 48,848 | (68 | ) | — | — | 57,472 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 706,745 | $ | 2,004,410 | $ | 67,459 | $ | 2,314 | $ | (368,247 | ) | $ | 2,412,681 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | — | $ | 513,730 | $ | 2,154 | $ | (695 | ) | $ | — | $ | 515,189 | |||||||||||
Accrued expenses | — | 60,198 | 316 | — | — | 60,514 | ||||||||||||||||||
Current maturities of long-term debt | — | 78 | 21 | — | — | 99 | ||||||||||||||||||
Intercompany payables | 53,167 | — | — | 8,287 | (61,454 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | 53,167 | 574,006 | 2,491 | 7,592 | (61,454 | ) | 575,802 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Long-term debt | — | 888,412 | 18 | — | — | 888,430 | ||||||||||||||||||
Deferred income taxes | — | 280,204 | 587 | 2,081 | — | 282,872 | ||||||||||||||||||
Other liabilities | — | 11,815 | 184 | — | — | 11,999 | ||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||
Intercompany investment | — | 280,622 | 64,935 | — | (345,557 | ) | — | |||||||||||||||||
Common stock | — | — | — | — | — | — | ||||||||||||||||||
Additional paid-in capital | 690,485 | 6,258 | — | — | (6,258 | ) | 690,485 | |||||||||||||||||
Accumulated deficit | (36,898 | ) | (36,898 | ) | (756 | ) | (7,359 | ) | 45,013 | (36,898 | ) | |||||||||||||
Accumulated other comprehensive income (loss) | (9 | ) | (9 | ) | — | — | 9 | (9 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total stockholders’ equity | 653,578 | 249,973 | 64,179 | (7,359 | ) | (306,793 | ) | 653,578 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and stockholders’ equity | $ | 706,745 | $ | 2,004,410 | $ | 67,459 | $ | 2,314 | $ | (368,247 | ) | $ | 2,412,681 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
Table of Contents
In thousands | Successor As of January 1, 2011 | |||||||||||||||||||||||
Parent Company | Subsidiary Issuer | Subsidiary Guarantor | Non-Guarantor Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 11,304 | $ | 132 | $ | 535 | $ | — | $ | 11,971 | ||||||||||||
Restricted cash | — | 250 | — | — | — | 250 | ||||||||||||||||||
Accounts receivable, net | — | 214,547 | 673 | (1,292 | ) | — | 213,928 | |||||||||||||||||
Inventories | — | 465,350 | 1,083 | — | — | 466,433 | ||||||||||||||||||
Assets held for sale | — | 203 | — | — | — | 203 | ||||||||||||||||||
Income tax receivable | — | 9,646 | — | — | — | 9,646 | ||||||||||||||||||
Intercompany receivables | — | 942 | 56,490 | — | (57,432 | ) | — | |||||||||||||||||
Other current assets | — | 19,427 | 5,132 | 768 | — | 25,327 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | — | 721,669 | 63,510 | 11 | (57,432 | ) | 727,758 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Property and equipment, net | — | 83,743 | 5,790 | 20 | — | 89,553 | ||||||||||||||||||
Goodwill and other intangible assets, net | 448,080 | 733,933 | 2,099 | 1,340 | — | 1,185,452 | ||||||||||||||||||
Investment in subsidiaries | 248,140 | 61,053 | — | — | (309,193 | ) | — | |||||||||||||||||
Other assets | 8,391 | 46,192 | 2 | — | — | 54,585 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 704,611 | $ | 1,646,590 | $ | 71,401 | $ | 1,371 | $ | (366,625 | ) | $ | 2,057,348 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | — | $ | 428,686 | $ | 3,979 | $ | (1,686 | ) | $ | — | $ | 430,979 | |||||||||||
Accrued expenses | — | 24,351 | 1,440 | — | — | 25,791 | ||||||||||||||||||
Current maturities of long-term debt | — | 641 | 15 | — | — | 656 | ||||||||||||||||||
Intercompany payables | 53,165 | — | — | 4,267 | (57,432 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | 53,165 | 453,678 | 5,434 | 2,581 | (57,432 | ) | 457,426 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Long-term debt | — | 651,849 | 39 | — | — | 651,888 | ||||||||||||||||||
Deferred income taxes | — | 280,501 | 587 | 2,081 | — | 283,169 | ||||||||||||||||||
Other liabilities | — | 12,422 | 997 | — | — | 13,419 | ||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||
Intercompany investment | — | 280,622 | 64,935 | — | (345,557 | ) | — | |||||||||||||||||
Common stock | — | — | — | — | — | — | ||||||||||||||||||
Additional paid-in capital | 687,537 | 3,609 | — | — | (3,609 | ) | 687,537 | |||||||||||||||||
Accumulated deficit | (36,312 | ) | (36,312 | ) | (591 | ) | (3,291 | ) | 40,194 | (36,312 | ) | |||||||||||||
Accumulated other comprehensive income (loss) | 221 | 221 | — | — | (221 | ) | 221 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total stockholders’ equity | 651,446 | 248,140 | 64,344 | (3,291 | ) | (309,193 | ) | 651,446 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and stockholders’ equity | $ | 704,611 | $ | 1,646,590 | $ | 71,401 | $ | 1,371 | $ | (366,625 | ) | $ | 2,057,348 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
Condensed consolidating statements of operations for the quarter ended October 1, 2011 for the Successor and the quarter ended October 2, 2010 for the Successor are as follows:
Successor For the Quarter Ended October 1, 2011 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 831,715 | $ | (20 | ) | $ | (729 | ) | $ | — | $ | 830,966 | ||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 697,843 | — | 11 | — | 697,854 | ||||||||||||||||||
Selling, general and administrative expenses | — | 110,496 | 336 | 862 | — | 111,694 | ||||||||||||||||||
Transaction expenses | — | 1,183 | — | — | — | 1,183 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | — | 22,193 | (356 | ) | (1,602 | ) | — | 20,235 | ||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | — | (17,231 | ) | — | — | — | (17,231 | ) | ||||||||||||||||
Other, net | — | (433 | ) | — | (1 | ) | — | (434 | ) | |||||||||||||||
Equity earnings of subsidiaries | 1,480 | (1,310 | ) | — | — | (170 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | 1,480 | 3,219 | (356 | ) | (1,603 | ) | (170 | ) | 2,570 | |||||||||||||||
Income tax provision (benefit) | — | 1,739 | (141 | ) | (508 | ) | — | 1,090 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | 1,480 | $ | 1,480 | $ | (215 | ) | $ | (1,095 | ) | $ | (170 | ) | $ | 1,480 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Successor For the Quarter Ended October 2, 2010 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 647,514 | $ | (16 | ) | $ | (181 | ) | $ | — | $ | 647,317 | ||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 557,108 | — | 5 | — | 557,113 | ||||||||||||||||||
Selling, general and administrative expenses | — | 92,271 | 441 | 1,562 | — | 94,274 | ||||||||||||||||||
Transaction expenses | — | 750 | — | — | — | 750 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | — | (2,615) | (457) | (1,748) | — | (4,820) | ||||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | — | (16,183 | ) | — | — | — | (16,183 | ) | ||||||||||||||||
Other, net | — | (240 | ) | (9 | ) | 6 | — | (243 | ) | |||||||||||||||
Equity earnings of subsidiaries | (18,881 | ) | (1,649 | ) | — | — | 20,530 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | (18,881 | ) | (20,687 | ) | (466 | ) | (1,742 | ) | 20,530 | (21,246 | ) | |||||||||||||
Income tax provision (benefit) | — | (1,806) | (129) | (430) | — | (2,365) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (18,881 | ) | $ | (18,881 | ) | $ | (337 | ) | $ | (1,312 | ) | $ | 20,530 | $ | (18,881 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
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21
Table of Contents
Condensed consolidating statements of operations for the nine months ended October 1, 2011 and the four months ended October 2, 2010 for the Successor and the five months ended May 28, 2010 for the Predecessor are as follows:
Successor For the Nine Months Ended October 1, 2011 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 2,235,717 | $ | 488 | $ | (1,930 | ) | $ | — | $ | 2,234,275 | |||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 1,859,965 | 282 | 28 | — | 1,860,275 | ||||||||||||||||||
Selling, general and administrative expenses | — | 314,868 | 476 | 4,729 | — | 320,073 | ||||||||||||||||||
Transaction expenses | — | 2,830 | — | — | — | 2,830 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | — | 58,054 | (270 | ) | (6,687 | ) | — | 51,097 | ||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | — | (50,756 | ) | — | — | — | (50,756 | ) | ||||||||||||||||
Other, net | — | (1,303 | ) | (1 | ) | 1 | — | (1,303 | ) | |||||||||||||||
Equity earnings of subsidiaries | (586 | ) | (4,233 | ) | — | — | 4,819 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | (586 | ) | 1,762 | (271 | ) | (6,686 | ) | 4,819 | (962 | ) | ||||||||||||||
Income tax provision (benefit) | — | 2,348 | (106 | ) | (2,618 | ) | — | (376 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (586 | ) | $ | (586 | ) | $ | (165 | ) | $ | (4,068 | ) | $ | 4,819 | $ | (586 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Successor For the Four Months Ended October 2, 2010 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 885,917 | $ | (30 | ) | $ | (291 | ) | $ | — | $ | 885,596 | ||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 790,252 | — | 7 | — | 790,259 | ||||||||||||||||||
Selling, general and administrative expenses | — | 123,052 | 571 | 2,374 | — | 125,997 | ||||||||||||||||||
Transaction expenses | — | 985 | — | — | — | 985 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | — | (28,372 | ) | (601 | ) | (2,672 | ) | — | (31,645 | ) | ||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | — | (21,462 | ) | — | — | — | (21,462 | ) | ||||||||||||||||
Other, net | — | (478 | ) | (12 | ) | 8 | — | (482 | ) | |||||||||||||||
Equity earnings of subsidiaries | (36,506 | ) | (2,231 | ) | — | — | 38,737 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | (36,506 | ) | (52,543 | ) | (613 | ) | (2,664 | ) | 38,737 | (53,589 | ) | |||||||||||||
Income tax provision (benefit) | — | (16,037 | ) | (196 | ) | (850 | ) | — | (17,083 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (36,506 | ) | $ | (36,506 | ) | $ | (417 | ) | $ | (1,814 | ) | $ | 38,737 | $ | (36,506 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
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22
Table of Contents
Predecessor For the Five Months Ended May 28, 2010 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 935,400 | $ | 39 | $ | (514 | ) | $ | — | $ | 934,925 | |||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 775,671 | (2 | ) | 9 | — | 775,678 | |||||||||||||||||
Selling, general and administrative expenses | 5,892 | 123,483 | 3,230 | 2,541 | — | 135,146 | ||||||||||||||||||
Transaction expenses | — | 42,608 | — | — | — | 42,608 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | (5,892 | ) | (6,362 | ) | (3,189 | ) | (3,064 | ) | — | (18,507 | ) | |||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | (7,588 | ) | (25,081 | ) | — | — | — | (32,669 | ) | |||||||||||||||
Other, net | — | (77 | ) | (67 | ) | 17 | — | (127 | ) | |||||||||||||||
Equity earnings of subsidiaries | (26,597 | ) | (4,432 | ) | — | — | 31,029 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | (40,077 | ) | (35,952 | ) | (3,256 | ) | (3,047 | ) | 31,029 | (51,303 | ) | |||||||||||||
Income tax provision (benefit) | (4,001 | ) | (9,355 | ) | (966 | ) | (905 | ) | — | (15,227 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (36,076 | ) | $ | (26,597 | ) | $ | (2,290 | ) | $ | (2,142 | ) | $ | 31,029 | $ | (36,076 | ) | |||||||
|
|
|
|
|
|
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23
Table of Contents
Condensed consolidating statements of cash flows for the nine months ended October 1, 2011 and the four months ended October 2, 2010 for the Successor and the five months ended May 28, 2010 for the Predecessor are as follows:
Successor For the Nine Months Ended October 1, 2011 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net cash provided by (used in) operations | $ | — | $ | (163,468 | ) | $ | (101 | ) | $ | 245 | $ | — | $ | (163,324 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisitions, net of cash acquired | — | (59,059 | ) | — | — | (59,059 | ) | |||||||||||||||||
Purchase of property and equipment | — | (18,862 | ) | — | — | — | (18,862 | ) | ||||||||||||||||
Purchase of assets held for sale | — | (2,263 | ) | (18 | ) | — | — | (2,281 | ) | |||||||||||||||
Proceeds from sale of property and equipment | — | 65 | 5 | — | — | 70 | ||||||||||||||||||
Proceeds from disposal of assets held for sale | — | 1,174 | — | — | — | 1,174 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net cash provided by (used in) investing activities | — | (78,945 | ) | (13 | ) | — | — | (78,958 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Borrowings from revolving credit facility | — | 2,088,278 | — | — | — | 2,088,278 | ||||||||||||||||||
Repayments of revolving credit facility | — | (1,852,239 | ) | — | — | — | (1,852,239 | ) | ||||||||||||||||
Outstanding checks | — | 15,488 | — | — | — | 15,488 | ||||||||||||||||||
Payments of other long-term debt | — | (753 | ) | (18 | ) | — | — | (771 | ) | |||||||||||||||
Payments of deferred financing costs | — | (5,880 | ) | — | — | — | (5,880 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net cash provided by (used in) financing activities | — | 244,894 | (18 | ) | — | — | 244,876 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 2,481 | (132 | ) | 245 | — | 2,594 | |||||||||||||||||
Cash and cash equivalents—beginning of period | — | 11,304 | 132 | 535 | — | 11,971 | ||||||||||||||||||
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| |||||||||||||
Cash and cash equivalents—end of period | $ | — | $ | 13,785 | $ | — | $ | 780 | $ | — | $ | 14,565 | ||||||||||||
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Successor For the Four Months Ended October 2, 2010 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net cash provided by (used in) operations | $ | — | $ | (25,324 | ) | $ | (330 | ) | $ | 76 | $ | — | $ | (25,578 | ) | |||||||||
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| |||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisitions, net of cash acquired | — | — | — | — | — | — | ||||||||||||||||||
Purchase of property and equipment | — | (6,286 | ) | — | — | — | (6,286 | ) | ||||||||||||||||
Purchase of assets held for sale | — | (608 | ) | — | — | — | (608 | ) | ||||||||||||||||
Proceeds from sale of property and equipment | — | 52 | — | — | — | 52 | ||||||||||||||||||
Proceeds from disposal of assets held for sale | — | 760 | — | — | — | 760 | ||||||||||||||||||
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|
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|
|
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| |||||||||||||
Net cash provided by (used in) investing activities | — | (6,082 | ) | — | — | — | (6,082 | ) | ||||||||||||||||
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| |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Borrowings from revolving credit facility | — | 1,361,299 | — | — | — | 1,361,299 | ||||||||||||||||||
Repayments of revolving credit facility | — | (1,355,729 | ) | — | — | — | (1,355,729 | ) | ||||||||||||||||
Outstanding checks | — | (5,661 | ) | — | — | — | (5,661 | ) | ||||||||||||||||
Payments of other long-term debt | — | (624 | ) | (3 | ) | — | — | (627 | ) | |||||||||||||||
Payments of deferred financing costs | — | (24,958 | ) | — | — | — | (24,958 | ) | ||||||||||||||||
Payments for termination of interest rate swap agreements | — | (2,804 | ) | — | — | — | (2,804 | ) | ||||||||||||||||
Payment of seller fees on behalf of Buyer | — | (16,792 | ) | — | — | — | (16,792 | ) | ||||||||||||||||
8% cumulative preferred stock redemption | — | (30,102 | ) | — | — | — | (30,102 | ) | ||||||||||||||||
Proceeds from issuance of long-term debt | — | (340,131 | ) | — | — | — | (340,131 | ) | ||||||||||||||||
Payments of Predecessor senior notes | — | 446,900 | — | — | — | 446,900 | ||||||||||||||||||
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| |||||||||||||
Net cash provided by (used in) financing activities | — | �� | 31,398 | (3 | ) | — | — | 31,395 | ||||||||||||||||
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|
|
|
|
|
| |||||||||||||
Net increase (decrease) in cash and cash equivalents | — | (8 | ) | (333 | ) | 76 | — | (265 | ) | |||||||||||||||
Cash and cash equivalents—beginning of period | — | 11,562 | 333 | 347 | — | 12,242 | ||||||||||||||||||
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| |||||||||||||
Cash and cash equivalents—end of period | $ | — | $ | 11,554 | $ | — | $ | 423 | $ | — | $ | 11,977 | ||||||||||||
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Predecessor For the Five Months Ended May 28, 2010 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net cash provided by (used in) operations | $ | 6,263 | $ | 21,901 | $ | (155 | ) | $ | 97 | $ | — | $ | 28,106 | |||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisitions, net of cash acquired | — | — | — | — | — | — | ||||||||||||||||||
Purchase of property and equipment | — | (6,424 | ) | — | — | — | (6,424 | ) | ||||||||||||||||
Purchase of assets held for sale | — | (1,498 | ) | — | — | — | (1,498 | ) | ||||||||||||||||
Proceeds from sale of property and equipment | — | 194 | 20 | — | — | 214 | ||||||||||||||||||
Proceeds from disposal of assets held for sale | — | 185 | — | — | — | 185 | ||||||||||||||||||
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| |||||||||||||
Net cash provided by (used in) investing activities | — | (7,543 | ) | 20 | — | — | (7,523 | ) | ||||||||||||||||
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| |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Borrowings from revolving credit facility | — | 828,727 | — | — | — | 828,727 | ||||||||||||||||||
Repayments of revolving credit facility | — | (822,005 | ) | — | — | — | (822,005 | ) | ||||||||||||||||
Outstanding checks | — | (15,369 | ) | — | — | — | (15,369 | ) | ||||||||||||||||
Payments of other long-term debt | — | (715 | ) | (6 | ) | — | — | (721 | ) | |||||||||||||||
Payment of Discount Notes | (6,263 | ) | — | — | — | — | (6,263 | ) | ||||||||||||||||
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| |||||||||||||
Net cash provided by (used in) financing activities | (6,263 | ) | (9,362 | ) | (6 | ) | — | — | (15,631 | ) | ||||||||||||||
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| |||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 4,996 | (141 | ) | 97 | — | 4,952 | |||||||||||||||||
Cash and cash equivalents—beginning of period | — | 6,566 | 474 | 250 | — | 7,290 | ||||||||||||||||||
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Cash and cash equivalents—end of period | $ | — | $ | 11,562 | $ | 333 | $ | 347 | $ | — | $ | 12,242 | ||||||||||||
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Table of Contents
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, the terms “American Tire Distributors,” “ATD,” “the Company,” “we,” “us,” “our” and similar terms in this report refer to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries, the term “Holdings” refers only to American Tire Distributors Holdings, Inc., a Delaware Corporation, and the term “ATDI” refers only to American Tire Distributors, Inc., a Delaware corporation.
The following discussion and analysis of our consolidated results of operations, financial condition and liquidity should be read in conjunction with our consolidated financial statements and the related notes included in Item 1 of this report. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecast and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See “Cautionary Statements on Forward-Looking Information.”
Company Overview
We are the leading replacement tire distributor in the United States, providing a critical range of services to enable tire retailers to effectively service and grow sales to consumers. Through our network of 99 distribution centers, we offer access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs), to approximately 50,000 customers. The critical range of services we provide includes frequent and timely delivery of inventory as well as business support services such as credit, training, access to consumer market data and the administration of tire manufacturer affiliate programs. In addition, our customers have access to a leading online ordering and reporting system as well as a website that enables our tire retailer customers to participate in the Internet marketing of tires to consumers. We estimate that our share of the replacement passenger and light truck tire market in the United States (U.S.) is approximately 9%, up from approximately 1% in 1996, with our largest customer and top ten customers accounting for less than 1.9% and 8.0%, respectively, of our net sales in fiscal 2010.
We believe we distribute the broadest product offering in our industry, supplying our customers with the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers —Bridgestone,Continental, Goodyear, andMichelin — as well asHankook,Kumho,Nexen,Nitto andPirellibrands. In addition to flag brands, we also sell lower price point associate brands of these and many other tire manufacturers, as well as proprietary brand tires, custom wheels and accessories and related tire supplies and tools. Our revenues are primarily generated from sales of passenger car and light truck tires, which represent approximately 80.7% of our total net sales for the quarter ended October 1, 2011. The remainder of net sales is primarily derived from other tire sales (16.3%), custom wheels (1.8%), and tire supplies, tools and other products (1.2%). We believe our large, diverse product offering allows us to better penetrate the replacement tire market across a broad range of price points.
Trends and Economic Events
The U.S. replacement tire market has historically experienced stable growth and favorable pricing dynamics. From 1955 through 2010, U.S. replacement tire unit shipments increased by an average of approximately 2.8% per year. However, during challenging economic periods, consumers may opt to defer replacement tire purchases or purchase less costly brand tires. Since the onset of the economic downturn in 2008, we have seen increased economic uncertainty, increased unemployment and rising fuel prices. These factors have impacted the availability of consumer credit and have changed consumer spending of disposable income, thus impacting our business and the industry as a whole.
The economic environment has been showing signs of stabilization. We experienced modest year-over-year unit volume growth in 2010 which has continued during the first nine months of 2011, reflecting, in part, an economy slowly reemerging from the severe economic downturn. The return to established driving habits and longer vehicle life has led to moderate growth in the U.S. replacement tire market compared with prior years. However, we believe the modest pace of the recovery continues to negatively impact consumer spending of disposable income and miles driven.
Going forward, we believe growth in the U.S. replacement tire market will continue to be driven by favorable underlying dynamics, including:
• | increases in the number and average age of passenger cars and light trucks; |
• | increases in the number of miles driven; |
• | increases in the number of licensed drivers as the U.S. population continues to grow; |
• | increase in the number of replacement tire SKUs; |
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• | growth of the high performance tire segment; and |
• | shortening tire replacement cycles due to changes in product mix that increasingly favor high performance tires, which have shorter average lives. |
Despite the current market environment, we have a solid infrastructure, an extensive and efficient distribution network, and a broad product offering. Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand in existing markets as well as in new geographic areas. In addition, we are investing in technology and new sales channels which will help fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above market results in both contracting and expanding market demand cycles.
Acquisition of Holdings
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, we were acquired by affiliates of TPG Capital, L.P. (“TPG”) for an aggregate purchase price valued at $1,287.5 million. As a result, we became a wholly-owned subsidiary of TPG (the “Merger”). Although we continue to operate as the same legal entity subsequent to the acquisition, periods prior to May 28, 2010 reflect the financial position, results of operations, and changes in financial position of us prior to the Merger (the “Predecessor”) and periods after May 28, 2010 reflect the financial position, results of operations, and changes in financial position of us after the Merger (the “Successor”).
Under the guidance provided by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Under push-down accounting, certain transactions incurred by the acquirer, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of our common stock has been pushed down from TPG to us. In addition, the Merger was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations. The guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, periods prior to the Merger are not comparable to subsequent periods due to the difference in the basis of presentation of purchase accounting as compared to historical cost.
Recent Developments
In the first nine months of 2011, we continued to execute on our plans to expand our distribution services into new domestic geographic markets. During this time, we have opened new distribution centers in Seattle, WA, Chicago, IL, Detroit, MI, Cleveland, OH, Totowa, NJ, Philadelphia, PA, Boston, MA and Wichita, KS. In addition, we opened distribution centers in Cincinnati, OH and Indianapolis, IN during the second half of 2010. We will continue to evaluate additional domestic geographic markets during 2011 and beyond.
We use interest rate swap agreements to hedge our exposure to changes in our variable interest rate debt. On September 23, 2011, ATDI entered into two interest rate swap agreements that cover an aggregate notional amount of $100 million, of which $50 million will expire in September 2014 and $50 million will expire in September 2015. In addition, on February 24, 2011, ATDI entered into two interest rate swap agreements that cover an aggregate notional amount of $75 million, of which $25.0 million will expire in February 2012 and $50.0 million will expire in February 2013.
On June 6, 2011, we entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. We maintain the option to request that the ABL Facility be increased by an amount not to exceed $200 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase.
On April 29, 2011, we completed the purchase of 100% of the capital stock of the Bowlus Service Company d/b/a North Central Tire (“NCT”). NCT owned and operated three distribution centers in Canton, OH, Cincinnati, OH and Rochester, NY, serving over 2,700 customers. The acquisition was funded through our ABL Facility. The purchase of NCT will significantly strengthen our market position in Ohio and Western New York.
On December 10, 2010, we completed the purchase of substantially all the assets of Lisac’s of Washington, Inc. (“Lisac’s”) and 100% of the capital stock of Tire Wholesalers, Inc. (“Tire Wholesalers”). Tire Wholesalers operated one distribution center in Kent, WA, which serviced over 750 customers in the area and Lisac’s operated tire distribution centers in Portland, Oregon and Spokane, Washington, serving over 1,400 customers in the area. The aggregate purchase price of these acquisitions was approximately $11 million, which was funded through our ABL Facility. The purchase of Lisac’s and Tire Wholesalers significantly expanded our position in the Northwestern United States.
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Results of Operations
Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarter and nine months ended October 1, 2011 for the Successor contain operating results for 13 weeks and 39 weeks, respectively. The quarter and four months ended October 2, 2010 for the Successor contain operating results for 13 weeks and 18 weeks, respectively. The five months ended May 28, 2010 for the Predecessor contains operating results for 21 weeks.
Quarter Ended October 1, 2011 for the Successor Compared to the Quarter Ended October 2, 2010 for the Successor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the quarter ended October 1, 2011 for the Successor are compared and discussed in relation to the quarter ended October 2, 2010 for the Successor.
The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
Successor | Successor | Period Over | Period Over | Percentage of Net Sales | ||||||||||||||||||||
Quarter Ended | Quarter Ended | Period Change | Period % Change | For the Respective Period Ended | ||||||||||||||||||||
In thousands | October 1, 2011 | October 2, 2010 | Favorable (unfavorable) | Favorable (unfavorable) | October 1, 2011 | October 2, 2010 | ||||||||||||||||||
Net sales | $ | 830,966 | $ | 647,317 | $ | 183,649 | 28.4 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold | 697,854 | 557,113 | (140,741 | ) | -25.3 | % | 84.0 | % | 86.1 | % | ||||||||||||||
Selling, general and administrative expenses | 111,694 | 94,274 | (17,420 | ) | -18.5 | % | 13.4 | % | 14.6 | % | ||||||||||||||
Transaction expenses | 1,183 | 750 | (433 | ) | -57.7 | % | 0.1 | % | 0.1 | % | ||||||||||||||
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Operating income (loss) | 20,235 | (4,820 | ) | 25,055 | 519.8 | % | 2.4 | % | -0.7 | % | ||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (17,231 | ) | (16,183 | ) | (1,048 | ) | -6.5 | % | -2.1 | % | -2.5 | % | ||||||||||||
Other, net | (434 | ) | (243 | ) | (191 | ) | -78.6 | % | -0.1 | % | 0.0 | % | ||||||||||||
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Income (loss) from operations before income taxes | 2,570 | (21,246 | ) | 23,816 | 112.1 | % | 0.3 | % | -3.3 | % | ||||||||||||||
Provision (benefit) for income taxes | 1,090 | (2,365 | ) | (3,455 | ) | -146.1 | % | 0.1 | % | -0.4 | % | |||||||||||||
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Net income (loss) | $ | 1,480 | $ | (18,881 | ) | $ | 20,361 | 107.8 | % | 0.2 | % | -2.9 | % | |||||||||||
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Net Sales
Net sales for the quarter ended October 1, 2011 increased 28.4%, or $183.6 million, compared with the quarter ended October 2, 2010. The increase in net sales was primarily driven by higher net tire pricing of $81.9 million. The pricing increase, which included $61.3 million related to passenger and light truck tires and $13.2 million related to medium truck tires, resulted from our passing through tire manufacturer price increases. The combined results of opening new distribution centers during the last twelve months as well as the integration of our fourth quarter 2010 and second quarter 2011 acquisitions added $69.2 million of incremental sales in the third quarter of 2011. In addition, an increase in comparable tire unit sales across all tire categories contributed $39.4 million. However, these increases were partially offset by lower equipment sales of $10.6 million during the third quarter of 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
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Cost of Goods Sold
Cost of goods sold for the quarter ended October 1, 2011 increased 25.3%, or $140.7 million, compared with the quarter ended October 2, 2010. The increase in cost of goods sold was primarily driven by higher net tire pricing of $80.7 million. The pricing increase, which included $50.9 million related to passenger and light truck tires and $11.0 million related to medium truck tires, resulted from tire manufacturer price increases. The combined results of opening new distribution centers during the last twelve months as well as the integration of our fourth quarter 2010 and second quarter 2011 acquisitions added $57.7 million of incremental costs in the third quarter of 2011. In addition, an increase in comparable tire unit sales across all tire categories contributed $32.6 million. However, these increases were partially offset by the $9.7 million reduction in equipment sales during the quarter ended October 1, 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering. Related to this decision, we recognized a $1.0 million impairment charge during the quarter ended October 2, 2010 in order to write down this inventory to fair market value.
Cost of goods sold as a percentage of net sales was 84.0% for the quarter ended October 1, 2011; a decrease compared with 86.1% during the quarter ended October 2, 2010. However, the quarter ended October 2, 2010 includes $20.6 million related to the nonrecurring amortization of the inventory step-up recorded in connection with the Merger. The charge had a 3.2 point impact on cost of goods sold as a percentage of net sales. In addition, the quarter ended October 2, 2010 included a higher level of favorable inventory cost layers that were generated from our passing through tire manufacturer price increases.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended October 1, 2011 increased 18.5%, or $17.4 million, compared with the quarter ended October 2, 2010. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers opened during the last twelve months as well as the integration of our fourth quarter 2010 and second quarter 2011 acquisitions. Combined, these factors added $8.7 million of incremental costs to the third quarter of 2011, including increased amortization expense of $1.3 million from newly established intangible assets. In addition, we experienced an increase to vehicle expenses of $2.2 million, primarily a result of a higher price per gallon for fuel; a $2.1 million increase to salaries and wage expense due to higher sales volume and related headcount; as well as a $1.8 million increase in occupancy costs as we expanded several of our distribution centers to better service our existing customers.
Transaction Expenses
Transaction expenses for the quarter ended October 1, 2011 were $1.2 million, which were primarily related to severance and integration costs in association with our acquisition of NCT in April 2011. During the quarter ended October 2, 2010, transaction expenses of $0.8 million were recorded which included direct acquisition costs in connection with the Merger.
Interest Expense
Interest expense for the quarter ended October 1, 2011 increased 6.5% or $1.0 million compared with the quarter ended October 2, 2010. The increase is primarily due to higher debt levels associated with our ABL Facility despite lower average interest rates on the outstanding debt. As a result, we incurred an additional $0.6 million in interest expense during the third quarter of 2011. In addition, we recorded $0.4 million in association with the fair value changes of our interest rate swaps entered into during 2011.
Provision (Benefit) for Income Taxes
Our income tax provision for the quarter ended October 1, 2011 was $1.1 million, which was based on pre-tax income of $2.6 million. Our income tax benefit for the quarter ended October 2, 2010 was $2.4 million, which was based on a pre-tax loss of $21.2 million. Our effective tax rate for the quarter ended October 1, 2011 and the quarter ended October 2, 2010 were 42.4% and 11.1%, respectively. The effective tax rate for the quarter ended October 1, 2011 is higher than our statutory tax rate primarily due to higher state income taxes, a result based on our legal entity tax structure. During the quarter ended October 2, 2010, we eliminated a valuation allowance against certain capital loss carryforwards and were impacted by certain permanent differences relating to the Merger, which are not deductable for income tax purposes. The income tax provision recorded for the third quarter of 2011 has been computed based on year-to-date amounts and projected results for the full year. The final effective tax rate to be applied to fiscal 2011 will depend on the actual amount of pre-tax income (loss) generated by us for the full year.
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Nine Months Ended October 1, 2011 for the Successor Compared to Four Months Ended October 2, 2010 for the Successor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the nine months ended October 1, 2011 for the Successor are compared and discussed in relation to the four months ended October 2, 2010 for the Successor.
The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
Successor | Successor | Period Over | Period Over | Percentage of Net Sales | ||||||||||||||||||||
Nine Months Ended | Four Months Ended | Period Change | Period % Change | For the Respective Period Ended | ||||||||||||||||||||
In thousands | October 1, 2011 | October 2, 2010 | Favorable (unfavorable) | Favorable (unfavorable) | October 1, 2011 | October 2, 2010 | ||||||||||||||||||
Net sales | $ | 2,234,275 | $ | 885,596 | $ | 1,348,679 | 152.3 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold | 1,860,275 | 790,259 | (1,070,016 | ) | -135.4 | % | 83.3 | % | 89.2 | % | ||||||||||||||
Selling, general and administrative expenses | 320,073 | 125,997 | (194,076 | ) | -154.0 | % | 14.3 | % | 14.2 | % | ||||||||||||||
Transaction expenses | 2,830 | 985 | (1,845 | ) | -187.3 | % | 0.1 | % | 0.1 | % | ||||||||||||||
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Operating income (loss) | 51,097 | (31,645 | ) | 82,742 | 261.5 | % | 2.3 | % | -3.6 | % | ||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (50,756 | ) | (21,462 | ) | (29,294 | ) | -136.5 | % | -2.3 | % | -2.4 | % | ||||||||||||
Other, net | (1,303 | ) | (482 | ) | (821 | ) | -170.3 | % | -0.1 | % | -0.1 | % | ||||||||||||
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Income (loss) from operations before income taxes | (962 | ) | (53,589 | ) | 52,627 | 98.2 | % | 0.0 | % | -6.1 | % | |||||||||||||
Provision (benefit) for income taxes | (376 | ) | (17,083 | ) | (16,707 | ) | -97.8 | % | 0.0 | % | -1.9 | % | ||||||||||||
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Net income (loss) | $ | (586 | ) | $ | (36,506 | ) | $ | 35,920 | 98.4 | % | 0.0 | % | -4.1 | % | ||||||||||
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Net Sales
Net sales for the nine months ended October 1, 2011 for the Successor increased 152.3%, or $1,348.7 million compared with the four months ended October 2, 2010 for the Successor. The increase was directly attributable to the comparison of operating results of a nine month period with a four month period. In addition to the increase in tire unit sales attributable to the difference in the number of months in the comparable period, passenger and light truck tire pricing increased by 8.4%. The increase was driven primarily by tire manufacturer price increases. As well, the combined results of opening new distribution centers and the integration of our recent acquisitions contributed $124.1 million during the nine months ended October 1, 2011. However, these increases were partially offset by lower equipment sales of $14.9 million during the nine months ended October 1, 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
Cost of Goods Sold
Cost of goods sold for the nine months ended October 1, 2011 for the Successor increased 135.4%, or $1,070.0 million compared with the four months ended October 2, 2010 for the Successor. The increase was directly attributable to the comparison of operating results of a nine month period with a four month period. Cost of goods sold as a percentage of net sales was 83.3% and 89.2% for the nine months ended October 1, 2011 and the four months ended October 2, 2010, respectively. However, the four months ended October 2, 2010 includes $58.8 million related to the non-recurring amortization of the inventory step-up recorded in connection with the Merger. The charge had a 6.6 point impact on cost of goods sold as a percentage of net sales. Other factors that contributed to the increase in cost of goods sold included higher net tire pricing resulting from tire manufacturer price increases, higher tire unit sales coupled with the incremental tire units sold through new distribution centers and the integration of our recent acquisitions. However, these increases were partially offset by the reduction in net sales within our equipment product offering during the nine months ended October 1, 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended October 1, 2011 for the Successor increased 154.0%, or $194.1 million compared with the four months ended October 2, 2010 for the Successor. The increase in selling, general and administrative expenses was primarily attributable to the comparison of operating results for a nine month period with a four month period. As a percentage of net sales, selling, general and administrative expenses were 14.3% and 14.2% for the nine months ended October 1, 2011 and the four months ended October 2, 2010, respectively. Factors that contributed to the percentage of net sales increase include higher salaries and wages, increased price per gallon of fuel, costs associated with opening new distribution centers and the integration of our recent acquisitions.
Transaction Expenses
Transaction expenses for the nine months ended October 1, 2011 for the Successor were $2.8 million. Amounts recorded relate to acquisition fees as well as costs incurred in connection with both the amendment of our ABL Facility and the registration of our Senior Secured Notes with the SEC. During the four months ended October 2, 2010, the Successor incurred transaction expenses of $1.0 million related to the Merger.
Interest Expense
Interest expense for the nine months ended October 1, 2011 for the Successor increased 136.5% or $29.3 million compared with the four months ended October 2, 2010 for the Successor. The increase was primarily attributable to the comparison of operating results of a nine month period with a four month period. During the nine months ended October 1, 2011, higher average debt levels on our ABL Facility were partially offset by lower associated interest rates. In addition, the nine months ended October 1, 2011 included $0.9 million associated with the fair value changes of the 2011 Swaps.
Provision (Benefit) for Income Taxes
Our income tax benefit for the nine months ended October 1, 2011 for the Successor was $0.4 million, which was based on a pre-tax loss of $1.0 million. Our income tax benefit for the four months ended October 2, 2010 for the Successor was $17.1 million, which was based on a pre-tax loss of $53.6 million. Our effective tax rate for the nine months ended October 1, 2011 and the four months ended October 2, 2010 were 39.1% and 31.9%, respectively. The effective tax rate for the nine months ended October 1, 2011 is higher than our statutory tax rate primarily due to higher state income taxes, a result based on our legal entity tax structure. During the four months ended October 2, 2010, we eliminated a valuation allowance against certain capital loss carryforwards and were impacted by certain permanent differences relating to the Merger, which are not deductable for income tax purposes. The income tax benefit recorded for the first nine months of 2011 has been computed based on year-to-date amounts and projected results for the full year. The final effective tax rate to be applied to fiscal 2011 will depend on the actual amount of pre-tax income (loss) generated by us for the full year.
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Nine Months Ended October 1, 2011 for the Successor Compared to Five Months Ended May 28, 2010 for the Predecessor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the nine months ended October 1, 2011 for the Successor are compared and discussed in relation to the five months ended May 28, 2010 for the Predecessor.
The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
Successor | Predecessor | Period Over | Period Over | Percentage of Net Sales | ||||||||||||||||||||
Nine Months Ended | Five Months Ended | Period Change | Period % Change | For the Respective Period Ended | ||||||||||||||||||||
In thousands | October 1, 2011 | May 28, 2010 | Favorable (unfavorable) | Favorable (unfavorable) | October 1, 2011 | May 28, 2010 | ||||||||||||||||||
Net sales | $ | 2,234,275 | $ | 934,925 | $ | 1,299,350 | 139.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold | 1,860,275 | 775,678 | (1,084,597 | ) | -139.8 | % | 83.3 | % | 83.0 | % | ||||||||||||||
Selling, general and administrative expenses | 320,073 | 135,146 | (184,927 | ) | -136.8 | % | 14.3 | % | 14.5 | % | ||||||||||||||
Transaction expenses | 2,830 | 42,608 | 39,778 | 93.4 | % | 0.1 | % | 4.6 | % | |||||||||||||||
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Operating income (loss) | 51,097 | (18,507 | ) | 69,604 | 376.1 | % | 2.3 | % | -2.0 | % | ||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (50,756 | ) | (32,669 | ) | (18,087 | ) | -55.4 | % | -2.3 | % | -3.5 | % | ||||||||||||
Other, net | (1,303 | ) | (127 | ) | (1,176 | ) | -926.0 | % | -0.1 | % | 0.0 | % | ||||||||||||
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Income (loss) from operations before income taxes | (962 | ) | (51,303 | ) | 50,341 | 98.1 | % | 0.0 | % | -5.5 | % | |||||||||||||
Provision (benefit) for income taxes | (376 | ) | (15,227 | ) | (14,851 | ) | -97.5 | % | 0.0 | % | -1.6 | % | ||||||||||||
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Net income (loss) | $ | (586 | ) | $ | (36,076 | ) | $ | 35,490 | 98.4 | % | 0.0 | % | -3.9 | % | ||||||||||
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Net Sales
Net sales for the nine months ended October 1, 2011 for the Successor increased 139.0%, or $1,299.4 million compared with the five months ended May 28, 2010 for the Predecessor. The increase was directly attributable to the comparison of operating results of a nine month period with a five month period. In addition to the increase in tire unit sales attributable to the difference in the number of months in the comparable period, passenger and light truck tire pricing increased by 13.4%. The increase was driven primarily by tire manufacturer price increases. As well, the combined results of opening new distribution centers and the integration of our recent acquisitions contributed $124.1 million during the nine months ended October 1, 2011. However, these increases were partially offset by lower equipment sales of $16.2 million during the nine months ended October 1, 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
Cost of Goods Sold
Cost of goods sold for the nine months ended October 1, 2011 for the Successor increased 139.8%, or $1,084.6 million compared with the five months ended May 28, 2010 for the Predecessor. The increase was directly attributable to the comparison of operating results of a nine month period with a five month period. Higher tire unit sales attributable to the difference in the number of months in the comparable period coupled with the incremental tire units sold through our new distribution centers and the integration of our recent acquisitions contributed to the increase. In addition, we experienced higher net tire pricing as a result of tire manufacturer price increases. However, these increases were partially offset by a reduction in equipment sales during the nine months ended October 1, 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering. As a result, cost of goods sold as a percentage of net sales increased from 83.0% to 83.3% for the five months ended May 28, 2010 and the nine months ended October 1, 2011, respectively.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended October 1, 2011 for the Successor increased 136.8%, or $184.9 million compared with the five months ended May 28, 2010 for the Predecessor. The increase in selling, general and administrative expenses was primarily attributable to the comparison of operating results for a nine month period with a five month period. Increased amortization expense due to the revaluation of the customer list intangible assets established as part of both the Merger and our recent acquisitions was the primary driver of the increase. Other contributing factors include higher salaries and wages, increased price per gallon of fuel as well as additional costs associated with opening new distribution centers and the integration of our recent acquisitions. In addition, the five months ended May 28, 2010 includes $5.9 million of stock based compensation expense related to the discretionary vesting of certain previously unvested stock options. As a percentage of net sales, selling, general and administrative expenses were 14.3% and 14.5% for the nine months ended October 1, 2011 and the five months ended May 28, 2010, respectively.
Transaction Expenses
Transaction expenses for the nine months ended October 1, 2011 for the Successor were $2.8 million. Amounts recorded relate to acquisition fees as well as costs incurred in connection with both the amendment of our ABL Facility and the registration of our Senior Secured Notes with the SEC. During the five months ended May 28, 2010, the Predecessor incurred transaction costs of $42.6 million. These direct acquisition costs included investment banking, legal, accounting and other fees for professional services in connection with the Merger as well as certain financing fees that did not qualify for capitalization. Also included in this amount was $2.4 million related to our now suspended public offering of our common stock.
Interest Expense
Interest expense for the nine months ended October 1, 2011 for the Successor increased 55.4% or $18.1 million compared with the five months ended May 28, 2010 for the Predecessor. The increase was primarily attributable to the comparison of operating results of a nine month period with a five month period. The nine months ended October 1, 2011 was impacted by higher debt levels as well as slightly higher interest rates associated with the Successor’s senior debt obligations as compared with the Predecessor’s senior debt obligations. However, during the five months ended May 28, 2010, we wrote off $8.0 million of deferred financing fees related to the Predecessor’s existing debt and accreted the carrying amount of the Predecessor’s redeemable preferred stock to the redemption amount at the date of the Merger, which impacted interest expense by $2.3 million.
Provision (Benefit) for Income Taxes
Our income tax benefit for the nine months ended October 1, 2011 for the Successor was $0.4 million, which was based on a pre-tax loss of $1.0 million. Our income tax benefit for the five months ended May 28, 2010 for the Predecessor was $15.2 million, which was based on a pre-tax loss of $51.3 million. Our effective tax rate for the nine months ended October 1, 2011 and the five months ended May 28, 2010 were 39.1% and 29.7%, respectively. The effective tax rate for the nine months ended October 1, 2011 is higher than our statutory tax rate primarily due to higher state income taxes, a result based on our legal entity tax structure. During the five months ended May 28, 2010, permanent tax differences for redeemable preferred stock extinguished in conjunction with the Merger, which are not deductable for income tax purposes, contributed to reducing the prior period rate. The income tax benefit recorded for the first nine months of 2011 has been computed based on year-to-date amounts and projected results for the full year. The final effective tax rate to be applied to fiscal 2011 will depend on the actual amount of pre-tax income (loss) generated by us for the full year.
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Liquidity and Capital Resources
Overview
The following table contains several key measures to gauge our financial condition and liquidity:
In thousands | October 1, 2011 | January 1, 2011 | ||||||
Cash and cash equivalents | $ | 14,565 | $ | 11,971 | ||||
Working capital | 477,821 | 270,332 | ||||||
Total debt | 888,529 | 652,544 | ||||||
Total stockholders’ equity | 653,578 | 651,446 | ||||||
Debt-to-capital ratio | 57.6 | % | 50.0 | % |
Debt-to-capital ratio = total debt / (total debt plus total stockholders’ equity)
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditures commitments and income tax rates. Our cash requirements consist primarily of the following:
• | Debt service requirements |
• | Funding of working capital |
• | Funding of capital expenditures |
Our primary sources of liquidity include cash flows from operations and our availability under our ABL Facility. We expect our cash flow from operations, combined with availability under our ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements, restructuring obligations and capital spending during the next twelve month period. In addition, we expect our cash flow from operations and our availability under our newly amended ABL Facility, which now matures on June 6, 2016, to continue to provide sufficient liquidity to fund our ongoing obligations, projected working capital requirements, restructuring obligations and capital spending during the foreseeable future.
As a result of the Merger, we are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of October 1, 2011, our total indebtedness is $888.5 million. Our cash interest payments for the nine months ended October 1, 2011 for the Successor, the four months ended October 2, 2010 for the Successor and the five months ended May 28, 2010 for the Predecessor was $34.0 million, $3.8 million and $26.2 million, respectively. As of October 1, 2011, we have an additional $215.7 million of availability under our ABL Facility. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them.
Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under “Item 1A—Risk Factors” in our most recently filed Annual Report on Form 10-K. If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our ABL Facility, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.
Cash Flows
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, our cash flow results for the nine months ended October 1, 2011 for the Successor are compared and discussed in relation to the four months ended October 2, 2010 for the Successor as well as with the five months ended May 28, 2010 for the Predecessor.
The following table sets forth the major categories of cash flows:
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Successor | Predecessor | |||||||||||
In thousands | Nine Months Ended October 1, 2011 | Four Months Ended October 2, 2010 | Five Months Ended May 28, 2010 | |||||||||
Cash provided by (used in) operating activities | $ | (163,324 | ) | $ | (25,578 | ) | $ | 28,106 | ||||
Cash provided by (used in) investing activities | (78,958 | ) | (6,082 | ) | (7,523 | ) | ||||||
Cash provided by (used in) financing activities | 244,876 | 31,395 | (15,631 | ) | ||||||||
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Net increase (decrease) in cash and cash equivalents | 2,594 | (265 | ) | 4,952 | ||||||||
Cash and cash equivalents—beginning of period | 11,971 | 12,242 | 7,290 | |||||||||
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Cash and cash equivalents—end of period | $ | 14,565 | $ | 11,977 | $ | 12,242 | ||||||
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Cash payments for interest | $ | 34,020 | $ | 3,816 | $ | 26,188 | ||||||
Cash payments for taxes, net | $ | 1,358 | $ | 3,152 | $ | 1,122 | ||||||
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Operating Activities
Net cash used in operating activities for the nine months ended October 1, 2011 for the Successor was $163.3 million. During the nine months, working capital requirements for the Successor resulted in a cash outflow of $213.8 million, primarily driven by an increase in inventory of $208.3 million. The increase reflects our decision to increase manufacturer safety stock amounts as a result of tight supply levels with most of our manufacturers, the impact of manufacturer price increases on the replenishment of our inventory as well as the seasonal nature of our business. In addition, the combined impact of stocking new distribution centers and our recent acquisitions also contributed to the inventory increase. As well, higher sales volumes led to a $75.1 million increase to accounts receivable. However, these amounts were partially offset by a $73.7 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor payments and accrued interest on our senior notes.
Net cash used in operating activities for the four months ended October 2, 2010 for the Successor was $25.6 million. During the four months, working capital requirements for the Successor resulted in a cash outflow of $44.4 million. Accounts receivable and inventory increased $18.5 million and $5.4 million, respectively, as the increase in sales volume reflected the seasonal nature of our business. The decrease in accounts payable primarily resulted from the timing of vendor payments.
Net cash provided by operating activities for the five months ended May 28, 2010 for the Predecessor was $28.1 million. During the five months, working capital requirements for the Predecessor resulted in a cash inflow of $31.0 million. The increase, primarily driven by an increase in accounts payable and accrued expenses of $96.4 million, reflects the accrual for transaction costs associated with the Merger of $42.6 million as well as timing of vendor payments. These amounts were partially offset by an increase in accounts receivable and inventory as the increase in sales volume reflected the seasonal nature of our business.
Investing Activities
Net cash used in investing activities for the nine months ended October 1, 2011 for the Successor was $79.0 million. During the nine months, cash outflows for acquisitions net of cash acquired totaled $59.1 million. In addition, we invested $18.9 million in property and equipment purchases, which included information technology upgrades, IT application development and warehouse racking. During the four months ended October 2, 2010 for the Successor and the five months ended May 28, 2010 for the Predecessor, capital expenditures for property and equipment were $6.3 million and $6.4 million, respectively. The expenditures included information technology upgrades, IT application development and leasehold improvements.
Financing Activities
Net cash provided by financing activities for the nine months ended October 1, 2011 for the Successor was $244.9 million. The inflow was primarily related to higher net borrowings from our ABL Facility due to the increase in working capital requirements as well as cash paid for acquisitions. In addition, during the nine months, we paid $5.9 million related to the amendment of our ABL Facility.
Net cash provided by financing activities for the four months ended October 2, 2010 for the Successor was $31.4 million. The inflow was primarily related to the proceeds from the issuance of our Senior Secured Notes and our Senior Subordinated Notes. The proceeds were partially offset by the repayment of our previously outstanding senior notes and redeemable preferred stock.
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Also contributing to the increase were higher net borrowings from our ABL Facility related to increased working capital requirements. However, they were more than offset by payments for transaction fees and deferred financing costs paid in connection with the Merger.
Net cash used in financing activities for the five months ended May 28, 2010 for the Predecessor was $15.6 million. The outflow primarily related to the timing of outstanding checks. In addition, higher borrowings from our ABL Facility were partially offset by a $6.3 million payment related to the Predecessor’s Senior Notes.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest during the nine months ended October 1, 2011 for the Successor were $34.0 million, which included $23.7 million related to interest payments on our Senior Notes and $8.4 million related to our ABL Facility. Cash payments for the four months ended October 2, 2010 for the Successor was $3.8 million. The increase is primarily related to the comparison of a four month period to a nine month period. Cash payments for the five months ended May 28, 2010 was $26.2 million for the Predecessor, which included $1.9 million related to our ABL Facility as well as $20.9 million related to Senior Notes and $2.5 million related to our Swaps, both of which were cancelled in connection with the Merger. The increase primarily related to the comparison of a nine month period with a five month period in addition to higher debt levels during the nine months ended October 1, 2011.
Cash payments for taxes during the nine months ended October 1, 2011 for the Successor were $1.4 million, compared with $3.2 million paid during the four months ended October 2, 2010 for the Successor and compared with $1.1 million paid during the five months ended May 28, 2010 for the Predecessor. The differences between the periods primarily relate to the balance and timing of income tax extension payments.
Indebtedness
The following table summarizes the Successor’s outstanding debt at October 1, 2011:
In thousands | Matures | Interest Rate (1) | Outstanding Balance | |||||||||
ABL Facility | 2016 | 2.4 | % | $ | 426,309 | |||||||
Senior Secured Notes | 2017 | 9.75 | 247,337 | |||||||||
Senior Subordinated Notes | 2018 | 11.50 | 200,000 | |||||||||
Capital lease obligations | 2012 - 2022 | 7.1 -14.0 | 14,126 | |||||||||
Other | 2011 - 2020 | 6.6 - 10.6 | 757 | |||||||||
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Total debt | 888,529 | |||||||||||
Less—Current maturities | (99 | ) | ||||||||||
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Long-term debt | $ | 888,430 | ||||||||||
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(1) | Interest rate for the ABL Facility is the weighted average interest rate at October 1, 2011. |
ABL Facility
In connection with the acquisition of Holdings on May 28, 2010, ATDI entered into the Fifth Amended and Restated Credit Agreement, as subsequently amended (“ABL Facility”). The agreement provided for a senior secured asset-backed revolving credit facility of up to $450.0 million (of which up to $50.0 million could have been utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default was then existing or would arise therefrom, we had the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to mature on November 28, 2014.
On June 6, 2011, we entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. We maintain the option to request that the ABL Facility be increased by an amount not to exceed $200 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. At October 1, 2011, we had $426.3 million outstanding under the facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $8.0 million, leaving $215.7 million available for additional borrowings.
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Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of October 1, 2011 or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of October 1, 2011. The applicable margins under the ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
The borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
• | 85% of eligible accounts receivable; plus |
• | The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory and (b) 85% of the net orderly liquidation value of eligible tire inventory; plus |
• | The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory and (b) 85% of the net orderly liquidation value of eligible non-tire inventory. |
All obligations under the ABL Facility are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The ABL Facility contains customary covenants, including covenants that restricts our ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates or change our fiscal year. If the amount available for additional borrowing under the ABL Facility is less than the greater of (a) 12.5% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the borrowing base and (b) $25.0 million, then we would be subject to an additional covenant requiring them to meet a fixed charge coverage ratio of 1.0 to 1.0. As of October 1, 2011, our additional borrowing availability under the ABL Facility was above the required amount and we were therefore not subject to the additional covenants.
Senior Secured Notes
On May 28, 2010, ATDI issued Senior Secured Notes (“Senior Secured Notes”) due June 1, 2017 in an aggregate principal amount at maturity of $250.0 million. The Senior Secured Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $240.7 million after debt issuance costs (which represents a non-cash financing activity of $9.3 million). The Senior Secured Notes will accrete based on an effective interest rate of 10% to an aggregate accreted value of $250.0 million, the full principal amount at maturity. The Senior Secured Notes bear interest at a fixed rate of 9.75%. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Secured Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Secured Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 107.313% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount if the redemption date occurs between June 1, 2016 and May 31, 2017.
Until June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Secured Notes issued at a redemption price equal to 109.75% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds from one or more equity offerings to the extent that such net cash proceeds are received by or contributed to ATDI; provided that:
(1) | at least 50% of the sum of the aggregate principal amount of the Senior Secured Notes remains outstanding immediately after the occurrence of such redemption; and |
(2) | each such redemption occurs within 120 days of the date of the closing of the related equity offering. |
In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Secured Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a “make-whole” price based on the price of a U.S. treasury security plus 50 basis points) as of, plus accrued and unpaid interest, to, but not including, the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.
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The Senior Secured Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions. The Senior Secured Notes are also collateralized by a second-priority lien on accounts receivable and related assets and a first-priority lien on substantially all other assets (other than inventory), in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The indenture governing the Senior Secured Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur other contingent obligations; incur certain liens; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.
Senior Subordinated Notes
On May 28, 2010, ATDI issued Senior Subordinated Notes due June 1, 2018 (“Senior Subordinated Notes”) in an aggregate principal amount of $200.0 million. The Senior Subordinated Notes bear interest at a fixed rate of 11.50% per annum. Interest on the Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Subordinated Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Subordinated Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 104.0% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016.
Prior to June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes issued at a redemption price equal to 111.5% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that:
(1) | at least 50% of the aggregate principal amount of the Senior Subordinated Notes remains outstanding immediately after the occurrence of such redemption; and |
(2) | each such redemption occurs within 120 days of the date of the closing of the related equity offering. |
In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Subordinated Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a “make-whole” price based on the price of a U.S. treasury security plus 50 basis points) as of, and accrued and unpaid interest, to, but not including, the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.
The Senior Subordinated Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions.
The indenture governing the Senior Subordinated Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur other contingent obligations; incur certain liens without securing the Senior Subordinated Notes; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.
Adjusted EBITDA
We report our financial results in accordance with Generally Accepted Accounting Principles in the United States (GAAP). In addition, we present Adjusted EBITDA as a supplemental financial measure in order to provide a more complete understanding of the factors and trends affecting our business. Adjusted EBITDA is a non-GAAP financial measure that should be considered supplemental to, not a substitute for or superior to, the financial measure calculated in accordance with GAAP. It has limitations
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in that it does not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. In addition, this measure may not be comparable to non-GAAP financial measures reported by other companies. We believe that Adjusted EBITDA provides important supplemental information to both management and investors regarding financial and business trends used in assessing our financial condition and cash flow. As a result, one should not consider Adjusted EBITDA in isolation or as a substitute for our results reported under GAAP. We compensate for these limitations by analyzing results on a GAAP basis as well as on a non-GAAP basis, predominantly disclosing GAAP results and providing reconciliations from GAAP results to non-GAAP results.
The following table shows a reconciliation of Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss) in order to show the differences in these measures of operating performance:
Successor | Predecessor | |||||||||||||||||||
In thousands | Quarter Ended October 1, 2011 | Nine Months Ended October 1, 2011 | Quarter Ended October 2, 2010 | Four Months Ended October 2, 2010 | Five Months Ended May 28, 2010 | |||||||||||||||
Net income (loss) | $ | 1,480 | $ | (586 | ) | $ | (18,881 | ) | $ | (36,506 | ) | $ | (36,076 | ) | ||||||
Depreciation and amortization | 19,875 | 57,799 | 17,280 | 23,057 | 14,707 | |||||||||||||||
Interest expense | 17,231 | 50,756 | 16,183 | 21,462 | 32,669 | |||||||||||||||
Income tax provision (benefit) | 1,090 | (376 | ) | (2,365 | ) | (17,083 | ) | (15,227 | ) | |||||||||||
Management fee | 1,324 | 3,263 | 425 | 425 | 125 | |||||||||||||||
Incentive compensation | 1,462 | 2,648 | 2,103 | 2,103 | 5,892 | |||||||||||||||
Transaction fees | 1,183 | 2,830 | 750 | 985 | 42,608 | |||||||||||||||
Inventory step-up | — | — | 20,579 | 58,797 | — | |||||||||||||||
Other | 20 | 920 | 1,773 | 1,736 | 998 | |||||||||||||||
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Adjusted EBITDA | $ | 43,665 | $ | 117,254 | $ | 37,847 | $ | 54,976 | $ | 45,696 | ||||||||||
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Off-Balance Sheet Arrangements
We have no significant off balance sheet arrangements, other than liabilities related to leases of Winston Tire Company (“Winston Tire”) that we guaranteed when we sold Winston Tire in 2001. As of October 1, 2011, our total obligations as guarantor on these leases are approximately $3.9 million extending over eight years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $3.5 million as of October 1, 2011. A provision has been made for the net present value of the estimated shortfall. The accrual for lease liabilities could be materially affected by factors such as the credit worthiness of lessors, assignees and sublessees and our success at negotiating early termination agreements with lessors. These factors are significantly dependent on general economic conditions. While we believe that our current estimates of these liabilities are adequate, it is possible that future events could require significant adjustments to those estimates.
Critical Accounting Polices and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Please see the discussion of critical accounting policies and estimates in our Annual Report on Form 10-K. During the nine months ended October 1, 2011, there have been no material changes to our critical accounting policies.
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, “Testing for Goodwill Impairment” which amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow a company to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We have determined that this new guidance will not have a material impact on our consolidated financial statements.
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In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 requires us to present components of other comprehensive income and of net income in one continuous statement of comprehensive income, or in two separate, but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The option to report other comprehensive income within the statement of equity has been removed. This new presentation will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” ASU No. 2011-04 represents converged guidance between U.S. GAAP and IFRS resulting in common requirements for measuring fair value and for disclosing information about fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. We are currently assessing the impact, if any, on our consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, (ii) disclose separately the reasons for any transfers in and out of Level 3, and (iii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. We adopted this guidance in full beginning with the interim period ended April 3, 2010, except for the gross presentation of Level 3 rollforward information which we adopted in the interim period ended April 2, 2011.
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Cautionary Statements on Forward-Looking Information
This Form 10-Q, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements relating to our business and financial outlook that are based on our current expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or other comparable terminology.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions. Actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances, after we distribute this Form 10-Q, except as required by the federal securities laws. Many factors could cause actual results to differ materially from those indicated by the forward-looking statements or could contribute to such differences including:
• | general business and economic conditions in the United States and other countries, including uncertainty as to changes and trends; |
• | our ability to develop and implement the operational and financial systems needed to manage our operations; |
• | our ability to execute key strategies, including pursuing acquisitions and successfully integrating and operating acquired companies; |
• | the ability of our customers and suppliers to obtain financing related to funding their operations in the current economic market; |
• | the financial condition of our customers, many of which are small businesses with limited financial resources; |
• | changing relationships with customers, suppliers and strategic partners; |
• | changes in state or federal laws or regulations affecting the tire industry; |
• | impacts of competitive products and changes to the competitive environment; |
• | acceptance of new products in the market; and |
• | unanticipated expenditures. |
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Item 3.Quantitative and Qualitative Disclosures about Market Risk.
Our results of operations are exposed to changes in interest rates primarily with respect to our ABL Facility. Interest on the ABL Facility is tied to a Base Rate, as defined, or LIBOR. At October 1, 2011, we had $426.3 million outstanding under our ABL Facility subject to interest rate changes.
We use interest rate swap agreements to hedge our exposure to changes in our variable interest rate debt. On September 23, 2011, ATDI entered into two interest rate swap agreements that cover an aggregate notional amount of $100 million, of which $50 million will expire in September 2014 and $50 million will expire in September 2015. In addition, on February 24, 2011, ATDI entered into two interest rate swap agreements that cover an aggregate notional amount of $75 million, of which $25.0 million will expire in February 2012 and $50.0 million will expire in February 2013. The counterparties to each of the swaps are major financial institutions.
At October 1, 2011, $251.3 million of the outstanding balance of our ABL Facility is not hedged by an interest rate swap agreement and thus subject to interest rate changes. Based on this amount, a hypothetical increase of 1% in such interest rate percentages would result in an increase to our annual interest expense by $2.5 million.
Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
(a) | We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
(b) | As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. |
Changes in Internal Control Over Financial Reporting
During the quarter ended October 1, 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are, however, currently implementing a conversion of our legacy computer system to Oracle. We have already implemented the general ledger as well as the accounts payable, inventory and accounts receivable functions on Oracle but still must transition other key functions. We cannot be sure that the transition will be fully implemented on a timely basis, if at all. If we do not successfully implement this project, our controls over financial reporting may be disrupted and our operations adversely affected.
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We are involved from time to time in various lawsuits, including alleged class action lawsuits arising out of the ordinary conduct of our business. Although no assurances can be given, we do not expect that any of these matters will have a material adverse effect on our business or financial condition. We are also involved in various litigation proceedings incidental to the ordinary course of our business. We believe, based on consultation with legal counsel, that none of these will have a material adverse effect on our financial condition or results of operations.
There have been no material changes to any risk factor disclosed in our most recently filed Annual Report on Form 10-K.
31.1 | Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certifications of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statement of Stockholder’s Equity and Other Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 10, 2011 | AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC. | |||||
By: | /s/ DAVID L. DYCKMAN | |||||
David L. Dyckman | ||||||
Director, Executive Vice President and Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) |
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