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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 March 30, 2013
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 ¨ No x *
* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities and Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.
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 May 3, 2013:1,000
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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 is expressly qualified in its entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 29, 2012, particularly under the caption “Risk Factors”. 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. |
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. These risks are not the only risks and uncertainties facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.
We make available free of charge at www.atd-us.com (in the “Investor Relations” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.atd-us.com, we do not incorporate such website or its contents into this Quarterly Report on Form 10-Q.
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AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
FORM 10-Q
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PART I—FINANCIAL INFORMATION
Item 1. | Financial Statements |
American Tire Distributors Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
In thousands, except share amounts | March 30, 2013 | December 29, 2012 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 15,083 | $ | 25,951 | ||||
Accounts receivable, net | 299,384 | 301,303 | ||||||
Inventories | 718,168 | 721,672 | ||||||
Income tax receivable | 369 | 369 | ||||||
Deferred income taxes | 16,323 | 16,458 | ||||||
Assets held for sale | 7,201 | 7,151 | ||||||
Other current assets | 15,505 | 20,695 | ||||||
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Total current assets | 1,072,033 | 1,093,599 | ||||||
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Property and equipment, net | �� | 134,870 | 129,882 | |||||
Goodwill | 485,566 | 483,143 | ||||||
Other intangible assets, net | 724,405 | 738,698 | ||||||
Other assets | 53,983 | 58,680 | ||||||
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Total assets | $ | 2,470,857 | $ | 2,504,002 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 472,769 | $ | 502,221 | ||||
Accrued expenses | 51,296 | 44,916 | ||||||
Current maturities of long-term debt | 513 | 493 | ||||||
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Total current liabilities | 524,578 | 547,630 | ||||||
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Long-term debt | 963,749 | 950,711 | ||||||
Deferred income taxes | 279,398 | 285,345 | ||||||
Other liabilities | 14,845 | 14,662 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, par value $.01 per share; 1,000 shares authorized, issued and outstanding | — | — | ||||||
Additional paid-in capital | 757,006 | 756,338 | ||||||
Accumulated earnings (deficit) | (66,832 | ) | (50,541 | ) | ||||
Accumulated other comprehensive income (loss) | (1,887 | ) | (143 | ) | ||||
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Total stockholders’ equity | 688,287 | 705,654 | ||||||
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Total liabilities and stockholders’ equity | $ | 2,470,857 | $ | 2,504,002 | ||||
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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 Comprehensive Income (Loss)
(Unaudited)
In thousands | Quarter Ended March 30, 2013 | Quarter Ended March 31, 2012 | ||||||
Net sales | $ | 839,978 | $ | 794,132 | ||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | 708,156 | 669,311 | ||||||
Selling, general and administrative expenses | 136,504 | 119,319 | ||||||
Transaction expenses | 1,023 | 586 | ||||||
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Operating income (loss) | (5,705 | ) | 4,916 | |||||
Other income (expense): | ||||||||
Interest expense | (17,240 | ) | (16,752 | ) | ||||
Other, net | (973 | ) | (702 | ) | ||||
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Income (loss) from operations before income taxes | (23,918 | ) | (12,538 | ) | ||||
Income tax provision (benefit) | (7,627 | ) | (5,461 | ) | ||||
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Net income (loss) | $ | (16,291 | ) | $ | (7,077 | ) | ||
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Other comprehensive income (loss): | ||||||||
Unrealized gain (loss) on rabbi trust assets, net of tax | 67 | 110 | ||||||
Foreign currency translation | (1,811 | ) | — | |||||
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Other comprehensive income (loss) | (1,744 | ) | 110 | |||||
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Comprehensive income (loss) | $ | (18,035 | ) | $ | (6,967 | ) | ||
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See accompanying notes to condensed consolidated financial statements.
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American Tire Distributors Holdings, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
Total Stockholders’ Equity | Common Stock | Additional Paid-In Capital | Accumulated Earnings (Deficit) | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||||||||
In thousands, except share amounts | Shares | Amount | ||||||||||||||||||||||
Balance, December 29, 2012 | $ | 705,654 | 1,000 | $ | — | $ | 756,338 | $ | (50,541 | ) | $ | (143 | ) | |||||||||||
Net income (loss) | (16,291 | ) | — | — | — | (16,291 | ) | — | ||||||||||||||||
Unrealized gain (loss) on rabbi trust assets, net of tax | 67 | — | — | — | — | 67 | ||||||||||||||||||
Foreign currency translation | (1,811 | ) | — | — | — | — | (1,811 | ) | ||||||||||||||||
Stock-based compensation expense | 668 | — | — | 668 | — | — | ||||||||||||||||||
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Balance, March 30, 2013 | $ | 688,287 | 1,000 | $ | — | $ | 757,006 | $ | (66,832 | ) | $ | (1,887 | ) | |||||||||||
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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)
In thousands | Quarter Ended March 30, 2013 | Quarter Ended March 31, 2012 | ||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (16,291 | ) | $ | (7,077 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 25,031 | 21,054 | ||||||
Amortization of other assets | 1,033 | 1,217 | ||||||
Benefit for deferred income taxes | (5,577 | ) | (5,575 | ) | ||||
Inventory step-up amortization | 2,194 | — | ||||||
Provision for doubtful accounts | 528 | 372 | ||||||
Stock-based compensation | 668 | 557 | ||||||
Other, net | (177 | ) | 633 | |||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 966 | (10,957 | ) | |||||
Inventories | 3,529 | (21,332 | ) | |||||
Income tax receivable | — | 1,133 | ||||||
Other current assets | 5,190 | 99 | ||||||
Accounts payable and accrued expenses | (14,440 | ) | 33,859 | |||||
Other, net | (522 | ) | (451 | ) | ||||
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Net cash provided by operating activities | 2,132 | 13,532 | ||||||
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Cash flows from investing activities: | ||||||||
Acquisitions, net of cash acquired | (4,225 | ) | — | |||||
Purchase of property and equipment | (11,873 | ) | (12,350 | ) | ||||
Purchase of assets held for sale | (612 | ) | (837 | ) | ||||
Proceeds from sale of property and equipment | 13 | 29 | ||||||
Proceeds from sale of assets held for sale | — | 342 | ||||||
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Net cash provided by (used in) investing activities | (16,697 | ) | (12,816 | ) | ||||
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Cash flows from financing activities: | ||||||||
Borrowings from revolving credit facility | 719,993 | 695,063 | ||||||
Repayments of revolving credit facility | (706,949 | ) | (700,928 | ) | ||||
Outstanding checks | (8,677 | ) | 3,024 | |||||
Payments of deferred financing costs | (69 | ) | — | |||||
Payments of other long-term debt | (88 | ) | (1,478 | ) | ||||
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Net cash provided by (used in) financing activities | 4,210 | (4,319 | ) | |||||
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Effect of exchange rate changes on cash | (513 | ) | — | |||||
Net increase (decrease) in cash and cash equivalents | (10,868 | ) | (3,603 | ) | ||||
Cash and cash equivalents—beginning of period | 25,951 | 14,979 | ||||||
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Cash and cash equivalents—end of period | $ | 15,083 | $ | 11,376 | ||||
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Supplemental disclosures of cash flow information: | ||||||||
Cash payments for interest | $ | 3,733 | $ | 3,701 | ||||
Cash payments (receipts) for taxes, net | $ | 1,239 | $ | (171 | ) | |||
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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. (“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 is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools. Its customer base is comprised primarily of independent tire dealers with the remainder of other customers representing various national and corporate accounts. ATDI serves a majority of the contiguous United States, as well as Canada, through one operating and reportable segment. 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 December 29, 2012. Certain changes in classification of amounts reported in prior years have been made to conform with the 2013 classification.
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 quarters ended March 30, 2013 and March 31, 2012 each contain operating results for 13 weeks. It should be noted that the Company and its recently acquired TriCan Tire Distributors (“TriCan”) subsidiary have different year-end and quarter-end reporting dates. TriCan has a calendar year-end and quarterly reporting date. The impact from this difference on the consolidated financial statements is not material.
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by TPG Capital, L.P. and certain co-investors for an aggregate purchase price valued at $1,287.5 million (the “Merger”). The Merger was financed by $635 million in aggregate principal amount of debt financing as well as common equity capital. In connection with the Merger, the Company conducted cash tender offers for its existing outstanding debt securities, all of which were subsequently purchased and retired. Although the Company continues to operate as the same legal entity subsequent to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market values at the date of acquisition. As well, under the guidance of the Securities and Exchange Commission (“SEC”), push-down accounting is required when such transactions result in an entity being substantially wholly-owned. Therefore, the basis in shares of the Company’s common stock have been pushed down from the accounts of the parent and recorded on the financial statements of the subsidiary.
3. | Recently Adopted Accounting Pronouncements |
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted this guidance on December 30, 2012 the first day of the Company’s 2013 fiscal year; however the Company performs its annual impairment test in the fourth quarter and does not expect the impact of adopting this standard to have a material effect on the consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which amended the guidance for reporting reclassifications out of accumulated other comprehensive income. The amended guidance will require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is entirely reclassified to net
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income, as required by U.S. GAAP. For other amounts, that are not required by U.S. GAAP to be entirely reclassified to net income, an entity is required to cross-reference other disclosures that will provide additional detail concerning these amounts. The amendments are effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance on December 30, 2012 and its adoption did not have an effect on the Company’s consolidated financial statements.
4. | Acquisitions: |
On November 30, 2012, ATDI and ATD Acquisition Co. V Inc. (“Canada Acquisition”), a newly-formed direct wholly-owned Canadian subsidiary of ATDI, entered into a Share Purchase Agreement (the “Purchase Agreement”) with 1278104 Alberta Inc. (“Seller”), Triwest Trading (Canada) Ltd., a wholly-owned subsidiary of Seller (“Triwest”) and certain shareholders of Seller pursuant to which Canada Acquisition agreed to acquire from Seller all of the issued and outstanding common shares of Triwest along with an outstanding loan owed to Seller by Triwest for approximately $97.5 million, subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. Of the $97.5 million purchase price, $15.0 million is held in escrow pending the resolution of the post-closing adjustments in accordance with the terms of the Purchase Agreement and Escrow Agreement. As a result of the acquisition, Triwest became a direct wholly-owned subsidiary of Canada Acquisition. Triwest (dba: TriCan Tire Distributors, or “TriCan”) is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada with 15 distribution centers stretching across the country.
The acquisition of TriCan was completed on November 30, 2012 and funded through the Company’s ABL Facility. The acquisition was recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As a result, the total purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. The preliminary allocation of the purchase price is as follows:
In thousands | ||||
Cash | $ | 1,344 | ||
Accounts receivable | 35,072 | |||
Inventory | 45,445 | |||
Other current assets | 495 | |||
Property and equipment | 1,191 | |||
Intangible assets | 49,940 | |||
Other assets | 755 | |||
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Total assets acquired | 134,242 | |||
Debt | — | |||
Accounts payable | 37,102 | |||
Accrued and other liabilities | 14,609 | |||
Deferred income taxes | 13,003 | |||
Other liabilities | 475 | |||
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Total liabilities assumed | 65,189 | |||
Net assets acquired | 69,053 | |||
Goodwill | 28,401 | |||
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Purchase price | $ | 97,454 | ||
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The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $28.4 million.
Cash, and cash equivalents, accounts receivable and accounts payable were stated at their historical carrying values, which approximate their fair value, given the short-term nature of these assets and liabilities. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.
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The Company recorded intangible assets based on their estimated fair value which consisted of the following:
In thousands | Estimated Useful Life | Estimated Fair Value | ||||||
Customer list | 17 years | $ | 44,621 | |||||
Tradenames | 7 years | 4,958 | ||||||
Favorable leases | 6 years | 361 | ||||||
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Total | $ | 49,940 |
The following is unaudited pro forma supplementary data for the quarter ended March 31, 2012 to give effect to the TriCan acquisition as if it had occurred on January 1, 2012 (the first day of the Company’s 2012 fiscal year). 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 TriCan acquisition been consummated on the date assumed and does not project the Company’s results of operations for any future date.
Pro Forma | ||||
In thousands | Quarter Ended March 31, 2012 | |||
Net sales | $ | 821,879 | ||
Net income (loss) | (7,116 | ) | ||
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On May 24, 2012, the Company entered into a Stock Purchase Agreement with Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (“CTO”) to acquire 100% of the outstanding capital stock of CTO. CTO owned and operated three distribution centers in Baton Rouge, Slidell and Lafayette, Louisiana serving over 500 customers. The acquisition was completed on May 24, 2012 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of CTO 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 CTO 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. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $15.9 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $9.4 million. The premium in the purchase price paid for the acquisition of CTO reflects the anticipated realization of operational and cost synergies. As of the balance sheet date, the purchase price allocation is final except for the resolution of the post-closing purchase price adjustment and tax matters, both of which the Company anticipates finalizing during the second quarter 2013.
5. | Inventories: |
Inventories consist primarily of tires, custom wheels and accessories and tire supplies and tools. Reported amounts 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 9 for further information.
As a result of the TriCan acquisition, the carrying value of the acquired inventory was increased by $6.3 million to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The step-up in inventory value was amortized into cost of goods sold over the period of the Company’s normal inventory turns, which approximates two months. Amortization of the inventory step-up included in cost of goods sold in the accompanying consolidated statement of comprehensive income (loss) for the quarter ended March 30, 2013 was $2.2 million.
6. | 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
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no longer depreciated. At March 30, 2013, assets held for sale totaled $7.2 million, of which $1.5 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.
As part of the Am-Pac Tire Dist., Inc (“Am-Pac”) acquisition in 2008, the Company acquired a distribution center in California which contained office space that served as Am-Pac’s headquarters. The facility was used as a warehouse within the Company’s distribution operations until its activities were absorbed into nearby existing locations during 2011. During the first quarter of 2013, the Company determined that the carrying value of the facility exceeded its fair value due to the current market conditions. As a result, the Company recorded a $0.5 million adjustment related to the fair value of this facility. As of March 30, 2013 the fair value of the facility was $4.0 million. The Company continues to actively market the property for immediate sale at a reasonable price in relation to its fair value.
On February 1, 2012, the Company reacquired one of three facilities originally included in a sale-leaseback transaction completed in 2002 that had an initial lease term of 20 years, followed by two 10 year renewal options. The facility was used as a distribution center within the Company’s operations until its activities were relocated to an expanded location during the second quarter of 2012. As a result, the Company classified the facility as held for sale during the third quarter of 2012 when the appropriate criteria was met. At March 30, 2013, the carrying value of the facility was $1.7 million.
7. | 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 | Holdings | |||
Balance, December 29, 2012 | $ | 483,143 | ||
Purchase accounting adjustments | 1,357 | |||
Acquisitions | 1,605 | |||
Currency Translatation | (539 | ) | ||
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Balance, March 30, 2013 | $ | 485,566 | ||
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At March 30, 2013, the Company has recorded goodwill of $485.6 million, of which approximately $26.5 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. The Company does not have any accumulated goodwill impairment losses.
In addition to the TriCan acquisition, in February 2013 the Company acquired the inventory and accounts receivable of a small Canadian distributor. The purchase price was allocated to the assets acquired based on their estimated fair market value and this resulted in an increase to goodwill of $1.6 million.
On November 30, 2012, ATDI and Canada Acquisition entered into a Share Purchase Agreement to acquire all of the issued and outstanding common shares of TriCan. The acquisition was completed on November 30, 2012 and was funded through the Company’s ABL Facility. The preliminary 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 $28.4 million as goodwill. See Note 4 for additional information.
On May 24, 2012, the Company entered into a Stock Purchase Agreement to acquire 100% of the outstanding capital stock of CTO. The acquisition was completed on May 24, 2012 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 $9.4 million as goodwill. See Note 4 for additional information.
8. | 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.
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The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at March 30, 2013 and December 29, 2012:
In thousands | March 30, 2013 | December 29, 2012 | ||||||
Customer list | $ | 632,435 | $ | 632,589 | ||||
Noncompete agreement | 11,399 | 7,898 | ||||||
Favorable leases | 352 | 360 | ||||||
Tradenames | 8,944 | 9,043 | ||||||
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Total gross finite-lived intangible assets | 653,130 | 649,890 | ||||||
Accumulated amortization | (178,618 | ) | (161,085 | ) | ||||
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Total net finite-lived intangible assets | 474,512 | 488,805 | ||||||
Tradenames (indefinite-lived) | 249,893 | 249,893 | ||||||
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Total | $ | 724,405 | $ | 738,698 | ||||
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As part of the preliminary purchase price allocation of TriCan, the Company allocated $44.6 million to a finite-lived customer list intangible asset with a useful life of seventeen years, $4.9 million to a finite-lived tradename with a useful life of seven years and $0.4 million to a finite-lived favorable leases intangible asset with a useful life of six years. As part of the purchase price allocation of CTO, the Company allocated $15.9 million to a finite-lived customer list intangible asset with a useful life of sixteen years. See Note 4 for additional information.
Intangible asset amortization expense was $17.5 million and $16.0 million for the quarters ended March 30, 2013 and March 31, 2012 respectively. Estimated amortization expense on existing intangible assets is expected to approximate $53.1 million for the remaining nine months of 2013 and approximately $65.3 million in 2014, $56.2 million in 2015, $47.4 million in 2016 and $41.6 million in 2017.
9. | Long-term Debt: |
The following table presents the Company’s long-term debt at March 30, 2013 and at December 29, 2012:
In thousands | March 30, 2013 | December 29, 2012 | ||||||
ABL Facility | $ | 480,836 | $ | 478,616 | ||||
Canadian ABL Facility | 21,807 | 10,976 | ||||||
Senior Secured Notes | 247,903 | 247,802 | ||||||
Senior Subordinated Notes | 200,000 | 200,000 | ||||||
Capital lease obligations | 12,407 | 12,469 | ||||||
Other | 1,309 | 1,341 | ||||||
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Total debt | 964,262 | 951,204 | ||||||
Less—Current maturities | (513 | ) | (493 | ) | ||||
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Long-term debt | $ | 963,749 | $ | 950,711 | ||||
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The fair value of the Company’s long-term senior notes was $478.1 million at March 30, 2013 and $477.0 million at December 29, 2012. The fair value of the Senior Secured Notes is based upon quoted market values (Level 1). However, the Company uses quoted prices for similar liabilities (Level 2) in order to fair value the Senior Subordinated Notes.
ABL Facility
See Note 15 regarding recent amendment to the Sixth Amended and Restated Credit Agreement.
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In connection with the acquisition of TriCan on November 30, 2012, the Company amended and restated its Fifth Amended and Restated Credit Agreement in order to provide for borrowings under the agreement by Canada Acquisition and make certain other amendments (as so amended and restated, the “Sixth Amended and Restated Credit Agreement”). The Sixth Amended and Restated Credit Agreement provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the “U.S. ABL Facility”) and (ii) Canadian revolving credit commitments of $60.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the “Canadian ABL Facility” and, collectively with the U.S. ABL Facility, the “ABL Facility”). The U.S. ABL Facility provides for revolving loans available to ATDI, its wholly-owned subsidiary Am-Pac Tire Dist. Inc. and any other U.S. subsidiary that the Company designates in the future in accordance with the terms of the agreement. The Canadian ABL Facility provides for revolving loans available to Canada Acquisition and any other Canadian subsidiaries that the Company designates in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists or would arise therefrom, the Company has the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million (up to $50.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The maturity date for the Sixth Amended and Restated Credit Agreement is November 16, 2017, provided that if on March 1, 2017, either (i) more than $50.0 million in aggregate principal amount of ATDI’s Senior Secured Notes remains outstanding or (ii) any principal amount of ATDI’s Senior Secured Notes remains outstanding with a scheduled maturity date which is earlier than 91 days after November 16, 2017 and excess availability under the ABL Facility is less than 12.5% of the aggregate revolving commitments, then the maturity date will be March 1, 2017.
At March 30, 2013, the Company had $480.8 million outstanding under the U.S. ABL Facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $8.2 million, leaving $135.4 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at March 30, 2013 was $21.8 million, leaving $15.4 million available for additional borrowings.
Borrowings under the U.S. 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 March 30, 2013 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 March 30, 2013. The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the aggregate ABL Facility.
Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate”, (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of March 30, 2013 or (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate”, (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 1.0% as of March 30, 2013. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the aggregate ABL Facility.
The U.S. and Canadian borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
• | 85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus |
• | The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus |
• | The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable. |
All obligations under the U.S. 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. The Canadian ABL Facility is unconditionally guaranteed by the U.S. loan parties, TriCan and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.
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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 borrowings under the combined ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the combined 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 March 30, 2013, the Company’s additional borrowing availability under the combined ABL Facility was above the required amount and the Company was 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% 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.
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,
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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.
Capital Lease Obligations
At December 31, 2011, the Company had a capital lease obligation of $14.1 million which related to the 2002 sale and subsequent leaseback of three of its owned facilities. Due to continuing involvement with the properties, the Company accounted for the transaction as a direct financing lease and recorded the cash received as a financing obligation. The transaction had an initial lease term of 20 years, followed by two 10 year renewal options. No gain or loss was recognized as a result of the initial sales transaction.
On February 1, 2012, the Company reacquired one of the three facilities included in the 2002 sale-leaseback transaction for $1.5 million. Accordingly, the original lease was amended to extend the lease term on the two remaining facilities by 5 years as well as to adjust the future lease payments over the remaining 15 years. Per current accounting guidance, the change in the debt terms was not considered substantial. As a result, the Company treated the amendment as a debt modification for accounting purposes and therefore, reduced the financing obligation by the purchase price. Cash payments to the lessor are allocated between interest expense and amortization of the financing obligation. At the end of the lease term, the Company will recognize the sale of the remaining facilities; however, no gain or loss will be recognized as the financing obligation will equal the expected carrying value of the facilities. At March 30, 2013, the outstanding balance of the financing obligation was $12.4 million.
10. | 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 comprehensive income (loss) 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 comprehensive income (loss).
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On August 1, 2012, the Company entered into two interest rate swap agreements (“3Q 2012 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 $100.0 million, with each $50.0 million contract having a fixed rate of 0.655% and expiring in June 2016. The counterparty to each swap is a major financial institution. The 3Q 2012 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 comprehensive income (loss).
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 $100.0 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 comprehensive income (loss).
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 covered an aggregate notional amount of $75.0 million, of which $25.0 million was at a fixed interest rate of 0.585% and expired in February 2012. The remaining swap covered an aggregate notional amount of $50.0 million at a fixed interest rate of 1.105% and expired in February 2013. The counterparty to each swap is a major financial institution. Neither swap met the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract are recognized in the condensed consolidated statement of comprehensive income (loss).
The following table presents the fair values of the Company’s derivative instruments included within the condensed consolidated balance sheets as of March 30, 2013 and December 29, 2012:
Liability Derivatives | ||||||||||||
In thousands | Balance Sheet Location | March 30, 2013 | December 29, 2012 | |||||||||
Derivatives not designated as hedges: | ||||||||||||
1Q 2011 swap—$50 million notional | Accrued expenses | $ | — | $ | 149 | |||||||
3Q 2011 swaps—$100 million notional | Accrued expenses | 1,158 | 1,314 | |||||||||
3Q 2012 swaps—$100 million notional | Accrued expenses | 619 | 750 | |||||||||
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Total | $ | 1,777 | $ | 2,213 | ||||||||
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The pre-tax effect of the Company’s derivative instruments on the condensed consolidated statement of comprehensive income (loss) was as follows:
(Gain) Loss Recognized | ||||||||||||
In thousands | Location of (Gain) Loss Recognized | Quarter Ended March 30, 2013 | Quarter Ended March 31, 2012 | |||||||||
Derivatives not designated as hedges: | ||||||||||||
1Q 2011 swap—$50 million notional | Interest Expense | $ | (149 | ) | $ | 14 | ||||||
1Q 2011 swap—$25 million notional | Interest Expense | — | (12 | ) | ||||||||
3Q 2011 swaps—$100 million notional | Interest Expense | (156 | ) | 214 | ||||||||
3Q 2012 swaps—$100 million notional | Interest Expense | (131 | ) | — | ||||||||
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Total | $ | (436 | ) | $ | 216 | |||||||
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11. | 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. |
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• | 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, therefore requiring an entity to develop its own assumptions. |
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 Company’s assets and liabilities, which are measured at fair value on a recurring basis as of March 30, 2013:
Fair Value Measurements | ||||||||||||||||
In thousands | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Benefit trust assets | $ | 2,990 | $ | 2,990 | $ | — | $ | — | ||||||||
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Total | $ | 2,990 | $ | 2,990 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Derivative instruments | $ | 1,777 | $ | — | $ | 1,777 | $ | — | ||||||||
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Total | $ | 1,777 | $ | — | $ | 1,777 | $ | — | ||||||||
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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 fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments. The methodologies used by the Company to determine the fair value of its financial assets and liabilities at March 30, 2013 are the same as those used at December 29, 2012. As a result, there have been no transfers between Level 1 and Level 2 categories.
As discussed in Note 6, the Company determined that the carrying value of a facility acquired from Am-Pac in 2008, and which is currently held for sale, exceeded its fair value due to current market conditions. As a result, the Company recorded a $0.5 million adjustment during the first quarter of 2013 related to the fair value of this facility. The Company continues to actively market the property for immediate sale at a reasonable price in relation to its fair value. As of March 30, 2013 the fair value of the facility was $4.0 million and was based upon quoted market prices from a broker for similar facilities (Level 2).
12. | 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.
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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, which includes both time-based and performance-based awards, was amended on February 15, 2013 by the board of directors of the Company’s indirect parent, Accelerate Parent Corp., to increase the maximum number of shares of common stock for which stock options may be granted under the 2010 Plan, from 48.6 million to 52.1 million. In addition to the increase in the maximum number of shares, on February 15, 2013 the board of directors of Accelerate Parent Corp. approved the issuance of stock options to certain members of management. The approved options are for the purchase of up to 3.5 million shares of common stock, have an exercise price of $1.20 per share, and vest over a three to five-year vesting period. As of March 30, 2013, the Company has 1.9 million shares available for future incentive awards.
Changes in options outstanding under the 2010 Plan are as follows:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding—December 29, 2012 | 46,681,600 | $ | 1.01 | |||||
Granted | 3,500,002 | 1.20 | ||||||
Exercised | — | — | ||||||
Cancelled | — | — | ||||||
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Outstanding—March 30, 2013 | 50,181,602 | $ | 1.02 | |||||
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Exercisable—March 30, 2013 | 17,728,270 | $ | 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 weighted-average remaining contractual term for options outstanding and exercisable at March 30, 2013 was 7.7 years and 7.5 years, respectively. The fair value of each of the Company’s time-based stock option awards is expensed on a straight-line basis over the requisite 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 both the performance target will be achieved and the requisite service period is satisfied. At March 30, 2013, unrecognized compensation expense related to non-vested options granted under the 2010 Plan totaled $9.6 million and the weighted-average period over which this expense will be recognized is 2.1 years.
The weighted average fair value of stock options granted during the quarter ended March 30, 2013 and March 31, 2012 was $0.54 and $0.50, respectively, using the Black-Scholes option pricing model. The following weighted average assumptions were used:
Quarter Ended March 30, 2013 | Quarter Ended March 31, 2012 | |||||||
Risk-free interest rate | 1.38 | % | 1.48 | % | ||||
Dividend yield | — | — | ||||||
Expected life | 6.0 years | 6.5 years | ||||||
Volatility | 45.39 | % | 42.81 | % | ||||
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As the Company does not have sufficient historical volatility data for the Company’s 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 is derived from the Simplified Method as allowed under SAB Topic 14.
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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. Upon vesting, these awards entitle the holder to receive one share of common stock for each restricted stock unit granted. 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, of which 0.3 million remain available at March 30, 2013 for future incentive awards.
The following table summarizes RSU activity under the 2010 RSU Plan for the three months ended March 30, 2013:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding and unvested at December 29, 2012 | 269,298 | $ | 1.11 | |||||
Granted | — | — | ||||||
Vested | (159,649 | ) | 1.10 | |||||
Cancelled | — | — | ||||||
|
|
|
| |||||
Outstanding and unvested at March 30, 2013 | 109,649 | $ | 1.14 | |||||
|
|
|
|
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 the requisite service period, which is generally the two-year vesting period. At March 30, 2013 unrecognized compensation expense related to non-vested RSUs granted under the 2010 RSU Plan totaled $0.1 million and the weighted-average period over which this expense will be recognized is 0.8 years.
Compensation Expense
Stock-based compensation expense is included in selling, general and administrative expenses within the condensed consolidated statement of comprehensive income (loss). The amount of compensation expense recognized during a period is based on the portion of the granted awards that are expected to vest. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards as of the grant date that actually vest. The following table summarizes the compensation expense recognized:
In thousands | Quarter Ended March 30 2013 | Quarter Ended March 31, 2012 | ||||||
Stock Options | $ | 626 | $ | 526 | ||||
Restricted Stock Units | 42 | 31 | ||||||
|
|
|
| |||||
Total | $ | 668 | $ | 557 | ||||
|
|
|
|
13. | Income Taxes: |
The tax provision for the three months ended March 30, 2013, was calculated on a national jurisdiction basis. The Company accounts for its provision for income taxes in accordance with ASC 740 – Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the respective interim period. However, the authoritative guidance allows the use of the discrete method when, in certain situations, the actual interim period effective tax rate provides a better estimate of the income tax provision. For the quarter ended March 30, 2013, the discrete method was used to calculate the Company’s U.S. and Canadian interim tax expense as management determined that it provided a more reliable estimate of year-to-date income tax expense.
Based on the reported loss before income taxes for the quarter ended March 30, 2013, the Company had an income tax benefit of $7.6 million, consisting of a $6.4 million U.S. tax benefit and a $1.2 million foreign tax benefit, and an effective tax benefit rate of 31.9%. The effective rate of the year-to-date tax benefit is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower from the statutory U.S. federal rate and the impact of several non-deductible tax items as well as our state effective tax rate, a result based on our legal entity tax structure and individual state tax filing requirements.
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At March 30, 2013, the Company has a net deferred tax liability of $263.1 million, of which, $16.3 million was recorded as a current deferred tax asset and $279.4 million was recorded as a non-current deferred tax liability. The 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 Merger, assuming an effective tax rate of 39.6%. It is the Company’s intention to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries. As these earnings are considered permanently reinvested, no provisions for U.S. federal or state income taxes are required under ASC 740-30. Determination of the amount of unrecognized U.S. federal and state deferred tax liabilities on these unremitted earnings is not practicable.
At March 30, 2013, the Company had unrecognized tax benefits of $1.9 million, of which $0.6 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 Company’s effective tax rate is $1.5 million as of March 30, 2013. In addition, $0.4 million related to temporary timing differences. During the next 12 months, management does not believe that it is reasonably possible that any of the unrecognized tax benefits will be recognized.
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. The Company files federal income tax returns, as well as multiple state jurisdiction tax returns. The tax years 2008 – 2012 remain open to examination by the taxing jurisdictions to which the Company is subject.
14. | Commitments and Contingencies: |
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.
Guaranteed Lease Obligations
The Company remains liable as a guarantor on certain leases related to the Winston Tire Company, which was sold in 2001. As of March 30, 2013, the Company’s total obligations are $2.6 million extending over six years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractual assigned or subleased rentals of $2.4 million. A provision has been made for the net present value of the estimated shortfall.
15. | Subsequent Events: |
Acquisition
On April 30, 2013, the Company completed the previously announced acquisition of Regional Tire Holdings, Inc. (RTD) (“the Acquisition”), pursuant to the Share Purchase Agreement dated as of March 22, 2013, among TriCan, ATDI and RTD (the “Acquisition Agreement”). RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada. The purchase price of $62.5 million was paid by the Company at the closing in cash and was funded by borrowings under the Company’s Sixth Amended and Restated Credit Agreement, as amended as described below. As of the date of these financial statements, the information is not yet available to perform the preliminary purchase price allocation and prepare the supplemental pro forma disclosures. The disclosures and supplemental pro forma information required by ASC 805 – Business Combinations will be made when the information becomes available.
Amendment of Sixth Amended and Restated Credit Agreement
In connection with the Acquisition, on March 22, 2013, Holdings entered into the First Amendment to the Sixth Amended and Restated Credit Agreement (“First Amendment”). The First Amendment (1) provides the U.S. Borrowers under the agreement with a new first-in last-out facility (the “FILO Facility”) in an aggregate principal amount of up to $60.0 million to be used to fund the acquisition and, to the extent not so used, for general corporate purposes, subject to a borrowing base specific thereto, and (2)
20
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increases the aggregate principal amount available under the Canadian ABL Facility from $60.0 million to $100.0 million, subject to the Canadian borrowing base. The additional borrowings provided for under the First Amendment were contingent upon, among other things, the closing of the acquisition of RTD on or before May 31, 2013. The acquisition of RTD occurred, and the First Amendment became effective, on April 30, 2013. The First Amendment also made certain other changes to the Sixth Amended and Restated Credit Agreement and added RTD as a party upon the closing of the acquisition. The maturity date for the FILO Facility is 18 months from April 30, 2013. The First Amendment did not change the maturity dates of the U.S. ABL Facility or the Canadian ABL Facility. Immediately following the closing of the acquisition of RTD, $50.1 million was drawn on the FILO Facility.
16. | Subsidiary Guarantor Financial Information: |
ATDI is the issuer of $250.0 million in aggregate principal amount of Senior Secured Notes and $200.0 million in aggregate principal amount of Senior Subordinated Notes. The Senior Secured Notes and the Senior Subordinated Notes (collectively, the “Notes”) are fully and unconditionally guaranteed, jointly and severally, by Holdings, Am-Pac and Tire Wholesalers, Inc. (“Tire Wholesalers”). ATDI is a direct wholly-owned subsidiary of Holdings and Am-Pac and Tire Wholesalers are indirect wholly-owned subsidiaries of Holdings. None of our other subsidiaries guarantees the Notes. The guarantees provided by Holdings, Am-Pac and Tire Wholesalers can be released in certain customary circumstances.
In accordance with Rule 3-10 of Regulation S-X, the following presents condensed consolidating financial information for:
• | Holdings, under the column heading “Parent Company”; |
• | ATDI, under the column heading “Subsidiary Issuer”; |
• | Am-Pac and Tire Wholesalers, on a combined basis, under the column heading “Guarantor Subsidiaries”; and |
• | Our other subsidiaries, on a combined basis, under the column heading “Non-Guarantor Subsidiaries”; |
• | Consolidating entries and eliminations, under the column heading “Eliminations”; and |
• | Holdings, ATDI and their subsidiaries on a consolidated basis, under the column heading “Consolidated.” |
At the beginning of 2013, we merged a subsidiary that previously guaranteed the Notes, Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil, into ATDI.
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As of March 30, 2013 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 12,070 | $ | — | $ | 3,013 | $ | — | $ | 15,083 | ||||||||||||
Accounts receivable, net | — | 285,495 | 1 | 13,888 | — | 299,384 | ||||||||||||||||||
Inventories | — | 665,579 | — | 52,589 | — | 718,168 | ||||||||||||||||||
Assets held for sale | — | 7,201 | — | — | — | 7,201 | ||||||||||||||||||
Income tax receivable | — | 369 | — | — | — | 369 | ||||||||||||||||||
Intercompany receivables | 36,322 | — | 60,513 | — | (96,835 | ) | — | |||||||||||||||||
Other current assets | — | 22,943 | 4,899 | 3,986 | — | 31,828 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | 36,322 | 993,657 | 65,413 | 73,476 | (96,835 | ) | 1,072,033 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Property and equipment, net | — | 132,719 | 422 | 1,729 | — | 134,870 | ||||||||||||||||||
Goodwill and other intangible assets, net | 418,592 | 709,059 | 1,589 | 80,731 | — | 1,209,971 | ||||||||||||||||||
Investment in subsidiaries | 224,643 | 139,970 | — | — | (364,613 | ) | — | |||||||||||||||||
Other assets | 8,730 | 44,672 | 308 | 273 | — | 53,983 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| �� |
| |||||||||||||
Total assets | $ | 688,287 | $ | 2,020,077 | $ | 67,732 | $ | 156,209 | $ | (461,448 | ) | $ | 2,470,857 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | — | $ | 449,356 | $ | 2,255 | $ | 21,158 | $ | — | $ | 472,769 | ||||||||||||
Accrued expenses | — | 46,867 | 108 | 4,321 | — | 51,296 | ||||||||||||||||||
Current maturities of long-term debt | — | 507 | 6 | — | — | 513 | ||||||||||||||||||
Intercompany payables | — | 77,726 | 1,244 | 17,865 | (96,835 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | — | 574,456 | 3,613 | 43,344 | (96,835 | ) | 524,578 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Long-term debt | — | 941,934 | 8 | 21,807 | — | 963,749 | ||||||||||||||||||
Deferred income taxes | — | 264,727 | 587 | 14,084 | — | 279,398 | ||||||||||||||||||
Other liabilities | — | 14,317 | 40 | 488 | — | 14,845 | ||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||
Intercompany investment | — | 280,622 | 64,935 | 97,454 | (443,011 | ) | — | |||||||||||||||||
Common stock | — | — | — | — | — | — | ||||||||||||||||||
Additional paid-in capital | 757,006 | 12,740 | — | — | (12,740 | ) | 757,006 | |||||||||||||||||
Accumulated deficit | (66,832 | ) | (66,832 | ) | (1,451 | ) | (18,813 | ) | 87,096 | (66,832 | ) | |||||||||||||
Accumulated other comprehensive income (loss) | (1,887 | ) | (1,887 | ) | — | (2,155 | ) | 4,042 | (1,887 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total stockholders’ equity | 688,287 | 224,643 | 63,484 | 76,486 | (364,613 | ) | 688,287 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and stockholders’ equity | $ | 688,287 | $ | 2,020,077 | $ | 67,732 | $ | 156,209 | $ | (461,448 | ) | $ | 2,470,857 | |||||||||||
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Table of Contents
As of December 29, 2012 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 12,346 | $ | — | $ | 13,605 | $ | — | $ | 25,951 | ||||||||||||
Accounts receivable, net | — | 278,557 | 38 | 22,708 | — | 301,303 | ||||||||||||||||||
Inventories | — | 682,159 | — | 39,513 | — | 721,672 | ||||||||||||||||||
Assets held for sale | — | 7,151 | — | — | — | 7,151 | ||||||||||||||||||
Income tax receivable | — | 369 | — | — | — | 369 | ||||||||||||||||||
Intercompany receivables | 36,323 | — | 60,616 | — | (96,939 | ) | — | |||||||||||||||||
Other current assets | — | 28,299 | 4,899 | 3,955 | — | 37,153 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | 36,323 | 1,008,881 | 65,553 | 79,781 | (96,939 | ) | 1,093,599 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Property and equipment, net | — | 128,259 | 455 | 1,168 | — | 129,882 | ||||||||||||||||||
Goodwill and other intangible assets, net | 418,592 | 724,681 | 1,636 | 76,932 | — | 1,221,841 | ||||||||||||||||||
Investment in subsidiaries | 242,010 | 146,615 | — | — | (388,625 | ) | — | |||||||||||||||||
Other assets | 8,729 | 48,430 | 317 | 1,204 | — | 58,680 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 705,654 | $ | 2,056,866 | $ | 67,961 | $ | 159,085 | $ | (485,564 | ) | $ | 2,504,002 | |||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | — | $ | 469,717 | $ | 2,255 | $ | 30,249 | $ | — | $ | 502,221 | ||||||||||||
Accrued expenses | — | 38,524 | 126 | 6,266 | — | 44,916 | ||||||||||||||||||
Current maturities of long-term debt | — | 487 | 6 | — | — | 493 | ||||||||||||||||||
Intercompany payables | — | 82,420 | 1,290 | 13,229 | (96,939 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | — | 591,148 | 3,677 | 49,744 | (96,939 | ) | 547,630 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Long-term debt | — | 939,719 | 9 | 10,983 | — | 950,711 | ||||||||||||||||||
Deferred income taxes | — | 269,857 | 587 | 14,901 | — | 285,345 | ||||||||||||||||||
Other liabilities | — | 14,132 | 46 | 484 | — | 14,662 | ||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||
Intercompany investment | — | 280,622 | 64,935 | 97,454 | (443,011 | ) | — | |||||||||||||||||
Common stock | — | — | — | — | — | — | ||||||||||||||||||
Additional paid-in capital | 756,338 | 12,072 | — | — | (12,072 | ) | 756,338 | |||||||||||||||||
Accumulated earnings (deficit) | (50,541 | ) | (50,541 | ) | (1,293 | ) | (14,137 | ) | 65,971 | (50,541 | ) | |||||||||||||
Accumulated other comprehensive income (loss) | (143 | ) | (143 | ) | — | (344 | ) | 487 | (143 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total stockholders’ equity | 705,654 | 242,010 | 63,642 | 82,973 | (388,625 | ) | 705,654 | |||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and stockholders’ equity | $ | 705,654 | $ | 2,056,866 | $ | 67,961 | $ | 159,085 | $ | (485,564 | ) | $ | 2,504,002 | |||||||||||
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Table of Contents
Condensed consolidating statements of comprehensive income (loss) for the quarters ended March 30, 2013 and March 31, 2012 are as follows:
For the Quarter Ended March 30, 2013 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 813,009 | $ | — | $ | 26,969 | $ | — | $ | 839,978 | ||||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 683,226 | — | 24,930 | — | 708,156 | ||||||||||||||||||
Selling, general and administrative expenses | — | 128,274 | 236 | 7,994 | — | 136,504 | ||||||||||||||||||
Transaction expenses | — | 988 | — | 35 | — | 1,023 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | — | 521 | (236 | ) | (5,990 | ) | — | (5,705 | ) | |||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | — | (17,003 | ) | — | (237 | ) | — | (17,240 | ) | |||||||||||||||
Other, net | — | (710 | ) | — | (263 | ) | — | (973 | ) | |||||||||||||||
Equity earnings of subsidiaries | (16,291 | ) | (4,834 | ) | — | — | 21,125 | — | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | (16,291 | ) | (22,026 | ) | (236 | ) | (6,490 | ) | 21,125 | (23,918 | ) | |||||||||||||
Income tax provision (benefit) | — | (5,735 | ) | (78 | ) | (1,814 | ) | — | (7,627 | ) | ||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (16,291 | ) | $ | (16,291 | ) | $ | (158 | ) | $ | (4,676 | ) | $ | 21,125 | $ | (16,291 | ) | |||||||
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|
|
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|
|
|
|
|
| |||||||||||||
Comprehensive income (loss) | $ | (18,035 | ) | $ | (18,035 | ) | $ | — | $ | — | $ | 18,035 | $ | (18,035 | ) | |||||||||
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|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, 2012 | ||||||||||||||||||||||||
In thousands | Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 794,598 | $ | — | $ | (466 | ) | $ | — | $ | 794,132 | |||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below | — | 669,289 | — | 22 | — | 669,311 | ||||||||||||||||||
Selling, general and administrative expenses | — | 116,192 | 317 | 2,810 | — | 119,319 | ||||||||||||||||||
Transaction expenses | — | 586 | — | — | — | 586 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income (loss) | — | 8,531 | (317 | ) | (3,298 | ) | — | 4,916 | ||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | — | (16,752 | ) | — | — | — | (16,752 | ) | ||||||||||||||||
Other, net | — | (702 | ) | — | — | — | (702 | ) | ||||||||||||||||
Equity earnings of subsidiaries | (7,077 | ) | (2,041 | ) | — | — | 9,118 | — | ||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Income (loss) from operations before income taxes | (7,077 | ) | (10,964 | ) | (317 | ) | (3,298 | ) | 9,118 | (12,538 | ) | |||||||||||||
Income tax provision (benefit) | — | (3,887 | ) | (138 | ) | (1,436 | ) | — | (5,461 | ) | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net income (loss) | $ | (7,077 | ) | $ | (7,077 | ) | $ | (179 | ) | $ | (1,862 | ) | $ | 9,118 | $ | (7,077 | ) | |||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Comprehensive income (loss) | $ | (6,967 | ) | $ | (6,967 | ) | $ | — | $ | — | $ | 6,967 | $ | (6,967 | ) | |||||||||
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24
Table of Contents
Condensed consolidating statements of cash flows for the quarters ended March 30, 2013 and March 31, 2012 are as follows:
In thousands | For the Quarter Ended March 30, 2013 | |||||||||||||||||||||||
Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net cash provided by (used in) operations | $ | — | $ | 18,144 | $ | 2 | $ | (16,014 | ) | $ | — | $ | 2,132 | |||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisitions, net of cash acquired | — | — | — | (4,225 | ) | — | (4,225 | ) | ||||||||||||||||
Purchase of property and equipment | — | (11,204 | ) | — | (669 | ) | — | (11,873 | ) | |||||||||||||||
Purchase of assets held for sale | — | (612 | ) | — | — | — | (612 | ) | ||||||||||||||||
Proceeds from sale of property and equipment | — | 8 | — | 5 | — | 13 | ||||||||||||||||||
Proceeds from disposal of assets held for sale | — | — | — | — | — | — | ||||||||||||||||||
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Net cash provided by (used in) investing activities | — | (11,808 | ) | — | (4,889 | ) | — | (16,697 | ) | |||||||||||||||
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Cash flows from financing activities: | ||||||||||||||||||||||||
Borrowings from revolving credit facility | — | 660,348 | — | 59,645 | — | 719,993 | ||||||||||||||||||
Repayments of revolving credit facility | — | (658,128 | ) | — | (48,821 | ) | — | (706,949 | ) | |||||||||||||||
Outstanding checks | — | (8,677 | ) | — | — | — | (8,677 | ) | ||||||||||||||||
Payments of other long-term debt | — | (86 | ) | (2 | ) | — | — | (88 | ) | |||||||||||||||
Payments of deferred financing costs | — | (69 | ) | — | — | — | (69 | ) | ||||||||||||||||
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Net cash provided by (used in) financing activities | — | (6,612 | ) | (2 | ) | 10,824 | — | 4,210 | ||||||||||||||||
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Effect of exchange rate changes on cash | (513 | ) | (513 | ) | ||||||||||||||||||||
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Net increase (decrease) in cash and cash equivalents | — | (276 | ) | — | (10,592 | ) | — | (10,868 | ) | |||||||||||||||
Cash and cash equivalents—beginning of period | — | 12,346 | — | 13,605 | — | 25,951 | ||||||||||||||||||
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Cash and cash equivalents—end of period | $ | — | $ | 12,070 | $ | — | $ | 3,013 | $ | — | $ | 15,083 | ||||||||||||
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In thousands | For the Quarter Ended March 31, 2012 | |||||||||||||||||||||||
Parent Company | Subsidiary Issuer | Subsidiary Guarantors | Non-Guarantor Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net cash provided by (used in) operations | $ | — | $ | 13,444 | $ | 6 | $ | 82 | $ | — | $ | 13,532 | ||||||||||||
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Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisitions, net of cash acquired | — | — | — | — | — | — | ||||||||||||||||||
Purchase of property and equipment | — | (12,350 | ) | — | — | — | (12,350 | ) | ||||||||||||||||
Purchase of assets held for sale | — | (837 | ) | — | — | — | (837 | ) | ||||||||||||||||
Proceeds from sale of property and equipment | — | 29 | — | — | — | 29 | ||||||||||||||||||
Proceeds from disposal of assets held for sale | — | 342 | — | — | — | 342 | ||||||||||||||||||
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Net cash provided by (used in) investing activities | — | (12,816 | ) | — | — | — | (12,816 | ) | ||||||||||||||||
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Cash flows from financing activities: | ||||||||||||||||||||||||
Borrowings from revolving credit facility | — | 695,063 | — | — | — | 695,063 | ||||||||||||||||||
Repayments of revolving credit facility | — | (700,928 | ) | — | — | — | (700,928 | ) | ||||||||||||||||
Outstanding checks | — | 3,024 | — | — | — | 3,024 | ||||||||||||||||||
Payments of deferred financing costs | — | — | — | — | — | — | ||||||||||||||||||
Payments of other long-term debt | — | (1,472 | ) | (6 | ) | — | — | (1,478 | ) | |||||||||||||||
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Net cash provided by (used in) financing activities | — | (4,313 | ) | (6 | ) | — | — | (4,319 | ) | |||||||||||||||
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Net increase (decrease) in cash and cash equivalents | — | (3,685 | ) | — | 82 | — | (3,603 | ) | ||||||||||||||||
Cash and cash equivalents—beginning of period | — | 14,118 | — | 861 | — | 14,979 | ||||||||||||||||||
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Cash and cash equivalents—end of period | $ | — | $ | 10,433 | $ | — | $ | 943 | $ | — | $ | 11,376 | ||||||||||||
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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 terms “TPG” and “Sponsor” relate to TPG Capital, L.P. and/or certain funds affiliated with TPG Capital, L.P.
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, forecasts 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 North America, providing a critical range of services to enable tire retailers to effectively service and grow sales to consumers. Through our network of 123 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 70,000 customers (approximately 62,000 in the U.S. and 8,000 in Canada). 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 U.S. 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 10%, up from approximately 1% in 1996, with our largest customer and top ten customers accounting for less than 3.0% and 11.3%, respectively, of our net sales. Our estimated share of the replacement passenger and light truck tire market in Canada is approximately 6%.
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 flagship brands from each of the four largest tire manufacturers —Bridgestone,Continental, GoodyearandMichelin —as well as theHankook, Kumho, Nexen, NittoandPirellibrands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers. In addition, we sell 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 83.7% of our total net sales for the quarter ended March 30, 2013. The remainder of net sales is derived from other tire sales (13.1%), custom wheels (2.3%) and tire supplies, tools and other products (0.9%). We believe our large, diverse product offering allows us to better penetrate the replacement tire market across a broad range of price points.
Industry Overview
The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and the economic conditions that impact its customers. As a result, our customers may opt to defer replacement tire purchases or purchase less costly brand tires during challenging economic periods where macro-economic factors such as unemployment, persistently high fuel costs and weakness in the housing market impact their financial health.
From 1955 through 2012, U.S. replacement tire unit shipments increased by an average of approximately 2.6% per year. The impact of the recent recession led to negative growth during 2008 and 2009. The economic environment showed signs of stabilization during 2010 and 2011 ending the negative growth trend, although slow economic growth, persistently high fuel cost and a decrease in miles driven continued to impact the market. Despite an increase in miles driven during 2012, the U.S. and Canadian replacement tire markets continued the negative growth trend as replacement tire unit shipments were down 1.8% and 5.5%, respectively, as compared to 2011. Our outlook for 2013 reflects little or no market improvement, however, we expect to continue to follow our historic trend and outperform our expectations of the market.
Despite these recent declines, we believe that, going forward, growth in the U.S. and Canadian replacement tire markets 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; |
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• | increases in the number of replacement tire SKUs; |
• | 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.
Recent Developments
As part of our ongoing business strategy, we intend to expand in existing markets as well as enter into previously underserved markets and new geographic areas. From the second half of 2010 through December 2011, we opened new distribution centers in 10 locations throughout the contiguous United States, increasing the size of our distribution network to 98 distribution centers as of December 31, 2011. During 2012, we continued to execute our plans to expand by opening new distribution centers in Long Island, NY, Milwaukee, WI, Colorado Springs, CO, Austin, TX, Peoria, IL, Tulsa, OK and Tucson, AZ. In the first 3 months of 2013, we continued to execute our plan of expansion by opening new distribution centers in Chattanooga, TN, and Manchester, NH.
On April 30, 2013, the Company completed the previously announced acquisition of Regional Tire Holdings, Inc. (RTD) (“the Acquisition”), pursuant to the Share Purchase Agreement dated as of March 22, 2013, among TriCan, ATDI and RTD (the “Acquisition Agreement”). RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada. The purchase price of $62.5 million was paid by the Company at the closing in cash and was funded by borrowings under the Company’s Sixth Amended and Restated Credit Agreement, as amended as described below.
In connection with the Acquisition, on March 22, 2013, Holdings entered into the First Amendment to the Sixth Amended and Restated Credit Agreement (“First Amendment”). The First Amendment (1) provides the U.S. Borrowers under the agreement with a new first-in last-out facility (the “FILO Facility”) in an aggregate principal amount of up to $60.0 million to be used to fund the acquisition and, to the extent not so used, for general corporate purposes, subject to a borrowing base specific thereto, and (2) increases the aggregate principal amount available under the Canadian ABL Facility from $60.0 million to $100.0 million, subject to the Canadian borrowing base. The additional borrowings provided for under the First Amendment were contingent upon, among other things, the closing of the acquisition of RTD on or before May 31, 2013. The acquisition of RTD occurred, and the First Amendment became effective, on April 30, 2013. The First Amendment also made certain other changes to the Sixth Amended and Restated Credit Agreement and added RTD as a party upon the closing of the acquisition. The maturity date for the FILO Facility is 18 months from April 30, 2013. The First Amendment did not change the maturity dates of the U.S. ABL Facility or the Canadian ABL Facility. Immediately following the closing of the acquisition of RTD, $50.1 million was drawn on the FILO Facility.
On November 30, 2012, we completed the purchase of all of the issued and outstanding common shares of Triwest Trading (Canada) Ltd. d/b/a TriCan Tire Distributors (“TriCan”). TriCan is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada with 15 distribution centers stretching across the country. The acquisition was funded through our ABL Facility, which was amended and restated in connection with the acquisition. Prior to the closing of the acquisition, we received a cash contribution of $60.0 million from our parent, which was used to reduce amounts then outstanding under the ABL Facility. The cash contribution was funded from the proceeds of the sale by Accelerate Parent Corp., Holdings’ indirect parent, of common stock to affiliates of TPG Capital L.P. and certain co-investors. See “—Liquidity and Capital Resources—ABL Facility.” The purchase of TriCan expanded our distribution services beyond the borders of the United States for the first time.
On August 1, 2012, ATDI entered into two interest rate swap agreements (“3Q 2012 Swaps”) used to hedge a portion of our exposure to changes in our variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, with each $50.0 million contract having a fixed rate of 0.655% and expiring in June 2016. The 3Q 2012 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 comprehensive income (loss).
On May 24, 2012, we completed the purchase of 100% of the capital stock of Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (“CTO”). CTO owned and operated three distribution centers in Baton Rouge, Slidell and Lafayette, Louisiana serving over 500 customers. The acquisition was funded through our ABL Facility. The purchase of CTO expanded our market position in Louisiana.
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On February 1, 2012, we reacquired one of three facilities that were included in a 2002 sale-leaseback transaction. The purchase price of the facility was $1.5 million. Accordingly, the original lease was amended to extend the lease term on the two remaining facilities by 5 years as well as to adjust the future lease payments over the remaining 15 years. Per current accounting guidance, the change in the debt terms was not considered substantial. As a result, the amendment was treated as a debt modification for accounting purposes and therefore, we reduced the original financing obligation of $14.1 million by the purchase price. No gain or loss was recognized as a result of the initial sales transaction or the 2012 amendment.
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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 quarters ended March 30, 2013 and March 31, 2012 each contain operating results for 13 weeks.
Quarter Ended March 30, 2013 Compared to the Quarter Ended March 31, 2012
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:
Quarter Ended | Quarter Ended | Period Over Period Change | Period Over Period % Change | Percentage of Net Sales For the Respective Period Ended | ||||||||||||||||||||
In thousands | March 30, 2013 | March 31, 2012 | Favorable (unfavorable) | Favorable (unfavorable) | March 30, 2013 | March 31, 2012 | ||||||||||||||||||
Net sales | $ | 839,978 | $ | 794,132 | $ | 45,846 | 5.8 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold | 708,156 | 669,311 | (38,845 | ) | (5.8 | %) | 84.3 | % | 84.3 | % | ||||||||||||||
Selling, general and administrative expenses | 136,504 | 119,319 | (17,185 | ) | (14.4 | %) | 16.3 | % | 15.0 | % | ||||||||||||||
Transaction expenses | 1,023 | 586 | (437 | ) | (74.6 | %) | 0.1 | % | 0.1 | % | ||||||||||||||
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Operating income (loss) | (5,705 | ) | 4,916 | (10,621 | ) | (216.0 | %) | (0.7 | %) | 0.6 | % | |||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (17,240 | ) | (16,752 | ) | (488 | ) | (2.9 | %) | (2.1 | %) | (2.1 | %) | ||||||||||||
Other, net | (973 | ) | (702 | ) | (271 | ) | (38.6 | %) | (0.1 | %) | (0.1 | %) | ||||||||||||
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Income (loss) from operations before income taxes | (23,918 | ) | (12,538 | ) | (11,380 | ) | (90.8 | %) | (2.8 | %) | (1.6 | %) | ||||||||||||
Provision (benefit) for income taxes | (7,627 | ) | (5,461 | ) | 2,166 | 39.7 | % | (0.9 | %) | (0.7 | %) | |||||||||||||
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Net income (loss) | $ | (16,291 | ) | $ | (7,077 | ) | $ | (9,214 | ) | (130.2 | %) | (1.9 | %) | (0.9 | %) | |||||||||
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Net Sales
Net sales for the quarter ended March 30, 2013 were $840.0 million, a $45.8 million, or 5.8% increase, as compared with the quarter ended March 31, 2012. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisition of CTO and TriCan. These growth initiatives added $65.0 million of incremental sales in the first quarter of 2013. However, this increase was partially offset by lower net tire pricing of $6.9 million, primarily driven by manufacturer price repositioning, one less selling day in 2013 as compared to 2012, and an overall softer sales unit environment.
Cost of Goods Sold
Cost of goods sold for the quarter ended March 30, 2013 were $708.2 million, a $38.8 million, or 5.8% increase, as compared with the quarter ended March 31, 2012. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers as well as the acquisition of CTO and TriCan. These growth initiatives added $55.2 million of incremental costs in the first quarter of 2013. Cost of goods sold for the quarter ended March 30, 2013 also includes $2.2 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisition of TriCan. These increases were partially offset by lower net tire pricing, one less selling day in 2013 as compared to 2012 and to an overall softer sales unit environment.
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Cost of goods sold as a percentage of net sales was 84.3% for each of the quarters ended March 30, 2013 and March 31, 2012.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended March 30, 2013 were $136.5 million, a $17.2 million, or a 14.4% increase as compared with the quarter ended March 31, 2012. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisition of CTO and TriCan. Combined, these factors added $11.7 million of incremental costs to the first quarter of 2013. In addition, we also experienced a $4.1 million increase to vehicle and occupancy expenses due to a higher overall consumption of fuel and other vehicle related expenses as well as increases in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation and amortization expense added an additional $2.1 million of costs to the quarter ended March 30, 2013 as we increased our capital expenditure costs for information system technologies.
Selling, general and administrative expenses as a percentage of net sales were 16.3% for the quarter ended March 30, 2013, an increase compared with 15.0% during the quarter ended March 31, 2012. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened distribution centers as well as an increase in non-cash depreciation and amortization expense.
Transaction Expenses
Transaction expenses for the quarter ended March 30, 2013 were $1.0 million and were primarily related to integration costs associated with our acquisition of TriCan in November 2012, as well as with expenses related to potential future acquisitions and other corporate initiatives. During the quarter ended March 31, 2012, transaction expenses of $0.6 million primarily related to severance and integration costs in association with our acquisition of NCT in April 2011.
Interest Expense
Interest expense for the quarter ended March 30, 2013 was $17.2 million, a $0.5 million or a 2.9% increase, compared with the quarter ended March 31, 2012. This increase was due to higher debt levels associated with our ABL Facility, which were driven by our acquisitions of CTO and TriCan. Included in interest expense for the quarter ended March 30, 2013 was a $0.4 million gain associated with the fair value changes of our interest rate swaps, compared to a $0.2 million loss for the quarter ended March 31, 2012.
Provision (Benefit) for Income Taxes
Our income tax benefit for the quarter ended March 30, 2013 was $7.6 million, based on a pre-tax loss of $23.9 million; our effective tax rate was 31.9%. For the quarter ended March 31, 2012, our income tax benefit was $5.5 million which was based on a pre-tax loss of $12.5 million; our effective tax rate was 43.6%. The effective rate of the year-to-date tax benefit is lower than the statutory income tax rate primarily due to a tax benefit related to lower income taxes on international operations and the impact of several non-deductable tax items as well as our state effective tax rate, a result based on our legal entity tax structure and individual state tax filing requirements.
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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 | March 30, 2013 | December 29, 2012 | ||||||
Cash and cash equivalents | $ | 15,083 | $ | 25,951 | ||||
Working capital | 547,455 | 545,969 | ||||||
Total debt | 964,262 | 951,204 | ||||||
Total stockholders’ equity | 688,287 | 705,654 | ||||||
Debt-to-capital ratio | 58.3 | % | 57.4 | % | ||||
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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 expenditure 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 and capital spending during the next twelve month period. In addition, we expect our cash flow from operations and our availability under our ABL Facility to continue to provide sufficient liquidity to fund our ongoing obligations, projected working capital requirements, restructuring obligations and capital spending during the foreseeable future.
We are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of March 30, 2013, our total indebtedness is $964.3 million with a debt-to-capital ratio of 58.3%. Cash interest payments for the quarters ended March 30, 2013 and March 31, 2012 amounted to $3.7 million and $3.7 million, respectively. As of March 30, 2013, we have an additional $135.4 million of availability under our U.S. ABL Facility and an additional $15.4 million of availability under our Canadian ABL Facility. The availability under our U.S. and Canadian ABL Facilities 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, 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.
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Cash Flows
The following table sets forth the major categories of cash flows:
In thousands | Quarter Ended March 30 2013 | Quarter Ended March 31, 2012 | ||||||
Cash provided by (used in) operating activities | $ | 2,132 | $ | 13,532 | ||||
Cash provided by (used in) investing activities | (16,697 | ) | (12,816 | ) | ||||
Cash provided by (used in) financing activities | 4,210 | (4,319 | ) | |||||
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Effect of exchange rate changes on cash | (513 | ) | — | |||||
Net increase (decrease) in cash and cash equivalents | (10,868 | ) | (3,603 | ) | ||||
Cash and cash equivalents - beginning of period | 25,951 | 14,979 | ||||||
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Cash and cash equivalents - end of period | $ | 15,083 | $ | 11,376 | ||||
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Cash payments for interest | $ | 3,733 | $ | 3,701 | ||||
Cash payments (receipts) for taxes, net | $ | 1,239 | $ | (171 | ) | |||
Capital expenditures financed by debt | $ | — | $ | — | ||||
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Operating Activities
Net cash provided by operating activities for the quarter ended March 30, 2013 was $2.1 million compared with $13.5 million during the quarter ended March 31, 2012. During the current quarter, working capital requirements resulted in a cash outflow of $5.3 million, primarily driven by a $14.4 million cash outflow in accounts payable and accrued expenses that was associated with the timing of vendor payments related to winter tire programs.
Net cash provided by operating activities for the quarter ended March 31, 2012 was $13.5 million. During the quarter, working capital requirements resulted in a cash inflow of $2.4 million. Inventory increased $21.3 million as a result of stocking two new distribution centers opened during the quarter as well as the normal seasonal build in our inventory. In addition, higher sales volume led to an $11.0 million increase to accounts receivable. However, these amounts were predominately offset by a $33.9 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor payments.
Investing Activities
Net cash used in investing activities for the quarter ended March 30, 2013 was $16.7 million, compared with $12.8 million during the quarter ended March 31, 2012. The change was primarily associated with our investing $11.9 million in property and equipment purchases during the quarter ended March 30, 2013, which included information technology upgrades, IT application development and warehouse racking. After the TriCan acquisition, we invested an additional $4.2 million in ancillary acquisition activities. During the quarter ended March 31, 2012 capital expenditures for property and equipment were $12.4 million. The expenditures included information technology upgrades, IT application development and warehouse racking.
Financing Activities
Net cash provided by financing activities for the quarter ended March 30, 2013 was $4.2 million, compared with cash used in financing activities of $4.3 million during the quarter ended March 31, 2012. The change was primarily related to higher net borrowings from our ABL Facility, specifically our Canadian ABL facility, due to the increase in working capital requirements, as well as for the purchase of property and equipment.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest during the quarter ended March 30, 2013 were $3.7 million, compared with $3.7 million paid during the quarter ended March 31, 2012. Despite higher average debt levels during the current period, we experienced lower average interest rates on the outstanding debt during the quarter ended March 30, 2013. As well, we paid an additional $0.2 million during the quarter ended March 30, 2013 related to our interest rate swaps.
Net cash payments for taxes during the quarter ended March 30, 2013 were $1.2 million, compared with net refunds received of $0.2 million paid during the quarter ended March 31, 2012. The difference between the periods primarily relates to the timing of income tax extension payments.
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Indebtedness
The following table summarizes the Company’s outstanding debt at March 30, 2013:
In thousands | Matures | Interest Rate (1) | Outstanding Balance | |||||||||
U.S. ABL Facility | 2017 | 3.2 | % | $ | 480,836 | |||||||
Canadian ABL Facility | 2017 | 4.0 | $ | 21,807 | ||||||||
Senior Secured Notes | 2017 | 9.75 | 200,000 | |||||||||
Senior Subordinated Notes | 2018 | 11.50 | 247,903 | |||||||||
Capital lease obligations | 2013 - 2027 | 7.1 - 12.3 | 12,407 | |||||||||
Other | 2014 - 2021 | 8.0 - 10.6 | 1,309 | |||||||||
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Total debt | 964,262 | |||||||||||
Less—Current maturities | (513 | ) | ||||||||||
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Long-term debt | $ | 963,749 | ||||||||||
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(1) | Interest rates for each of the U.S. ABL Facility and the Canadian ABL Facility are the weighted average interest rates at March 30, 2013. |
ABL Facility
In connection with the acquisition of TriCan on November 30, 2012, we amended and restated our Fifth Amended and Restated Credit Agreement in order to provide for borrowings under the agreement by TriCan and make certain other amendments (as so amended and restated, the “Sixth Amended and Restated Credit Agreement”). The Sixth Amended and Restated Credit Agreement provides for senior secured asset-backed revolving credit facilities consisting of (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the “U.S. ABL Facility”) and (ii) Canadian revolving credit commitments of $60.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the “Canadian ABL Facility” and, collectively with the U.S. ABL Facility, the “ABL Facility”). The U.S. ABL Facility is available to ATDI, its wholly-owned subsidiary Am-Pac Tire Dist. Inc. and any other U.S. subsidiary that we designate in the future in accordance with the terms of the agreement. The Canadian ABL Facility is available to TriCan and any other Canadian subsidiaries that we designate in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists or would arise therefrom, we have the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million (up to $50.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The maturity date for the Sixth Amended and Restated Credit Agreement is November 16, 2017, provided that if on March 1, 2017, either (i) more than $50.0 million in aggregate principal amount of ATDI’s Senior Secured Notes remains outstanding or (ii) any principal amount of ATDI’s Senior Secured Notes remains outstanding with a scheduled maturity date which is earlier than 91 days after November 16, 2017 and excess availability under the ABL Facility is less than 12.5% of the aggregate revolving commitments, then the maturity date will be March 1, 2017.
At March 30, 2013, we had $480.8 million outstanding under the U.S. ABL Facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $8.2 million, leaving $135.4 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at March 30, 2013 was $21.8 million, leaving $15.4 million available for additional borrowings.
Borrowings under the U.S. 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 March 30, 2013 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 March 30, 2013. The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the aggregate ABL Facility.
Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate”, (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of March 30, 2013 or (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate”, (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates
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Service for a 30 day interest period, plus an applicable margin of 1.0% as of March 30, 2013. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the aggregate ABL Facility.
The U.S. and Canadian borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
• | 85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus |
• | The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus |
• | The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, applicable. |
All obligations under the U.S. 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. The Canadian ABL Facility is unconditionally guaranteed by the U.S. loan parties, TriCan and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.
The ABL Facility contains customary covenants, including covenants that restrict 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 borrowings under the combined ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the combined ABL Facility and (y) the borrowing base and (b) $25.0 million, then we would be subject to an additional covenant requiring us to meet a fixed charge coverage ratio of 1.0 to 1.0. As of March 30, 2013, our additional borrowing availability under the combined ABL Facility were above the required amount and we were therefore not subject to the additional covenants.
In connection with the acquisition of RTD (the “Acquisition”), on March 22, 2013, we entered into the First Amendment to the Sixth Amended and Restated Credit Agreement (“First Amendment”). The First Amendment (1) provides the U.S. Borrowers under the agreement with a new first-in last-out facility (the “FILO Facility”) in an aggregate principal amount of up to $60.0 million, subject to a borrowing base specific thereto, and (2) increases the aggregate principal amount available under the Canadian ABL Facility from $60.0 million to $100.0 million, subject to the Canadian borrowing base. The additional borrowings provided for under the First Amendment were contingent upon, among other things, the closing of the acquisition of RTD on or before May 31, 2013. The acquisition of RTD occurred, and the FILO Facility became effective, on April 30, 2013. The First Amendment also made certain other changes to the Sixth Amended and Restated Credit Agreement and added RTD as a party upon the closing of the acquisition. The maturity date for the FILO Facility is 18 months from April 30, 2013. The First Amendment did not change the maturity dates of the U.S. ABL Facility or the Canadian ABL Facility. Immediately following the closing of the acquisition of RTD, $50.1 million was drawn on the FILO Facility.
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.
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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.
Senior Subordinated Notes
On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due June 1, 2018, which we refer to as the Senior Subordinated Notes. 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.
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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 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. 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:
In thousands | Quarter Ended March 30, 2013 | Quarter Ended March 31, 2012 | ||||||
Net income (loss) | $ | (16,291 | ) | $ | (7,077 | ) | ||
Depreciation and amortization | 25,031 | 21,054 | ||||||
Interest expense | 17,240 | 16,752 | ||||||
Income tax provision (benefit) | (7,627 | ) | (5,461 | ) | ||||
Management fee | 991 | 1,147 | ||||||
Stock-based compensation | 668 | 557 | ||||||
Transaction fees | 1,023 | 586 | ||||||
Inventory step up | 2,194 | 0 | ||||||
Other | 682 | 568 | ||||||
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Adjusted EBITDA | $ | 23,911 | $ | 28,126 | ||||
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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 March 30, 2013, our total obligations as guarantor on these leases are approximately $2.6 million extending over seven years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $2.4 million as of March 30, 2013. 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
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.
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Management believes there have been no significant changes during the three months ended March 30, 2013, to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 29, 2012.
Recently Adopted Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted this guidance on December 30, 2012 the first day of the Company’s 2013 fiscal year; however the Company performs its annual impairment test in the fourth quarter and does not expect the impact of adopting this standard to have a material effect on the consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which amended the guidance for reporting reclassifications out of accumulated other comprehensive income. The amended guidance will require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is entirely reclassified to net income, as required by U.S. GAAP. For other amounts, that are not required by U.S. GAAP to be entirely reclassified to net income, an entity is required to cross-reference other disclosures that will provide additional detail concerning these amounts. The amendments are effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance on December 30, 2012 and its adoption did not impact the Company’s consolidated financial statements.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Our U.S. and Canadian ABL Facilities are exposed to fluctuations in interest rates which could impact our results of operations and financial condition. Interest on the U.S. ABL Facility is tied to Base Rate, as defined, or LIBOR. Interest on the Canadian ABL Facility is tied to Base Rate, as defined, or Prime Rate, as defined. At March 30, 2013, we had $502.6 million outstanding under our aggregate ABL Facility subject to interest rate changes.
To manage this exposure, we use interest rate swap agreements in order to hedge the changes in our variable interest rate debt. Interest rate swap agreements utilized by us in our hedging programs are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To minimize the risk of counterparty non-performance, interest rate swap agreements are made only through major financial institutions with significant experience in such instruments.
At March 30, 2013, $302.6 million of the aggregate 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 $3.0 million.
The financial position and results of operations for TriCan, our wholly-owned subsidiary acquired during 2012, are impacted by movements in the exchange rates between the Canadian dollar and the U.S. dollar. As of March 30, 2013, we do not have any foreign currency derivatives in place.
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 March 30, 2013, 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 believe we are maintaining and monitoring appropriate internal controls during the implementation period.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
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.
Item 1A. | Risk Factors. |
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 30, 2012.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
None.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
2.1 | Share Purchase Agreement, dated as of March 22, 2013, by and among TriCan Tire Distributors Inc., American Tire Distributors, Inc., as parent guarantor, Regional Tire Holdings Inc., Regional Tire Distributors Inc., and the shareholders of Regional Tire Holdings Inc., and Regional Tire Distributors Inc. |
2.2 | Share Purchase Agreement, dated as of November 30, 2012, by and among ATD Acquisition Co. V Inc., American Tire Distributors, Inc., as parent guarantor, 1278104 Alberta Inc, Triwest Trading (Canada) Ltd., and the shareholders of 1278104 Alberta Inc. party thereto. |
10.1 | First Amendment to Sixth Amended and Restated Credit Agreement, dated as of March 22, 2013, among American Tire Distributors, Inc., TriCan Tire Distributors Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Tire Wholesalers, Inc., Lenders party thereto and Bank of America, N.A. as Administrative and Collateral Agent and Lender. |
10.2 | Conformed Sixth Amended and Restated Credit Agreement, dated as of March 22, 2013, among American Tire Distributors, Inc., ATD Acquisition Co. V Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Firestone of Denham Springs, Inc., Tire Wholesalers, Inc., ATD Acquisition Co. IV, Lenders party thereto and Bank of America, N.A. as Administrative and Collateral Agent and Lender. |
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 March 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statement of Stockholders’ Equity, (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: May 10, 2013 | AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC. | |||||
By: | /s/ JASON T. YAUDES | |||||
Jason T. Yaudes | ||||||
Executive Vice President and Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) |
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