UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
December 31, 2011 For the fiscal year ended December 31, 2011
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-124878
American Tire Distributors Holdings, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 59-3796143 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
12200 Herbert Wayne Court, Suite 150
Huntersville, North Carolina 28078
(Address, including zip code, of principal executive offices)
(704) 992-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes x No ¨
Indicate by a 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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
The aggregate market value of the voting stock held by non-affiliates of the registrant: None
Number of common shares outstanding at March 5, 2012: 1,000
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| PART II | ||||||
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| ITEM 6. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| ITEM 8. |
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| ITEM 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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| ITEM 9B. |
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| ITEM 11. |
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| ITEM 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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| ITEM 13. |
Certain Relationships and Related Transactions and Director Independence |
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| ITEM 14. |
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| PART IV | ||||||
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Cautionary Statements on Forward-Looking Information
This Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements relating to our business and financial outlook, that are based on our current expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or other comparable terminology.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions. Actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances, after we distribute this Annual Report on Form 10-K, 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. |
See Item 1A—”Risk Factors” for further discussion.
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PART I
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 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 consolidated subsidiaries constitute the operations of Holdings presented under accounting principles generally accepted in the United States. The terms “TPG” and “Sponsor” relate to TPG Capital, L.P. and/or certain funds affiliated with TPG Capital, L.P.
| Item 1. | Business. |
Our Company
We are the leading replacement tire distributor in the United States, providing a critical range of services to enable tire retailers to effectively service and grow sales to consumers. Through our network of 98 distribution centers, we offer access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 60,000 customers. The critical range of services we provide includes frequent and timely delivery of inventory as well as business support services such as credit, training, access to consumer market data and the administration of tire manufacturer affiliate programs. In addition, our customers have access to a leading online ordering and reporting system as well as a website that enables our tire retailer customers to participate in the Internet marketing of tires to consumers. We estimate that our share of the replacement passenger and light truck tire market in the United States (U.S.) is approximately 10%, up from approximately 1% in 1996, with our largest customer and top ten customers accounting for less than 1.9% and 8.7%, respectively, of our net sales.
We believe we distribute the broadest product offering in our industry, supplying our customers with the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin — as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. 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. We believe our large, diverse product offering allows us to better penetrate the replacement tire market across a broad range of price points.
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, we were acquired by TPG 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, we conducted cash tender offers for our existing outstanding debt securities, all of which were subsequently purchased and retired.
Our Industry
According to Modern Tire Dealer, the U.S. replacement tire market generated annual retail sales of approximately $38.4 billion in 2011. Passenger tires, medium truck tires and light truck tires accounted for 65.0%, 18.7% and 13.3%, respectively, of the total market. Farm, specialty and other types of tires accounted for the remaining 3.0%. In 2011, according to Tire Review, tire retailers obtained 60% of their tire volume from wholesale tire distributors, like us, and 26% of their tire volume from tire manufacturers.
In the U.S., replacement tires are sold to consumers through several different channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships, service stations and web-based marketers. Between 1990 and 2011, independent
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tire retailers and automotive dealerships have enjoyed the largest increase in market share, according to Modern Tire Dealer, moving from 54.0% to 61.0% and 1.0% to 6.5% of the market, respectively.
The U.S. replacement tire market has historically experienced stable growth and favorable pricing dynamics. From 1955 through 2011, U.S. replacement tire unit shipments increased by an average of approximately 2.7% per year. However, during challenging economic periods, consumers may opt to defer replacement tire purchases or purchase less costly brand tires. Beginning with the onset of the economic downturn in 2008, increased economic uncertainty, unemployment and rising fuel prices led to negative growth during 2008 and 2009 in the U.S. replacement tire market. The economic environment showed signs of stabilization during 2010, ending the negative growth trend with U.S. replacement tire unit shipments increasing 7.8% over 2009. However, during 2011, U.S. replacement tire unit shipments were down slightly compared to 2010 as slow economic growth, persistently high fuel cost and a decrease in miles driven impacted the U.S. tire replacement market.
Going forward, we believe growth in the U.S. replacement tire market will continue to be driven by favorable underlying dynamics, including:
| • | increases in the number and average age of passenger cars and light trucks; |
| • | increases in the number of miles driven; |
| • | increases in the number of licensed drivers as the U.S. population continues to grow; |
| • | 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. |
Our Business Strategy
Our objective is to be the largest distributor of replacement tires to local, regional and national independent U.S. tire retailers, as well as various national and corporate accounts while providing our customers a critical range of services such as frequent and timely delivery of inventory as well as business support services. We intend to accomplish this objective, drive above-market growth and further enhance profitability and cash flow by executing the following key operational strategies:
Leverage Our Infrastructure in Existing Markets. Through infrastructure expansions over the past several years, we have developed a scalable platform with available incremental distribution capacity. Our distribution infrastructure enables us to efficiently add new customers and service growing channels, such as automotive dealerships, thereby increasing profitability by leveraging the utilization of our existing assets. We believe our relative penetration in existing markets is largely a function of the services we offer and the length of time we have operated locally. Specifically, in new markets, we have experienced growth in market share over time, and in states we have served the longest, we generally have market share well in excess of our national average.
Maintain a Comprehensive and Deep Tire Portfolio to Meet Our Customers’ Needs. We provide a broad range of products covering all price points from entry-level to faster growing high and ultra-high performance tires, through a full suite of flag, associate and proprietary brand tires. We will continue to focus on high and ultra-high performance tires, given the growth in demand for such tires, while maintaining our emphasis on providing broad market and entry level tire offerings. Our comprehensive tire portfolio is designed to satisfy all of our customers’ needs and allow us to become the supplier of choice, thereby increasing customer penetration and retention.
Utilize Technology Platform to Continue to Increase Distribution Efficiency. We intend to continue to invest in our inventory and warehouse management systems and logistics technology in order to further increase our
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efficiency and profit margins and improve customer service. We continue to evaluate and incorporate technical solutions including our current roll out of handheld scanning for receiving, picking and delivery of products to our customers. We believe these increased efficiencies will continue to enhance our reputation with our customers for providing a high level of prompt customer service, while also reducing costs.
Continue to Expand in Existing and New Geographic Markets. While we have the largest distribution footprint in the U.S. replacement tire market, we have limited or no market presence in many geographic areas of the contiguous United States. We intend to enter into previously underserved geographic markets as well as expand in our existing markets by opening new distribution centers and/or through opportunistic acquisitions. Our acquisition strategy allows us to increase our share in existing markets and add distribution in new markets, utilizing our scale to realize cost savings. We believe our position as the leading replacement tire distributor in the United States, combined with our access to capital and our scalable platform, allows us to make acquisitions at attractive post-synergy valuations.
Expand Penetration of the Emerging Automotive Dealership Channel. Automotive dealerships are focused on growing their service business in an effort to expand profitability, and we believe they view having replacement tire capabilities as an important service element. During 2010, we began to train and deploy sales personnel to help build our sales at these accounts. In addition, we continue to strengthen and expand our relationships with the automobile manufacturers to further grow our share of tire sales to their dealerships.
Grow TireBuyer.com® into a Premier Internet Tire Provider. TireBuyer.com® is an Internet site that enables our local independent tire retailer customers to connect with consumers and sell to them over the Internet. TireBuyer.com® allows our broad base of independent tire retailer customers to participate in a greater share of the growing Internet tire market. We believe that TireBuyer.com® complements and services our participating local independent tire retailers by providing them access to a sales and marketing channel previously unavailable to them. Since launching TireBuyer.com® in late 2009, we have continued to enhance the online consumer experience and have seen increased consumer traffic on the site.
Our Competitive Strengths
We believe the following key strengths position us well to maintain our ability to achieve revenue growth that exceeds that of the U.S. replacement tire industry:
Leading Position in a Highly-Fragmented Marketplace. We are the leading replacement tire distributor in the United States with an estimated market share of approximately 10%. We believe our scale provides us key competitive advantages relative to our smaller, and generally regionally-focused, competitors. These include the ability to: efficiently stock and deliver a wide variety of tires, custom wheels, tire supplies, tools and accessories; invest in services, including sales tools and technologies, to support our customers; and realize operating efficiencies from our scalable infrastructure. We believe our leading market position, combined with our commitment to distribution, as opposed to the retail operations engaged in by our customers, enhances our ability to expand our sales footprint cost effectively both in our existing markets and in new domestic geographic markets.
Extensive and Efficient Distribution Network. We believe we have the largest independent replacement tire distribution network in the United States with 98 distribution centers and approximately 800 delivery vehicles serving a majority of the contiguous United States. Our extensive distribution footprint, combined with our sophisticated inventory management and logistics technologies, enables us to deliver the vast majority of orders on a same or next day basis, which is critical for tire retailers who are typically limited by physical inventory capacity and working capital constraints. Our delivery technologies allow us to more effectively and efficiently organize and optimize our route systems to provide timely product delivery. Our Oracle ERP system provides a scalable platform that can support future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit.
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Broad Product Offering from Diverse Supplier Base. We believe we offer the most comprehensive selection of tires in the industry through a diverse group of suppliers. We supply the top ten leading passenger tire brands, and we carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. Our tire product line includes a full suite of flag, associate and proprietary brand tires, allowing us to service a broad range of price points from entry level to the faster growing ultra-high performance category. In addition to tires, we also offer custom wheels and accessories and related tire supplies and tools. We believe that our broad product offering drives penetration among existing customers, attracts new customers and maximizes customer retention.
Broad Range of Critical Services. We provide a critical range of services which enable our tire retailer customers to operate their businesses more profitably. These services include convenient access to and timely delivery of the broadest product offerings available in the industry, as well as fundamental business support services, such as credit, training and access to consumer market data, that enable our tire retailer customers to better service their individual markets, and administration of tire manufacturer affiliate programs. We provide our customers with convenient 24/7 access to our extensive product offerings through our innovative and proprietary business-to-business web portal, ATDOnline®. Our online services also include TireBuyer.com®, which was launched in late 2009 to allow our local independent tire retailer customers to participate in the Internet marketing of tires to consumers. We also provide select, qualified independent tire retailers with the opportunity to participate in our Tire Pros® franchise program through which they receive advertising and marketing support and the benefits of a national brand identity.
Diversified Customer Base and Longstanding Customer Relationships. We serve a highly diversified customer base comprised of local, regional and national independent tire retailers, automotive dealerships, tire manufacturer-owned stores, mass merchandisers and service stations. We believe we are a top supplier to many of our customers and maintain customer relationships that exceed a decade on average for our top 20 customers. We believe the diversity of our customer base and the strength of our customer relationships present an opportunity to grow market share regardless of macroeconomic and replacement tire market conditions.
Consistent Financial Performance and Strong Cash Flow Generation. Our financial performance has benefited from substantial growth that has been achieved based on a combination of organic initiatives and acquisitions. In addition, the low capital intensity of our business combined with the efficient management of our working capital, due to our advanced inventory management systems and close vendor relationships, has historically enabled us to generate strong cash flow from operations.
Experienced Management Team Supported by Strong Equity Sponsorship. Our senior management team, led by our President and CEO William E. Berry, has an average of over 23 years of experience in the replacement tire distribution industry. Management has a proven track record of implementing successful initiatives in a leverage environment, including the execution of a disciplined acquisition strategy, which has contributed to our gross profit expansion and above-market net sales growth. In addition, we have reduced costs through the integration of operating systems and introduction of standard operating practices across all locations, resulting in improved operating efficiencies, reduced headcount and improved operating profit at existing and acquired locations. We also benefit from the extensive management and business experience provided by our Sponsor, TPG.
Products
We provide our customers with a complete package of tires, tire supplies and tools as well as custom wheels and accessories. During 2011, tire sales accounted for 96.6% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 3.4% of our net sales.
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Tires
We sell a broad selection of well-known flag brands as well as lower price point associate and proprietary brand tires. We believe our large, diverse product offering allows us to service the broad range of price points in the replacement tire market. Sales of passenger and light truck tires accounted for 82.9% of our net sales in fiscal 2011. The remainder of our tire sales was for medium trucks, farm vehicles and other specialty tires.
Flag brands. Flag brands, which have the greatest brand recognition as a result of both strong sales and strong marketing support from tire manufacturers, are generally premium-quality and premium-priced offerings. The flag brands that we sell have high consumer recognition and generate higher per-tire profit than associate or proprietary brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. Within our flag brand product portfolio, we also carry high and ultra-high performance tires.
Associate brands. Associate brands are primarily lower-priced tires manufactured by well-known manufacturers. Our associate brands, such as Fuzion®, allow us to offer tires in a wider price range. In addition, associate brands are attractive to our tire retailer customers because they may count towards various incentive programs offered by manufacturers.
Proprietary and exclusive brands. Our Capitol® and Negotiator® brands are lower-priced tires made by tire manufacturers exclusively for, and marketed by, us for which we hold or control the trademark. These brands strengthen our entry-level priced product offering and allow us to sell value-oriented tires to tire retailers, increasing our overall market penetration.
Custom Wheels and Accessories
Custom wheels directly complement our tire products as many custom wheel consumers purchase tires when purchasing wheels. Customers can order custom wheels from us separately or in addition to their regular tire orders without the added complexity of being serviced by an additional vendor. We offer over 30 different wheel brands, along with installation and service accessories. Of these brands, five are proprietary: ICW® Racing, Pacer®, Drifz®, Cruiser Alloy® and O.E. Performance®. An additional seven brands are national and exclusive to us: CX, Maas, Zora, Gear, Motiv, TIS (Twenty Inches Strong) and Dropstars which also includes Monster Energy Edition wheel styles. Nationally available flag brands complement our offering with such brands as Asanti, Advanti Racing, Black Rock, BMF, Cragar, Dick Cepek, Ultra, Platinum, Lexani, Mickey Thompson, Konig and HRE. Collectively, these brands represent one of the most comprehensive wheel offerings in the industry. Sourcing of product is worldwide through a number of manufacturers.
Tire Supplies and Tools
We supply our customers with a wide array of tire supplies and tools which enable them to better service their customers as well as help them become a more profitable business. Our tire supplies and tools are the most popular brand names from leading manufacturers. These products broaden our portfolio and leverage our customer relationships.
Competition
The U.S. tire distribution industry is highly competitive and fragmented. In the United States, replacement tires are sold to consumers through several different outlets, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships, service stations and web-based marketers. We compete with a number of tire distributors on a regional basis.
Our main competitors include TBC/Treadways Wholesale (owned by Sumitomo), which has retail operations that compete with its distribution customers, and TCI Tire Centers. In the automotive dealership
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channel, our principal competitor is Dealer Tire, which is focused principally on administering replacement tire programs for selected automobile manufacturers’ dealerships. In the online channel, our principal competitor is Tire Rack, which is principally focused on high and ultra-high performance offerings, acting as both a retailer and a wholesaler. We face competition from smaller regional companies and would be adversely affected if mass merchandisers and warehouse clubs gained market share from local independent tire retailers, as our market share in those channels is lower.
Customers
We serve a highly diversified customer base comprised of local, regional and national independent tire retailers as well as various national and corporate accounts. During fiscal 2011, we sold to approximately 60,000 customers in a majority of the contiguous United States, principally located in the Southeastern and Mid-Atlantic regions, as well as portions of the Northeast, Midwest, Southwest and the West Coast of the United States. In fiscal 2011, our largest customer and our top ten customers accounted for less than 1.9% and 8.7%, respectively, of our net sales. We believe we are a top supplier to many of our customers and maintain customer relationships that exceed a decade on average for our top 20 customers.
Suppliers
We purchase our tires from several sources, including the four largest tire manufacturers, Bridgestone, Continental, Goodyear and Michelin, from whom we bought 57.5% of our tire products in fiscal 2011. In general, we do not have long-term supply agreements with tire manufacturers, instead relying on oral arrangements or written agreements that are renegotiated annually and can be terminated on short notice. However, we have conducted business with many of our major tire suppliers for over 20 years, and we believe that we have good relationships with all of our major suppliers. In recent years, tire manufacturers have reduced the number of tire retailers they service directly. As a result of this change, tire retailers have increasingly relied on us, and we have become a more critical link between manufacturers and tire retailers.
There are a number of worldwide manufacturers of wheels and other automotive products. Most of the wheels we purchase are proprietary brands, namely, Pacer®, Cruiser Alloy®, Drifz®, O.E. Performance® and ICW® Racing, and are produced by a variety of manufacturers.
Distribution System
We have designed our distribution system to deliver products from a wide variety of tire manufacturers to our tire retailer customers. In recent years, tire manufacturers have reduced the number of tire retailers they service directly and tire retailers have reduced the inventory they hold. At the same time, the depth and breadth of replacement SKUs has continued to expand. As a result of these changes, tire retailers have increasingly relied on us and we have become a more critical link in enabling tire retailers to more efficiently manage their business.
We utilize a sophisticated inventory and delivery system to distribute our products to most customers on a same or next day basis. In our distribution centers, we use sophisticated bin locator systems, material handling equipment and routing software that link customer orders to our inventory and delivery routes. We believe this distribution system, which is integrated with our innovative and proprietary business-to-business ATDOnline® ordering and reporting system, provides us a competitive advantage by allowing us to ship customer orders quickly and efficiently while also reducing labor costs. Our logistics and routing technology uses third-party software packages and GPS systems, including dynamic routing and Roadnet 5000, to optimize route design and delivery capacity. Coupled with our fleet of approximately 800 delivery vehicles, this technology enables us to cost effectively make multiple daily or weekly shipments to customers as necessary.
Approximately 80% of our tire purchases are shipped directly by tire manufacturers to our distribution centers. The remainder is shipped by manufacturers to our redistribution centers located in Maiden, North
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Carolina, Bakersfield, California and Chicago, Illinois. These redistribution centers warehouse slower-moving and foreign-manufactured products, which are forwarded to our distribution centers as needed.
Information Systems
Through infrastructure expansions over the past several years, we have developed a scalable platform with incremental capacity available. We are currently finishing the implementation of an Oracle ERP system that supports future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit. The ERP implementation, which is nearing completion, has basically replaced our legacy computer system. We continue to evaluate and incorporate technical solutions such as handheld scanning for receiving, picking and delivery of product to our customers.
Inventory Control
We believe that we maintain levels of inventory that are adequate to meet our customers’ needs on a same day or next day basis. Since customers look to us to fulfill their needs on short notice, inventory levels are a primary focus of our business model. As a result, backlog of orders is not considered material to, or a significant factor in, evaluating and understanding our business. Our inventory levels are determined using sales data derived from distribution centers (on a combined basis, an individual basis or by geographic region) as well as from vendors who supply the distribution centers and retail customer stores that are served by the distribution center. All distribution centers stock a base inventory and may expand beyond preset inventory levels as deemed appropriate by their general managers. Computer systems monitor inventory levels for all stock items and quantities are periodically re-balanced from center-to-center.
Marketing and Customer Service
Our marketing efforts are focused on driving growth through customer service, additional product placement and market expansion. We provide a critical range of services which enable our tire retailer customers to operate their businesses more profitably. These services include frequent and timely delivery of inventory, as well as fundamental business support services such as credit, training and access to customer market data which enable our tire retailer customers to better service their individual markets. In addition, we provide our customers with an online web portal with convenient 24/7 access to our inventory, an internet site that allows our tire retailer customers to participate in the internet marketing of tires to customers as well as a franchise program where we deliver advertising and marketing support to our tire retailer customers.
Sales Force
We have structured our sales organization to best serve our existing customers and develop new prospective customers such as automotive dealerships. As the manufacturers have reduced their own sales staffs, our sales force has assumed the consultative role manufacturers previously provided to tire retailers. Our tire sales force consists of sales personnel at each distribution center plus a sales administrative team located at our field support center in Huntersville, North Carolina.
Sales teams, consisting of salespeople and customer service representatives, focus on tire retailers located within the service area of the distribution center and include a combination of tire-, wheel- and supplies-focused sales personnel. Some sales personnel visit targeted customers to advance our business opportunities and those of
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our customers, while other sales personnel remain at our facility, making client contact by telephone to advance specific products or programs. Customer service representatives manage incoming calls from customers and provide assistance with order placement, inventory inquiries and general customer support.
The Huntersville-based sales administrative team directs sales personnel at the distribution centers and manages our corporate account customers, including large national and regional retail tire and service companies. This team also manages our Huntersville-based call center, which provides call management assistance to the distribution centers during peak times of the day, thereby minimizing customer wait time, and also provides support upon any disruption in a distribution center’s local telephone service. They also serve as the primary point of contact for product and technical inquiries from TireBuyer.com® shoppers.
Our aftermarket wheel sales group employs sales and technical support personnel in the field and performance specialists in each region. The responsibilities of this sales group include cultivating new prospective wheel and supplies customers as well as coordinating with tire sales professionals to cover existing accounts. The technical support professionals provide answers to customer questions regarding wheel style and fitment and supplies.
Automotive dealerships are focused on growing their service business in an effort to expand profitability, and we believe they view having replacement tire capabilities as an important service element. Between 1990 and 2011, automotive dealerships have enjoyed a large increase in market share according to Modern Tire Dealer, moving from 1.0% of the U.S. replacement tire market to 6.5% of the market. During 2010 we began hiring, training and deploying sales personnel to help build our sales in the emerging automotive dealership channel. Additionally, this sales force works to strengthen and expand our relationships with the automobile manufacturers.
Tire Retailer Programs
Through our Tire Pros® franchise program we deliver advertising and marketing support to tire retailer customers operating as Tire Pros® franchisees. Local independent tire retailers participating in this franchise program enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identity. We anticipate increasing volume penetration among, and further aligning ourselves with, franchisees.
Individual manufacturers offer a variety of programs for tire retailers that sell their products, such as Bridgestone’s TireStarz, Continental’s Gold, Goodyear’s G3X, Kumho’s Fuel and Michelin’s Alliance. These programs, which are relatively complex, provide cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist in the administration of managing these programs for the manufacturers and enhance these programs through dedicated staff to assist tire retailers in managing their participation. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.
We also offer our tire retailer customers ATDServiceBAY®, which makes available a comprehensive suite of benefits including nationwide tire and service warranties (through third-party warranty providers), a nationally accepted, private-label credit card (through GE Capital), access to consumer market data and training and marketing programs to provide our tire retailer customers with the support and service that are critical to succeed in today’s increasingly competitive marketplace.
ATDOnline® and TireBuyer.com®
ATDOnline® provides our customers with web-based online ordering and 24/7 access to our inventory availability and pricing. Orders are processed automatically and printed in the appropriate distribution center within minutes of entry through ATDOnline®. Our customers are able to track expected deliveries and retrieve
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copies of their signed delivery receipts. ATDOnline® also allows customers to track account balances and participation in tire manufacturer incentive programs. We encourage our customers to use this system because it represents a more efficient method of order entry and information access than traditional order systems. In fiscal 2011, approximately 65% of our total order volume was ordered through ATDOnline®, up from 56% in fiscal 2007.
TireBuyer.com® is an Internet site that enables our local independent tire retailer customers to connect with consumers and sell to them over the Internet. Consumers using TireBuyer.com® choose to buy from a select, qualified independent tire retailer participating in our TireBuyer.com® program. We then distribute the purchased products to the selected tire retailer for local installation. The tire retailer receives the full revenue of the transaction, less any applicable processing fees, upon product installation. We employ a third-party provider to handle the online billing and payment process. We do not handle customers’ credit card or other sensitive information.
We account for revenues from TireBuyer.com® in the same manner as other orders received from tire retailer customers. The TireBuyer.com® transaction structure allows us to retain our distribution focus, while strengthening our relationship with our tire retailer customers by providing them access to a sales and marketing channel previously unavailable to them. Since launching TireBuyer.com® in late 2009, we have continued to enhance the online consumer experience and have seen increased consumer traffic on the site.
Trademarks
The proprietary brand names under which we market our products are trademarks of our company. We value our brand names because they help develop brand identification. All of our trademarks are of perpetual duration as long as they are periodically renewed. We currently intend to maintain all of them in force. The principal proprietary brand names under which we market our products are: CAPITOL® tires, NEGOTIATOR® tires, DYNATRAC® tires, CRUISERALLOY® custom wheels, DRIFZ® custom wheels, ICW® custom wheels, PACER® custom wheels and O.E. PERFORMANCE® custom wheels. Our other trademarks include: AMERICAN TIRE DISTRIBUTORS®, ATD®, ATDONLINE®, ATDSERVICEBAY®, WHEEL WIZARD®, ENVIZIO®, WHEEL WIZARD ENVIZIO®, WHEELENVIZIO.COM®, XPRESSPERFORMANCE®, TIREBUYER.COM® AND TIRE PROS®.
Seasonality
Although the effects of seasonality are not significant to our business, we have historically experienced an increase in net sales in the second and third fiscal quarters and an increase in working capital in the first fiscal quarter.
Environmental Matters
Our operations and properties are subject to federal, state and local laws and regulations relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and waste as well as relating to the investigation and clean-up of contaminated properties, including off-site disposal locations. We do not incur significant costs complying with environmental laws and regulations. However, we could be subject to material environmental costs, liabilities or claims in the future, especially in the event of the adoption of new environmental laws or changes in existing laws and regulations or in their interpretation.
Employees
As of December 31, 2011, our operations employed approximately 3,100 people. None of our employees are represented by a union. We believe our employee relations are satisfactory.
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Available Information
In accordance with the requirements of the Securities and Exchange Act of 1934, we file reports and other information with the Securities and Exchange Commission (“SEC”). You may read and, for a fee, copy any document that we file with the SEC at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from commercial document retrieval services and at the website maintained by the SEC at www.sec.gov.
You may also request a copy of these filings at no cost, by writing or telephoning us at the following address:
American Tire Distributors Holdings, Inc.
Attention: Corporate Secretary
12200 Herbert Wayne Court
Suite 150
Huntersville, NC 28078
(704) 992-2000
| Item 1A. | Risk Factors. |
You should carefully consider the risks described below when evaluating our business and operations. The risks described below could materially adversely affect our business, financial condition or results of operations.
Risks Relating to Our Business
Demand for tire products is lower when general economic conditions are weak. Decreases in the availability of consumer credit or consumer spending could adversely affect our business, results of operations or cash flows.
The popularity, supply and demand for tire products changes from year to year based on consumer confidence, the volume of tires reaching the replacement tire market and the level of personal discretionary income, among other factors. Decreases in the availability of consumer credit or decreases in consumer spending as a result of recent economic conditions, including increased unemployment and rising fuel prices, may cause consumers to delay tire purchases, reduce spending on tires or purchase less expensive tires. These changes in consumer behavior could reduce the number of tires we sell, reduce our net sales or cause a change in our product mix toward products with lower per-tire margins, any of which could adversely affect our business, results of operations or cash flows.
Local economic, employment, weather, transportation and other conditions also affect tire sales, on both a wholesale and retail basis. Such fluctuations have been exacerbated by the current economic downturn. We cannot, as a result of these factors and others, assure you that our business will continue to generate sufficient cash flows to finance or grow our business or that our cash needs will not increase. For instance, in 2008, rising fuel costs, increased unemployment and tightening credit caused a decrease in miles driven and consumer spending, both of which we believe caused a decrease in unit sales in the U.S. replacement tire industry. Our business was adversely affected as a result of these industry-wide events and we may be adversely affected by similar events in the future.
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our notes and our other indebtedness.
We have a substantial amount of debt, which requires significant interest and principal payments. As of December 31, 2011, we had approximately $835.8 million of total indebtedness outstanding. Subject to the limits contained in our ABL Facility, the indenture governing our Senior Secured Notes, the indenture governing our
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Senior Subordinated Notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt will increase.
Specifically, our high level of debt could have important consequences to the holders of our notes, including the following:
| • | making it more difficult to satisfy our obligations with respect to our notes and our other debt. Any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under the indenture governing our notes and the agreements governing our other debt; |
| • | limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements; |
| • | requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and general corporate requirements; |
| • | increasing our vulnerability to general adverse economic and industry conditions; |
| • | exposing us to the risk of increased interest rates as a significant amount of our borrowings are at variable rates of interest, including borrowings under our ABL Facility; |
| • | limiting our flexibility in planning for and reacting to changes in the industry in which we compete; |
| • | placing us at a disadvantage compared to other, less leveraged competitors; |
| • | increasing our cost of borrowing; and |
| • | preventing us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control, which would constitute an event of default under the indenture governing our notes. |
In addition, the indentures that govern our notes and our ABL Facility contain restrictive covenants that limit our ability to engage in activities that may be in our long term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
Our business requires a significant amount of cash, and fluctuations in our cash flows may adversely affect our ability to fund our business or acquisitions or satisfy our debt obligations.
Our ability to fund working capital needs and planned capital expenditures and acquisitions and our ability to satisfy our debt obligations depend on our ability to generate cash flows. If we are unable to generate sufficient cash flows from operations to meet these needs, we may need to refinance all or a portion of our existing debt, obtain additional financing or reduce expenditures that we deem necessary to our business. Further, our ability to grow our business and market share through acquisitions may be impaired. We cannot assure you that we would be able to obtain refinancing of this kind on favorable terms or at all or that any additional financing could be obtained. The inability to obtain additional financing could materially and adversely affect our business, financial condition and cash flows.
The industry in which we operate is highly competitive and our failure to effectively compete may adversely affect our results of operations, financial condition and cash flows.
The industry in which we operate is highly competitive. In the United States, replacement tires are sold to consumers through several different outlets, including local independent tire retailers and mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships, service stations and web-based
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marketers. A number of independent wholesale tire distributors compete with us in the regions in which we do business. Most of our tire retailer customers buy products from both us and our competitors. We cannot assure you that we will be able to compete successfully in our markets in the future. Furthermore, some of our competitors, including mass merchandisers, warehouse clubs and tire manufacturers, are significantly better leveraged than us and have greater resources. See Item 1 “Business—Competition.”
We would also be adversely affected if certain channels in the replacement tire market, including mass merchandisers and warehouse clubs, gain market share at the expense of the local independent tire retailers; as our market share in those channels is lower.
We depend on manufacturers to provide us with the products we sell and disruptions in these relationships or manufacturers’ operations could adversely affect our results of operations, financial condition or cash flows.
There are a limited number of tire manufacturers worldwide. Accordingly, we rely on a limited number of tire manufacturers to supply us with the products we sell, including flag and associate brands and our proprietary brands. Our business depends on developing and maintaining productive relationships with these manufacturers. Outside of our proprietary brands, we do not have long-term contracts with these manufacturers, and we cannot assure you that these manufacturers will continue to supply products to us on favorable terms or at all. Many of our supplier manufacturers are free to terminate their business relationship with us with little or no notice and may elect to do so for any reason or no reason. Further, certain of our key suppliers also compete with us as they distribute and sell tires to certain of our tire retailer customers. A move towards this business model among our supplier manufacturers could adversely affect our results of operations, financial condition or cash flows.
In addition, our growth strategy depends in part on our ability to make selective acquisitions, but manufacturers may not be willing to supply the companies we acquire, which could adversely affect our business and results of operations. Furthermore, we could be adversely affected if any significant manufacturer experiences financial, operational, production, supply, labor or quality assurance difficulties that result in a reduction or interruption in our supply, or if they otherwise fail to meet our needs. These risks have been more pronounced recently in light of the economic downturn, commodity price volatility and governmental actions. In addition, our failure to order or promptly pay for sufficient quantities of our products may result in an increase in the unit cost of the products we purchase, a reduction in cooperative advertising and marketing funds, or a manufacturer’s unwillingness or refusal to sell products to us. If we are required to replace our manufacturers, we could experience cost increases, time delays in deliveries and a loss of customers, any of which would adversely affect us. Finally, although most newly manufactured tires are sold in the replacement tire market, manufacturers pay disproportionate attention to automobile manufacturers that purchase tires for new cars. Increased demand from automobile manufacturers could result in cost increases and time delays in deliveries to us, any of which could adversely affect us.
Pricing volatility for raw materials could result in increased costs and may affect our profitability.
Costs for certain raw materials used in manufacturing the products we sell, including natural rubber, chemicals, steel reinforcements, carbon black, synthetic rubber and other petroleum-based products are volatile. Increasing costs for raw materials supplies would result in increased production costs for tire manufacturers. Tire manufacturers typically pass along a portion of their increased costs to us through price increases. While we typically try to pass increased prices and fuel costs through to tire retailers or to modify our activities to mitigate the impact of higher prices, we may not be successful. Failure to fully pass these increased prices and costs through to tire retailers or to modify our activities to mitigate the impact would adversely affect our operating margins and results of operations. Further, even if we do successfully pass along these costs, demand for tires may decline as a result of the increased costs, which would adversely affect us.
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Attempts to expand our distribution services into new domestic geographic markets may adversely affect our business, results of operations, financial condition or cash flows.
We plan to expand our distribution services into new domestic geographic markets, which will require us to make capital investments to extend and develop our distribution infrastructure. We may not achieve profitability in new regions for a period of time. If we do not successfully add new distribution centers and routes, we experience unanticipated costs or delays or we experience competition in such markets that is greater than we expect, our business, results of operations, financial condition or cash flows may be adversely affected.
We may be unable to identify desirable acquisition targets or future acquisitions may not be successful.
We plan to investigate and acquire strategic businesses or product lines with the potential to be accretive to earnings, increase our market penetration, strengthen our market position or enhance our existing product offering. We cannot assure you, however, that we will identify or successfully complete transactions with suitable acquisition candidates in the future. A failure to identify and acquire desirable acquisition targets may slow growth in our annual unit volume, which could adversely affect our existing business, financial condition, results of operations or cash flows.
We also cannot assure you that completed acquisitions will be successful. If an acquired business fails to operate as anticipated or cannot be successfully integrated with our existing business, our financial condition, results of operations or cash flows could be adversely affected.
Future acquisitions could require us to issue additional debt or equity.
If we were to undertake a substantial acquisition, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or other arrangements. We cannot assure you that the necessary acquisition financing would be available to us on acceptable terms if and when required, particularly because we are currently highly leveraged, which may make it difficult or impossible for us to secure financing for acquisitions. If we were to undertake an acquisition by issuing equity securities or equity-linked securities, the acquisition may have a dilutive effect on the interests of the holders of our common shares. If we were to undertake an acquisition by incurring additional debt, the risks associated with our already substantial level of indebtedness could intensify.
The failure of the Company’s information technology systems could disrupt the Company’s business operations which could have a material adverse effect on the Company’s business, financial condition and/or results of operations.
The operation of our business depends on our information technology systems. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in, among other things, transaction errors, processing inefficiencies, loss of data and the loss of sales and customers, which could cause our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, systems failure, system conversions, security breaches, cyber-attacks, viruses and/or human error. In any such event, we could be required to make a significant investment to fix or replace information technology systems, and we could experience interruptions in our ability to service our customers. Any such damage or interruption could have a material adverse effect on our business, financial condition and/or results of operations.
Our business strategy relies increasingly upon online commerce. If our customers were unable to access any of our websites, such as ATDOnline®, our business and operations could be disrupted and our operating results would be adversely affected.
Customers’ access to our websites directly affects the volume of orders we fulfill and our revenues. Approximately 65% of our total order volume in fiscal 2011 was placed online using ATDOnline®, up from
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approximately 56% in fiscal 2007. We expect our Internet-generated business to continue to grow as a percentage of overall sales. To be successful, we must ensure that ATDOnline® is well supported and functional on a 24/7 basis. If we are not able to continuously make these ordering tools available to our customers, there could be a decline in online orders and a decrease in our net sales.
We may not successfully execute our plan to grow our TireBuyer.com® service or we may not attain the growth we expect from our TireBuyer.com® service.
In 2009, we launched TireBuyer.com®, an Internet site which enables our independent tire retailer customers to access the online tire consumer market and sell to consumers over the Internet. We expect that by growing and developing our TireBuyer.com® service, we can leverage our tire retailer customer footprint to capture a greater share of the Internet tire market. For TireBuyer.com® to be successful, however, we must ensure that it is well supported and functional on a 24/7 basis. In addition, TireBuyer.com® faces significant competition from other online participants, some of which have significantly larger Internet market share, longer Internet market presence, greater Internet marketing experience and better name recognition than we enjoy. We may fail to successfully grow, develop or support the TireBuyer.com® service or we may not attain the growth or benefits we expect TireBuyer.com® to provide us due to strong competition or other factors, which may adversely affect our business, financial condition or results of operations.
Because the majority of our inventory is stored in our warehouse distribution centers, a disruption in our warehouse distribution centers could adversely affect our results of operations by increasing our cost and distribution lead times.
We maintain the majority of our inventory in 98 distribution centers. Serious disruptions affecting these distribution centers or the flow of products in or out of these centers, including disruptions from inclement weather, fire, earthquakes or other causes, could damage a significant portion of our inventory and could adversely affect our ability to distribute our products to tire retailers in a timely manner or at a reasonable cost. During the time that it may take us to reopen or replace a distribution center, we could incur significantly higher costs and longer lead times associated with distributing our products to tire retailers, which could adversely affect our reputation, as well as our results of operations and our customer relationships.
If we experience problems with our fleet of trucks or are otherwise unable to make timely deliveries of our products to our customers, our business and reputation could be adversely affected.
We use a fleet of trucks to deliver our products to our customers, most of which are leased from third parties. We are subject to the risks associated with product delivery, including inclement weather, disruptions in the transportation infrastructure, disruptions in our lease arrangements, availability and price of fuel, and liabilities arising from accidents to the extent we are not covered by insurance. Our failure to deliver tires and other products in a timely and accurate manner could harm our reputation and brand, which could adversely affect our business and reputation.
Participants in our Tire Pros® franchise program are independent operators and we have limited influence over their operations. Our Tire Pros® franchisees could take actions that could harm the value of the Tire Pros® franchise, or could be unwilling or unable to continue to participate in the program, which could materially and adversely affect our business, results of operations, financial condition and cash flows.
Participants in our Tire Pros® franchise program are independent operators and have significant discretion in running their operations. Their employees are not our employees. Franchisees could take actions that subject them to legal and financial liabilities, and we may, regardless of the actual validity of such a claim, be named as a party in an action relating to, or be held liable for, the conduct of our franchisees if it is shown that we exercise a sufficient level of control over a particular franchisee’s operation. In addition, the quality of franchise operations may be diminished by any number of factors beyond our control. We do not offer financial or management
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services to our franchisees, which may not have sufficient resources or expertise to operate their businesses at the level we would expect. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements, we may not be able to identify problems and take action quickly enough and, as a result, the image and reputation of Tire Pros® may suffer, fewer tire retailers may become Tire Pros® franchisees and existing participants may leave the Tire Pros® program.
In addition, our franchise agreements have limited durations and our franchisees may not be willing or able to renew their franchise agreements with us. For example, a franchisee may decide not to renew due to a lawsuit or disagreement with us, dissatisfaction with the Tire Pros® program or a perception that the Tire Pros® program conflicts with other business interests. Similarly, a franchisee may be unable to renew its franchise agreement with us due to a bankruptcy or restructuring event or the failure to secure a real estate lease renewal, among other factors.
Our business, business prospects, results of operations, financial condition and cash flows could be adversely affected if we are forced to defend claims made against our franchisees, if others seek to hold us accountable for our franchisees’ actions, if the Tire Pros® program does not grow as we expect or if the Tire Pros® franchise program is not otherwise successful.
We could become subject to additional government regulation which could cause us to incur significant liabilities.
We are currently subject to federal and state laws and other regulations that apply to our business, including laws and regulations that affect tire distribution and sale, safety matters and tire specifications. Our costs of complying with these laws and regulations, including our operating expenses and liabilities arising under governmental regulations, may be increased in the future and additional fees and taxes may be imposed by governmental authorities. Future regulatory requirements, such as required disclosure of made-on dates for tires or an expansion of the Transportation Recall Enhancement Accountability and Documentation (TREAD) Act to cover tire distributors, could cause a material increase in our liabilities or operating expenses, which would materially and adversely affect our business, results of operations, financial condition and cash flows.
Loss of key personnel or failure to attract and retain highly qualified personnel could adversely affect our results of operations, financial condition and cash flows.
We are dependent on the continued services of our senior management team. We may not be able to retain our existing senior management, fill new positions or vacancies created by expansion or turnover, or attract additional senior management personnel. We believe the loss of such key personnel could adversely affect our financial performance. In addition, our ability to manage our anticipated growth will depend on our ability to identify, hire and retain qualified management personnel. We cannot assure you that we will attract and retain sufficient qualified personnel to meet our business needs.
Consolidation among customers may reduce our importance as a holder of sizable inventory, which could adversely affect our business and results of operations.
Our success has been dependent, in part, on the fragmented customer base in our industry. Due to the small size of most tire retailers, they cannot support substantial inventory positions and thus, as our size permits us to maintain a sizable inventory, we fill an important role. We do not generally have long-term arrangements with our tire retailer customers and they can cease doing business with us at any time. If a trend towards consolidation among tire retailers develops in the future, it could reduce our importance and reduce our revenues, margins and earnings. While the local independent tire retailer share of the replacement tire market has been relatively stable in the recent past, the share of larger tire retailers has grown at the expense of smaller tire retailers. If that trend continues, the number of tire retailers able to handle sizable inventory could increase, reducing the importance of distributors to the local independent tire retailer market.
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We could be subject to product liability, personal injury or other litigation claims that could adversely affect our business, results of operations and financial condition.
Purchasers of our products, or their employees or customers, could be injured or suffer property damage from exposure to, or defects in, products we sell or distribute, or have sold or distributed in the past. We could be subject to claims, including personal injury claims. These claims may not be covered by insurance or tire manufacturers may be unwilling or unable to assume the defense of these claims, as they have in the past. In addition, if any tire manufacturer encounters financial difficulty or ceases to operate, it may not be able to assume the defense of such claims. We also may be subject to claims due to injuries caused by our truck drivers which may not be covered by insurance. As a result, the defense, settlement or successful assertion of any future product liability, personal injury or other litigation claims could cause us to incur significant costs and could have an adverse effect on our business, financial condition, results of operations or cash flows.
We could be adversely affected by compliance with environmental regulations and could incur costs relating to environmental matters, particularly those relating to our distribution centers.
We are subject to various federal, state, local and foreign environmental laws and regulations, as well as health and safety laws and regulations. Environmental laws are complex, change frequently and have tended to become more stringent over time. Compliance costs associated with current and future environmental and health and safety laws, particularly as they relate to our distribution centers, as well as liabilities arising from past or future releases of, or exposure to, hazardous substances, may adversely affect our business, results of operations, financial condition or cash flows.
Failure to maintain effective internal control over financial reporting could materially adversely affect our business, results of operations and financial condition.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Changes to our business will necessitate ongoing changes to our internal control systems and processes. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain adequate internal controls, including any required new or improved controls, we may be unable to provide financial information in a timely and reliable manner and might be subject to sanctions or investigation by regulatory authorities such as the SEC or the Public Company Accounting Oversight Board. Any such action could adversely affect our financial results or investors’ confidence in us and could cause the price of our securities to fall.
If we determine that our goodwill and other intangible assets have become impaired, we may record significant impairment charges, which would adversely affect our results of operations.
Goodwill and other intangible assets represent a significant portion of our assets. Goodwill is the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill and intangible assets may increase as a result of future acquisitions. We review our goodwill and intangible assets at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions and adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business. Any impairment of goodwill or other intangible assets would result in a non-cash charge against earnings, which would adversely affect our results of operations.
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Affiliates of the Sponsor indirectly own substantially all our equity interests and may have conflicts of interest with us or the holders of our notes.
As a result of the Merger, investment funds affiliated with the Sponsor indirectly own substantially all of our capital stock, and the Sponsor’s designees hold a majority of the seats on our indirect parent company’s board of directors. As a result, affiliates of the Sponsor will have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders regardless of whether holders of the notes believe that any such transactions are in their own best interests. For example, affiliates of the Sponsor could collectively cause us to make acquisitions that increase the amount of our indebtedness or to sell assets, or could cause us to issue additional capital stock or declare dividends. So long as investment funds affiliated with the Sponsor continue to indirectly own a significant amount of the outstanding shares of our capital stock, affiliates of the Sponsor will continue to be able to strongly influence or effectively control our decisions. The indenture governing our notes and our ABL Facility permit us to pay advisory and other fees, dividends and make other restricted payments to the Sponsor under certain circumstances and our arrangements with the Sponsor and its affiliates require us to pay certain fees on quarterly basis. See Item 13 “Certain Relationships and Related Party Transactions and Director Independence.” In addition, the Sponsor has no obligation to provide us with any additional debt or equity financing.
Additionally, the Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or that supply us with goods and services. The Sponsor may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. You should consider that the interests of the Sponsor may differ from your interests in material respects.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Borrowings under our ABL Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Our principal properties are geographically situated to meet sales and operating requirements. We believe that our properties have been well maintained, are generally in good condition and are suitable for the conduct of our business. As of December 31, 2011, we operate a total of 98 distribution centers located in 39 states, aggregating approximately 9.6 million square feet. Of these centers, two are owned by us, the remaining properties are leased. We also lease our principal executive office, located in Huntersville, North Carolina. This lease is scheduled to expire in 2022. In addition, we have some non-essential properties, principally acquired in the Am-Pac Tire Dist., Inc. acquisition, which we are attempting to sell or sublease.
Several of our property leases contain provisions prohibiting a change of control of the lessee or permitting the landlord to terminate the lease or increase rent upon a change of control of the lessee. Based primarily upon our belief that (i) we maintain good relations with the substantial majority of our landlords, (ii) most of our leases are at market rates and (iii) we have historically been able to secure suitable leased property at market rates when needed, we believe that these provisions will not have a material adverse effect on our business or financial position.
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| Item 3. | Legal Proceedings. |
We are involved from time to time in various lawsuits, including 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 4. | Mine Safety Disclosures. |
Not applicable.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
As of March 5, 2012, there was one holder of record of our common stock. There is no public trading market for our common stock.
As of December 31, 2011, we have not declared or paid dividends on our common stock since our incorporation in 2005, and we have no intention to declare or pay dividends in the foreseeable future. In addition, our ability to pay dividends is restricted by certain covenants contained in our ABL Facility and in the indentures that govern our Senior Subordinated Notes and Senior Secured Notes and may be further restricted by any future indebtedness that we incur. Our business is conducted through our subsidiaries. Dividends from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.
Information regarding securities authorized for issuance under equity compensation plans is set forth in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K.
| Item 6. | Selected Financial Data. |
On May 28, 2010, as a result of the Merger, Holdings was acquired by affiliates of TPG and certain co-investors. In the following table, periods prior to May 28, 2010 reflect the financial position, results of operations and changes in financial position of Holdings and its consolidated subsidiaries prior to the Merger (the “Predecessor”). Periods after May 28, 2010 reflect the financial position, results of operations, and changes in financial position of Holdings and its consolidated subsidiaries after the Merger (the “Successor”).
The following table sets forth both the Predecessor and Successor selected historical consolidated financial data for the periods indicated. Selected historical financial data for fiscal years 2007, 2008, and 2009 and the five months ended May 28, 2010 is derived from the Predecessor’s consolidated financial statements as of and for those periods. Selected historical financial data for the seven months ended January 1, 2011 and fiscal year 2011 is derived from the Successor’s consolidated financial statements as of and for those periods.
Both the Predecessor’s and the Successor’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 certain fiscal years will not be exactly comparable to the prior or subsequent fiscal years. The 2007 fiscal year, which ended December 29, 2007, and the 2009 fiscal year, which ended January 2, 2010, contains operating results for 52 weeks. The 2008 fiscal year, which ended January 3, 2009, contains operating results for 53 weeks. The five months ended May 28, 2010 contains operating results for 21 weeks. The seven months ended January 1, 2011 contains operating results for 31 weeks. The 2011 fiscal year, which ended December 31, 2011, contains operating results for 52 weeks. The following selected historical consolidated financial information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included under Item 8 of this report.
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| Successor | Predecessor | |||||||||||||||||||||||||
| Fiscal Year 2011 (1) |
Seven Months Ended January 1, 2011 (2) |
Five Months Ended May 28, 2010 |
Fiscal Year 2009 |
Fiscal Year 2008 (3) |
Fiscal Year 2007 (4) |
|||||||||||||||||||||
| Dollars in thousands | ||||||||||||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||||||||
| Net sales |
$ | 3,050,240 | $ | 1,525,249 | $ | 934,925 | $ | 2,171,787 | $ | 1,960,844 | $ | 1,877,480 | ||||||||||||||
| Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
2,535,020 | 1,316,679 | 775,678 | 1,797,905 | 1,605,064 | 1,552,975 | ||||||||||||||||||||
| Selling, general and administrative expenses |
437,110 | 228,513 | 135,146 | 306,189 | 274,412 | 258,347 | ||||||||||||||||||||
| Transaction expenses |
3,946 | 1,315 | 42,608 | — | — | — | ||||||||||||||||||||
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| Operating income (loss) |
74,164 | (21,258 | ) | (18,507 | ) | 67,693 | 81,368 | 66,158 | ||||||||||||||||||
| Other income (expense): |
||||||||||||||||||||||||||
| Interest expense |
(67,580 | ) | (37,391 | ) | (32,669 | ) | (54,415 | ) | (59,169 | ) | (61,633 | ) | ||||||||||||||
| Other, net |
(2,110 | ) | (958 | ) | (127 | ) | (1,020 | ) | (1,155 | ) | (285 | ) | ||||||||||||||
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| Income (loss) from operations before income taxes |
4,474 | (59,607 | ) | (51,303 | ) | 12,258 | 21,044 | 4,240 | ||||||||||||||||||
| Income tax provision (benefit) |
4,357 | (23,295 | ) | (15,227 | ) | 7,326 | 11,373 | 2,867 | ||||||||||||||||||
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| Net income (loss) |
$ | 117 | $ | (36,312 | ) | $ | (36,076 | ) | $ | 4,932 | $ | 9,671 | $ | 1,373 | ||||||||||||
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| Successor | Predecessor | |||||||||||||||||||||||||
| Fiscal Year 2011 (1) |
Seven Months Ended January 1, 2011 (2) |
Five Months Ended May 28, 2010 |
Fiscal Year 2009 |
Fiscal Year 2008 (3) |
Fiscal Year 2007 (4) |
|||||||||||||||||||||
| Dollars in thousands | ||||||||||||||||||||||||||
| Other Financial Data: |
||||||||||||||||||||||||||
| Cash flows provided by (used in): |
||||||||||||||||||||||||||
| Operating activities |
$ | (91,006 | ) | $ | (23,439 | ) | $ | 28,106 | $ | 131,105 | $ | (54,086 | ) | $ | 19,119 | |||||||||||
| Investing activities |
(92,249 | ) | (17,237 | ) | (7,523 | ) | (4,620 | ) | (81,671 | ) | (29,860 | ) | ||||||||||||||
| Financing activities |
186,263 | 40,405 | (15,631 | ) | (127,690 | ) | 139,503 | 11,890 | ||||||||||||||||||
| Depreciation and amortization |
78,071 | 40,905 | 14,707 | 32,078 | 25,530 | 28,096 | ||||||||||||||||||||
| Capital expenditures |
31,044 | 12,381 | 6,424 | 12,757 | 13,424 | 8,648 | ||||||||||||||||||||
| EBITDA (5) |
150,125 | 18,689 | (3,927 | ) | 98,751 | 105,743 | 93,969 | |||||||||||||||||||
| Adjusted EBITDA (5) |
164,255 | 87,974 | 45,696 | 101,035 | 106,994 | 95,397 | ||||||||||||||||||||
| Ratio of earnings to fixed charges (6) |
1.1x | — | — | 1.2x | 1.3x | 1.1x | ||||||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 14,979 | $ | 11,971 | $ | 7,290 | $ | 8,495 | $ | 4,749 | ||||||||||||||||
| Working capital (7) |
447,133 | 270,332 | 197,317 | 288,313 | 186,556 | |||||||||||||||||||||
| Total assets |
2,302,563 | 2,057,348 | 1,300,624 | 1,390,860 | 1,210,696 | |||||||||||||||||||||
| Total debt (8) |
835,808 | 652,544 | 549,576 | 642,434 | 539,853 | |||||||||||||||||||||
| Total redeemable preferred stock |
— | — | 26,600 | 23,941 | 21,450 | |||||||||||||||||||||
| Total stockholders’ equity |
655,819 | 651,446 | 230,647 | 224,486 | 216,395 | |||||||||||||||||||||
| (1) | Reflects the acquisition of Bowlus Service Company d/b/a North Central Tire in April 2011 |
| (2) | Reflects the acquisition of Lisac’s of Washington, Inc. and Tire Wholesalers, Inc. in December 2010 |
| (3) | Reflects the acquisition of Remington Tire Distributors, Inc., d/b/a Gray’s Wholesale Tire Distributors in October 2008 and the acquisition of Am-Pac Tire Dist., Inc. in December 2008 |
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| (4) | Reflects the acquisition of Jim Paris Tire City of Montebello, Inc. in May 2007, the acquisition of the distribution assets of Martino Tire Company in July 2007 and the acquisition of 6H-Homann, LLC and Homann Tire, LTD in December 2007 |
| (5) | EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA as further adjusted to reflect the items set forth in the table below. The presentation of EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We present EBITDA and Adjusted EBITDA because we believe they provide a more complete understanding of the factors and trends affecting our business than GAAP measures alone. We also believe that such measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing items that we do not believe are indicative of our core operating performance. In addition, the indentures governing our senior notes use a measure similar to Adjusted EBITDA to measure our compliance with certain covenants. Our board of directors also uses Adjusted EBITDA in determining compensation for our management. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers because not all issuers calculate Adjusted EBITDA in the same manner. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same or similar to some of the adjustments set forth below. Neither EBITDA nor Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. |
The following tables show the calculation of EBITDA and Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss):
| Successor | Predecessor | |||||||||||||||||||||||||
| Fiscal Year 2011 (1) |
Seven Months Ended January 1, 2011 (2) |
Five Months Ended May 28, 2010 |
Fiscal Year 2009 |
Fiscal Year 2008 (3) |
Fiscal Year 2007 (4) |
|||||||||||||||||||||
| In thousands | ||||||||||||||||||||||||||
| Net income (loss) |
$ | 117 | $ | (36,312 | ) | $ | (36,076 | ) | $ | 4,932 | $ | 9,671 | $ | 1,373 | ||||||||||||
| Depreciation and amortization |
78,071 | 40,905 | 14,707 | 32,078 | 25,530 | 28,096 | ||||||||||||||||||||
| Interest expense |
67,580 | 37,391 | 32,669 | 54,415 | 59,169 | 61,633 | ||||||||||||||||||||
| Income tax provision (benefit) |
4,357 | (23,295 | ) | (15,227 | ) | 7,326 | 11,373 | 2,867 | ||||||||||||||||||
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| EBITDA |
$ | 150,125 | $ | 18,689 | $ | (3,927 | ) | $ | 98,751 | $ | 105,743 | $ | 93,969 | |||||||||||||
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| Successor | Predecessor | |||||||||||||||||||||||||
| Fiscal Year 2011 (1) |
Seven Months Ended January 1, 2011 (2) |
Five Months Ended May 28, 2010 |
Fiscal Year 2009 |
Fiscal Year 2008 (3) |
Fiscal Year 2007 (4) |
|||||||||||||||||||||
| In thousands | ||||||||||||||||||||||||||
| EBITDA |
$ | 150,125 | $ | 18,689 | $ | (3,927 | ) | $ | 98,751 | $ | 105,743 | $ | 93,969 | |||||||||||||
| Management fee |
4,624 | 2,352 | 125 | 500 | 500 | 500 | ||||||||||||||||||||
| Incentive compensation |
4,115 | 3,706 | 5,892 | 326 | — | — | ||||||||||||||||||||
| Transaction fees |
3,946 | 1,315 | 42,608 | — | — | — | ||||||||||||||||||||
| Inventory step-up |
— | 58,797 | — | — | — | — | ||||||||||||||||||||
| Other |
1,445 | 3,115 | 998 | 1,458 | 751 | 928 | ||||||||||||||||||||
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| Adjusted EBITDA |
$ | 164,255 | $ | 87,974 | $ | 45,696 | $ | 101,035 | $ | 106,994 | $ | 95,397 | ||||||||||||||
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| (6) | For purposes of these ratios, (i) earnings have been calculated by adding interest expense and the estimated interest portion of rental expense to earnings before income taxes and (ii) fixed charges are comprised of |
22
| interest expense and capitalized interest, if any. In the five months ended May 28, 2010 and the seven months ended January 1, 2011, earnings were insufficient to cover fixed charges by approximately $51.3 million and $59.6 million, respectively. |
| (7) | Working capital is defined as current assets less current liabilities |
| (8) | Total debt is the sum of current maturities of long-term debt, non-current portion of long-term debt and capital lease obligations |
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| Item 7. | 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” and “our” 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 8 of this report. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecast and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See Item 1A “Risk Factors” and “Cautionary Statements on Forward-Looking Information.”
Company Overview
We are the leading replacement tire distributor in the United States, providing a critical range of services to enable tire retailers to effectively service and grow sales to consumers. Through our network of 98 distribution centers, we offer access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 60,000 customers. The critical range of services we provide includes frequent and timely delivery of inventory as well as business support services such as credit, training, access to consumer market data and the administration of tire manufacturer affiliate programs. In addition, our customers have access to a leading online ordering and reporting system as well as a website that enables our tire retailer customers to participate in the Internet marketing of tires to consumers. We estimate that our share of the replacement passenger and light truck tire market in the United States (U.S.) is approximately 10%, up from approximately 1% in 1996, with our largest customer and top ten customers accounting for less than 1.9% and 8.7%, respectively, of our net sales.
We believe we distribute the broadest product offering in our industry, supplying our customers with the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers —Bridgestone, Continental, Goodyear and Michelin — as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. 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. 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. replacement tire market has historically experienced stable growth and favorable pricing dynamics. From 1955 through 2011, U.S. replacement tire unit shipments increased by an average of approximately 2.7% per year. However, during challenging economic periods, consumers may opt to defer replacement tire purchases or purchase less costly brand tires. Beginning with the onset of the economic downturn in 2008, increased economic uncertainty, unemployment and rising fuel prices led to negative growth during 2008 and 2009 in the U.S. replacement tire market. The economic environment showed signs of stabilization during 2010, ending the negative growth trend with U.S. replacement tire unit shipments increasing 7.8% over 2009. However, during 2011, U.S. replacement tire unit shipments were down slightly compared to 2010 as slow economic growth, persistently high fuel cost and a decrease in miles driven impacted the U.S. replacement tire market.
Going forward, we believe growth in the U.S. replacement tire market will continue to be driven by favorable underlying dynamics, including:
| • | increases in the number and average age of passenger cars and light trucks; |
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| • | increases in the number of miles driven; |
| • | increases in the number of licensed drivers as the U.S. population continues to grow; |
| • | 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.
Acquisition of Holdings
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, we were acquired by TPG 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, we conducted cash tender offers for our existing outstanding debt securities, all of which were subsequently purchased and retired. Although we continue to operate as the same legal entity subsequent to the acquisition, periods prior to May 28, 2010 reflect our financial position, results of operations, and changes in financial position prior to the Merger (the “Predecessor”) and periods after May 28, 2010 reflect our financial position, results of operations, and changes in financial position after the Merger (the “Successor”). See Note 3 in Notes to Consolidated Financial Statements for additional information.
Under the guidance provided by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Under push-down accounting, certain transactions incurred by the acquirer, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of our common stock has been pushed down from TPG to us. In addition, the Merger was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations. The guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, periods prior to the Merger are not comparable to subsequent periods due to the difference in the basis of presentation of purchase accounting as compared to historical cost.
Recent Developments
During 2011, we continued to execute on our plan to expand our distribution services into new domestic geographic markets. During this time, we opened new distribution centers in Seattle, WA, Chicago, IL, Detroit, MI, Cleveland, OH, Totowa, NJ, Philadelphia, PA, Boston, MA and Wichita, KS. In addition, we opened distribution centers in Cincinnati, OH and Indianapolis, IN during the second half of 2010. We will continue to evaluate additional domestic geographic markets during 2012 and beyond.
We use interest rate swap agreements to hedge our exposure to changes in our variable interest rate debt. On September 23, 2011, ATDI entered into two interest rate swap agreements that cover an aggregate notional amount of $100.0 million, of which $50.0 million will expire in September 2014 and $50.0 million will expire in
25
September 2015. In addition, on February 24, 2011, ATDI entered into two interest rate swap agreements that cover an aggregate notional amount of $75.0 million, of which $25.0 million will expire in February 2012 and $50.0 million will expire in February 2013.
On June 6, 2011, we entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. We maintain the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase.
On April 29, 2011, we completed the purchase of 100% of the capital stock of the Bowlus Service Company d/b/a North Central Tire (“NCT”). NCT owned and operated three distribution centers in Canton, OH, Cincinnati, OH and Rochester, NY, serving over 2,700 customers. The acquisition was funded through our ABL Facility. The purchase of NCT expanded our market position in Ohio and Western New York.
On December 10, 2010, we completed the purchase of substantially all the assets of Lisac’s of Washington, Inc. (“Lisac’s”) and 100% of the capital stock of Tire Wholesalers, Inc. (“Tire Wholesalers”). Tire Wholesalers operated one distribution center in Kent, WA, which serviced over 750 customers in the area and Lisac’s operated tire distribution centers in Portland, Oregon and Spokane, Washington, serving over 1,400 customers in the area. The aggregate purchase price of these acquisitions was approximately $11 million, which was funded through our ABL Facility. The purchase of Lisac’s and Tire Wholesalers expanded our market position in the Northwestern United States.
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 certain fiscal years will not be exactly comparable to other fiscal years. The 2011 fiscal year for the Successor, which ended December 31, 2011 contains operating results for 52 weeks. The seven months ended January 1, 2011 for the Successor contains operating results for 31 weeks while the five months ended May 28, 2010 for the Predecessor contains operating results for 21 weeks. The 2009 fiscal year for the Predecessor, which ended January 2, 2010, contains operating results for 52 weeks.
Fiscal 2011 for the Successor Compared to Seven Months Ended January 1, 2011 for the Successor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the fiscal year ended December 31, 2011 for the Successor are compared and discussed in relation to the seven months ended January 1, 2011 for the Successor.
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The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
| Successor | Successor | |||||||||||||||||||||||
| Fiscal Year Ended |
Seven Months Ended |
Period Over Period Change |
Period Over Period % Change |
Percentage of Net Sales For the Respective Period Ended |
||||||||||||||||||||
| December 31, | January 1, | Favorable | Favorable | December 31, | January 1, | |||||||||||||||||||
| In thousands |
2011 | 2011 | (unfavorable) | (unfavorable) | 2011 | 2011 | ||||||||||||||||||
| Net sales |
$ | 3,050,240 | $ | 1,525,249 | $ | 1,524,991 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of goods sold |
2,535,020 | 1,316,679 | (1,218,341 | ) | -92.5 | % | 83.1 | % | 86.3 | % | ||||||||||||||
| Selling, general and administrative expenses |
437,110 | 228,513 | (208,597 | ) | -91.3 | % | 14.3 | % | 15.0 | % | ||||||||||||||
| Transaction expenses |
3,946 | 1,315 | (2,631 | ) | -200.1 | % | 0.1 | % | 0.1 | % | ||||||||||||||
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| Operating income (loss) |
74,164 | (21,258 | ) | 95,422 | 448.9 | % | 2.4 | % | -1.4 | % | ||||||||||||||
| Other income (expense): |
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| Interest expense |
(67,580 | ) | (37,391 | ) | (30,189 | ) | -80.7 | % | -2.2 | % | -2.5 | % | ||||||||||||
| Other, net |
(2,110 | ) | (958 | ) | (1,152 | ) | -120.3 | % | -0.1 | % | -0.1 | % | ||||||||||||
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| Income (loss) from operations before income taxes |
4,474 | (59,607 | ) | 64,081 | 107.5 | % | 0.1 | % | -3.9 | % | ||||||||||||||
| Income tax provision (benefit) |
4,357 | (23,295 | ) | (27,652 | ) | -118.7 | % | 0.1 | % | -1.5 | % | |||||||||||||
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| Net income (loss) |
$ | 117 | $ | (36,312 | ) | $ | 36,429 | 100.3 | % | 0.0 | % | -2.4 | % | |||||||||||
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Net Sales
Net sales for fiscal 2011 were $3,050.2 million, a $1,525.0 million or 100.0% increase compared with the seven months ended January 1, 2011. The increase was directly attributable to the comparison of operating results of a twelve month period with a seven month period. In addition to the increase in tire unit sales attributable to the difference in the number of months in the comparable period, passenger and light truck tire pricing increased by 8.7%. The increase was driven primarily by tire manufacturer price increases. As well, the combined results of opening new distribution centers and the integration of our recent acquisitions contributed $218.8 million during fiscal 2011. However, these increases were partially offset by lower equipment sales of $26.8 million during fiscal 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
Cost of Goods Sold
Cost of goods sold for fiscal 2011 were $2,535.0 million, a $1,218.3 million or a 92.5% increase compared with the seven months ended January 1, 2011. The increase was directly attributable to the comparison of operating results of a twelve month period with a seven month period. Cost of goods sold as a percentage of net sales was 83.1% and 86.3% for fiscal 2011 and the seven months ended January 1, 2011, respectively. However, the seven months ended January 1, 2011 includes $58.8 million related to the non-recurring amortization of the inventory step-up recorded in connection with the Merger. The charge had a 3.9 point impact on cost of goods sold as a percentage of net sales. Other factors that contributed to the increase in cost of goods sold included higher net tire pricing resulting from tire manufacturer price increases, higher tire unit sales coupled with the incremental tire units sold through new distribution centers as well as the integration of our recent acquisitions. However, these increases were partially offset by the reduction in net sales within our equipment product offering during fiscal 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
27
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2011 were $437.1 million, a $208.6 million or a 91.3% increase compared with the seven months ended January 1, 2011. The increase in selling, general and administrative expenses was primarily attributable to the comparison of operating results for a twelve month period with a seven month period. In addition to the increase in costs attributable to the difference in the number of months in the comparable period, incremental costs associated with our new distribution centers opened during the last twelve months were $21.8 million. Also, the expansion of several of our distribution centers in order to better service our existing customers as well as the integration of our fourth quarter 2010 and second quarter 2011 acquisitions contributed to the increase. Other factors included additional amortization of $3.9 million related to intangible assets acquired, a higher price per gallon of fuel and an increase in salaries and wage expense due to higher sales volume and related headcount. Despite the increase in expenses during 2011, operating efficiencies and improved operating leverage positively impacted our percentage of net sales. As a result, selling, general and administrative expenses as a percent of net sales decreased to 14.3% from 15.0% for fiscal 2011 and the seven months ended January 1, 2011, respectively.
Transaction Expenses
Transaction expenses for fiscal 2011 were $3.9 million, which primarily related to acquisition fees as well as costs incurred in connection with both the amendment of our ABL Facility and the registration of our Senior Secured Notes with the SEC. In addition, we incurred $1.1 million for exit costs associated with our decision to relocate two existing distribution centers into two expanded distribution centers. During the seven months ended January 1, 2011, transaction expenses of $1.1 million were incurred relating to the Merger.
Interest Expense
Interest expense for fiscal 2011 was $67.6 million, a $30.2 million or 80.7% increase compared with the seven months ended January 1, 2011. The increase was primarily attributable to the comparison of operating results of a twelve month period with a seven month period. During fiscal 2011, higher average debt levels on our ABL Facility were partially offset by lower associated interest rates. In addition, fiscal 2011 included $0.9 million associated with the fair value changes of the 2011 Swaps.
Provision (Benefit) for Income Taxes
Our income tax provision for fiscal 2011 was $4.4 million. The provision, which was based on pre-tax income of $4.5 million, includes $54.6 million of amortization expense that is not deductible for income tax purposes. Our income tax benefit for the seven months ended January 1, 2011 was $23.3 million, which was based on a pre-tax loss of $59.6 million, primarily resulting from the non-recurring amortization of the inventory step-up adjustment as well as the additional amortization expense related to the valuation of intangible assets acquired, both recorded in connection with the Merger. Our effective tax rate for fiscal 2011 and the seven months ended January 1, 2011 was 97.4% and 39.1%, respectively. The effective tax rate for fiscal 2011 is higher than the statutory tax rate primarily due to an increase in our state effective tax rate, a result based on our growing presence in jurisdictions with higher than average tax rates, and the related impact on our net deferred tax liabilities. During the seven months ended January 1, 2011, we decreased the valuation allowance related to state net operating losses as well as benefited from certain permanent differences relating to the Merger which were deductible for income tax purposes.
Fiscal 2011 for the Successor Compared to Five Months Ended May 28, 2010 for the Predecessor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the fiscal year ended December 31, 2011 for the Successor are compared and discussed in relation to the five months ended May 28, 2010 for the Predecessor.
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The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
| Successor | Predecessor | |||||||||||||||||||||||||
| Fiscal Year Ended December 31, 2011 |
Five Months Ended May 28, 2010 |
Period
Over Period Change Favorable (unfavorable) |
Period Over Period % Change Favorable (unfavorable) |
Percentage of Net Sales For the Respective Period Ended |
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| December 31, | May 28, | |||||||||||||||||||||||||
| In thousands |
2011 | 2010 | ||||||||||||||||||||||||
| Net sales |
$ | 3,050,240 | $ | 934,925 | $ | 2,115,315 | 226.3 | % | 100.0 | % | 100.0 | % | ||||||||||||||
| Cost of goods sold |
2,535,020 | 775,678 | (1,759,342 | ) | -226.8 | % | 83.1 | % | 83.0 | % | ||||||||||||||||
| Selling, general and administrative expenses |
437,110 | 135,146 | (301,964 | ) | -223.4 | % | 14.3 | % | 14.5 | % | ||||||||||||||||
| Transaction expenses |
3,946 | 42,608 | 38,662 | 90.7 | % | 0.1 | % | 4.6 | % | |||||||||||||||||
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|
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| Operating income (loss) |
74,164 | (18,507 | ) | 92,671 | 500.7 | % | 2.4 | % | -2.0 | % | ||||||||||||||||
| Other income (expense): |
||||||||||||||||||||||||||
| Interest expense |
(67,580 | ) | (32,669 | ) | (34,911 | ) | -106.9 | % | -2.2 | % | -3.5 | % | ||||||||||||||
| Other, net |
(2,110 | ) | (127 | ) | (1,983 | ) | -1561.4 | % | -0.1 | % | 0.0 | % | ||||||||||||||
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| Income (loss) from operations before income taxes |
4,474 | (51,303 | ) | 55,777 | 108.7 | % | 0.1 | % | -5.5 | % | ||||||||||||||||
| Income tax provision (benefit) |
4,357 | (15,227 | ) | (19,584 | ) | -128.6 | % | 0.1 | % | -1.6 | % | |||||||||||||||
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| Net income (loss) |
$ | 117 | $ | (36,076 | ) | $ | 36,193 | 100.3 | % | 0.0 | % | -3.9 | % | |||||||||||||
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||||||||||||||
Net Sales
Net sales for fiscal 2011 were $3,050.2 million, a $2,115.3 or 226.3% increase compared with the five months ended May 28, 2010. The increase was directly attributable to the comparison of operating results of a twelve month period with a five month period. In addition to the increase in tire unit sales attributable to the difference in the number of months in the comparable period, passenger and light truck tire pricing increased by 15.3%. The increase was driven primarily by tire manufacturer price increases. As well, the combined results of opening new distribution centers and the integration of our recent acquisitions contributed $218.8 million during fiscal 2011. However, these increases were partially offset by lower equipment sales of $16.4 million during fiscal 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering.
Cost of Goods Sold
Cost of goods sold for fiscal 2011 were $2,535.0 million, a $1,759.3 million or 226.8% increase compared with the five months ended May 28, 2010. The increase was directly attributable to the comparison of operating results of a twelve month period with a five month period. Higher tire unit sales attributable to the difference in the number of months in the comparable period coupled with the incremental tire units sold through our new distribution centers and the integration of our recent acquisitions contributed to the increase. In addition, we experienced higher net tire pricing as a result of tire manufacturer price increases. However, these increases were partially offset by a reduction in equipment sales during fiscal 2011 as a result of our 2010 decision to discontinue selling certain products within our equipment product offering. As a result, cost of goods sold as a percentage of net sales increased to 83.1% from 83.0% for fiscal 2011 and the five months ended May 28, 2010, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2011 were $437.1 million, a $302.0 million or a 223.4% increase compared with the five months ended May 28, 2010. The increase in selling, general and
29
administrative expenses was primarily attributable to the comparison of operating results for a twelve month period with a five month period. In addition to the increase in costs attributable to the difference in the number of months in the comparable period, incremental costs associated with our new distribution centers opened during the last twelve months were $24.6 million. Also, the expansion of several of our distribution centers in order to better service our existing customers as well as the integration of our fourth quarter 2010 and second quarter 2011 acquisitions contributed to the increase. Other factors included additional amortization due to both the revaluation of the customer list intangible asset established as part of the Merger and other intangible assets acquired, a higher price per gallon of fuel and an increase in salaries and wage expense due to higher sales volume and related headcount. These cost more than offset the $5.9 million of stock based compensation expense related to the discretionary vesting of certain previously unvested stock options during the five months ended May 28, 2010. Despite the increase in expenses during 2011, operating efficiencies and improved operating leverage positively impacted our percentage of net sales. As a result, selling, general and administrative expenses as a percentage of net sales decreased to 14.3% from 14.5% for fiscal 2011 and the five months ended May 28, 2010, respectively.
Transaction Expenses
Transaction expenses for fiscal 2011 were $3.9 million, which primarily related to acquisition fees as well as costs incurred in connection with both the amendment of our ABL Facility and the registration of our Senior Secured Notes with the SEC. In addition, we incurred $1.1 million for exit costs associated with our decision to relocate two existing distribution centers into two expanded distribution centers. During the five months ended May 28, 2010, we incurred transaction costs of $42.6 million. These direct acquisition costs included investment banking, legal, accounting and other fees for professional services in connection with the Merger as well as certain financing fees that did not qualify for capitalization. In addition, $2.4 million related to our now suspended public offering of our common stock.
Interest Expense
Interest expense for fiscal 2011 was $67.6 million, a $34.9 million or 106.9% increase compared with the five months ended May 28, 2010. The increase was primarily attributable to the comparison of operating results of a twelve month period with a five month period. Fiscal 2011 was impacted by higher debt levels as well as slightly higher interest rates associated with the Successor’s senior debt obligations as compared with the Predecessor’s senior debt obligations. However, during the five months ended May 28, 2010, we wrote off $8.0 million of deferred financing fees related to the Predecessor’s existing debt and accreted the carrying amount of the Predecessor’s redeemable preferred stock to the redemption amount at the date of the Merger, which impacted interest expense by $2.3 million.
Provision (Benefit) for Income Taxes
Our income tax provision for fiscal 2011 was $4.4 million. The provision, which was based on pre-tax income of $4.5 million, includes $54.6 million of amortization expense that is not deductible for income tax purposes. Our income tax benefit for the five months ended May 28, 2010 was $15.2 million, which was based on a pre-tax loss of $51.3 million, primarily resulting from the $42.6 million of transaction expenses recorded during this time period. Our effective tax rate for fiscal 2011 and the five months ended May 28, 2010 were 97.4% and 29.7%, respectively. The effective tax rate for fiscal 2011 is higher than our statutory tax rate primarily due to an increase our state effective tax rate, a result based our growing presence in jurisdictions with higher than average tax rates, and the related impact on our net deferred tax liabilities. During the five months ended May 28, 2010, the income tax benefit was impacted by certain permanent differences relating to the Merger, which were not deductable for income tax purposes.
30
Seven Months Ended January 1, 2011 for the Successor Compared to Fiscal 2009 for the Predecessor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the seven months ended January 1, 2011 for the Successor are compared and discussed in relation to the fiscal year ended January 2, 2010 for the Predecessor.
The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
| Successor | Predecessor | Period Over Period Change |
Period Over Period % Change |
Percentage of Net Sales For the Respective Period Ended |
||||||||||||||||||||||
| Seven Ended |
Fiscal Year Ended |
|||||||||||||||||||||||||
| In thousands |
January 1, 2011 |
January 2, 2010 |
Favorable (unfavorable) |
Favorable (unfavorable) |
January 1, 2011 |
January 2, 2010 |
||||||||||||||||||||
| Net sales |
$ | 1,525,249 | $ | 2,171,787 | $ | (646,538 | ) | -29.8 | % | 100.0 | % | 100.0 | % | |||||||||||||
| Cost of goods sold |
1,316,679 | 1,797,905 | 481,226 | 26.8 | % | 86.3 | % | 82.8 | % | |||||||||||||||||
| Selling, general and administrative expenses |
228,513 | 306,189 | 77,676 | 25.4 | % | 15.0 | % | 14.1 | % | |||||||||||||||||
| Transaction expenses |
1,315 | — | (1,315 | ) | -100.0 | % | 0.1 | % | 0.0 | % | ||||||||||||||||
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| Operating income (loss) |
(21,258 | ) | 67,693 | (88,951 | ) | -131.4 | % | -1.4 | % | 3.1 | % | |||||||||||||||
| Other income (expense): |
||||||||||||||||||||||||||
| Interest expense |
(37,391 | ) | (54,415 | ) | 17,024 | 31.3 | % | -2.5 | % | -2.5 | % | |||||||||||||||
| Other, net |
(958 | ) | (1,020 | ) | 62 | 6.1 | % | -0.1 | % | 0.0 | % | |||||||||||||||
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| Income (loss) from operations before income taxes |
(59,607 | ) | 12,258 | (71,865 | ) | -586.3 | % | -3.9 | % | 0.6 | % | |||||||||||||||
| Income tax provision (benefit) |
(23,295 | ) | 7,326 | 30,621 | 418.0 | % | -1.5 | % | 0.3 | % | ||||||||||||||||
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|||||||||||||||
| Net income (loss) |
$ | (36,312 | ) | $ | 4,932 | $ | (41,244 | ) | -836.3 | % | -2.4 | % | 0.2 | % | ||||||||||||
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Net Sales
Net sales for the seven months ended January 1, 2011 were $1,525.2 million, a $646.5 million or 29.8% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. In addition, lower sales contributions from the retail stores acquired from Am-Pac and subsequently sold in fiscal 2009 impacted the seven month period ended January 1, 2011 by $27.9 million. The decline in tire unit sales attributable to the difference in the number of months in the comparable periods, however, was partially offset by an increase in passenger and light truck tire pricing of approximately 15.4% during the seven months ended January 1, 2011. This increase was driven both by manufacturer price increases and, to a lesser extent, mix of products sold.
Cost of Goods Sold
Cost of goods sold for the seven months ended January 1, 2011 were $1,316.7 million, a $481.2 million or a 26.8% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. Cost of goods sold as a percentage of net sales was 86.3% and 82.8% for the seven months ended January 1, 2011 and fiscal 2009, respectively. The amortization of the inventory step-up adjustment recorded in connection with the Merger increased cost of goods sold during the seven months ended January 1, 2011 by $58.8 million as our entire Merger-related inventory was sold during the seven month period. In addition, we recognized a $1.0 million impairment charge in cost of goods sold during the seven month period of 2010 related to the write-down of a component of our equipment inventory due to our
31
decision to discontinue selling certain products within this product offering. Combined, these items had a 3.9 point impact on cost of goods sold as a percentage of net sales. Included in fiscal 2009 were expenses related to the Am-Pac retail stores, which were completely sold by December 2009. These retail stores had a $14.7 million impact on cost of goods sold during fiscal 2009 that did not repeat during the seven months ended January 1, 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the seven months ended January 1, 2011 were $228.5 million, a $77.7 million or a 25.4% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results for a seven month period with a twelve month period. Selling, general and administrative expenses as a percentage of net sales was 15.0% and 14.1% for the seven months ended January 1, 2011 and fiscal 2009, respectively. The seven months ended January 1, 2011 included an additional $14.5 million of amortization related to the valuation of amortizable intangible assets acquired in the Merger, primarily associated with a customer relationship intangible asset. The additional expense had a 1.0 impact to selling, general and administrative expenses as a percentage of net sales. Expenses during fiscal 2009 included costs for retail stores acquired from Am-Pac and subsequently sold during the year. In addition, we experienced lower compensation, rent, fuel and vehicle expenses during the seven months ended January 1, 2011 as 20 of the Am-Pac distribution centers were integrated into our existing distribution centers as of July 2009 and thus eliminated certain duplicate expenses.
Interest Expense
Total interest expense for the seven months ended January 1, 2011 was $37.4 million, a $17.0 million or a 31.3% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. However, during the seven months ended January 1, 2011, we experienced higher average debt levels and slightly higher interest rates associated with the Successor’s senior debt obligations as compared to the Predecessor’s average debt levels and interest rates, partially offsetting the decrease due to the number of months in the comparable periods.
Provision (Benefit) for Income Taxes
Our income tax benefit was $23.3 million during the seven month period ended January 1, 2011 compared with an income tax provision of $7.3 million during fiscal 2009. The benefit recorded during the seven months ended January 1, 2011 was based on a pre-tax loss of $59.6 million, primarily resulting from the non-recurring amortization of the inventory step-up adjustment as well as the additional amortization expense related to the valuation of amortizable intangible assets acquired, both recorded in connection with the Merger. The provision recorded during fiscal 2009 was based on pre-tax income of $12.3 million. Our effective tax rates for the seven months ended January 1, 2011 and fiscal 2009 were 39.1% and 59.8%, respectively. The decrease in the effective tax rate is due primarily to changes in pre-tax income levels during the seven months ended January 1, 2011 as compared to fiscal 2009. In addition, we decreased the valuation allowance related to state net operating losses and benefited from certain permanent differences relating to the Merger which were deductible for income tax purposes.
Five Months Ended May 28, 2010 for the Predecessor Compared to Fiscal 2009 for the Predecessor
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, results for the five months ended May 28, 2010 for the Predecessor are compared and discussed in relation to the fiscal year ended January 2, 2010 for the Predecessor.
32
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:
| Predecessor | Predecessor | Period Over Period Change |
Period Over Period % Change |
Percentage of Net Sales For the Respective Period Ended |
||||||||||||||||||||
| Five Ended |
Fiscal Year Ended |
|||||||||||||||||||||||
| In thousands |
May
28, 2010 |
January
2, 2010 |
Favorable (unfavorable) |
Favorable (unfavorable) |
May
28, 2010 |
January
2, 2010 |
||||||||||||||||||
| Net sales |
$ | 934,925 | $ | 2,171,787 | $ | (1,236,862 | ) | -57.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Cost of goods sold |
775,678 | 1,797,905 | 1,022,227 | 56.9 | % | 83.0 | % | 82.8 | % | |||||||||||||||
| Selling, general and administrative expenses |
135,146 | 306,189 | 171,043 | 55.9 | % | 14.5 | % | 14.1 | % | |||||||||||||||
| Transaction expenses |
42,608 | — | (42,608 | ) | -100.0 | % | 4.6 | % | 0.0 | % | ||||||||||||||
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|
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| Operating income (loss) |
(18,507 | ) | 67,693 | (86,200 | ) | -127.3 | % | -2.0 | % | 3.1 | % | |||||||||||||
| Other income (expense): |
||||||||||||||||||||||||
| Interest expense |
(32,669 | ) | (54,415 | ) | 21,746 | 40.0 | % | -3.5 | % | -2.5 | % | |||||||||||||
| Other, net |
(127 | ) | (1,020 | ) | 893 | 87.5 | % | 0.0 | % | 0.0 | % | |||||||||||||
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| Income (loss) from operations before income taxes |
(51,303 | ) | 12,258 | (63,561 | ) | -518.5 | % | -5.5 | % | 0.6 | % | |||||||||||||
| Income tax provision (benefit) |
(15,227 | ) | 7,326 | 22,553 | 307.8 | % | -1.6 | % | 0.3 | % | ||||||||||||||
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| Net income (loss) |
$ | (36,076 | ) | $ | 4,932 | $ | (41,008 | ) | -831.5 | % | -3.9 | % | 0.2 | % | ||||||||||
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Net Sales
Net sales for the five months ended May 28, 2010 were $934.9 million, a $1,236.9 million or 57.0% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a five month period with a twelve month period. In addition, lower sales contributions from the retail stores acquired from Am-Pac and subsequently sold in fiscal 2009 impacted the five month period ended May 28, 2010 by $27.9 million. The decline in tire unit sales attributable to the difference in the number of months in the comparable periods, however, was partially offset by an increase in passenger and light truck tire pricing of approximately 9.6% during the five months ended May 28, 2010 as compared to fiscal 2009. This increase was driven both by manufacturer price increases and, to a lesser extent, mix of products sold.
Cost of Goods Sold
Cost of goods sold for the five months ended May 28, 2010 were $775.7 million, a $1,022.2 million or a 56.9% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a five month period with a twelve month period. Cost of goods sold as a percentage of net sales was 83.0% and 82.8% for the five months ended May 28, 2010 and fiscal 2009, respectively. Included in fiscal 2009 were expenses related to the Am-Pac retail stores, which were completely sold by December 2009. These retail stores had a $14.7 million impact on cost of goods sold during fiscal 2009 that did not repeat during the five months ended May 28, 2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the five months ended May 28, 2010 were $135.1 million, a $171.0 million or 55.9% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results for a five month period with a twelve month period. Selling, general and administrative expenses as a percentage of net sales was 14.5% and 14.1% for the five months ended May 28, 2010 and fiscal 2009, respectively. The percentage increase was primarily driven by higher non-cash
33
stock-based compensation expense of $5.6 million related to the discretionary vesting of certain previously unvested stock options and an increased price per gallon of fuel, which approximated 19% per gallon. Expenses during fiscal 2009 included costs for retail stores acquired from Am-Pac and subsequently sold during the year. In addition, we experienced lower compensation, rent, fuel and vehicle expenses during the five months ended May 28, 2010 as 20 of the Am-Pac distribution centers were integrated into our existing distribution centers as of July 2009 and thus eliminated certain duplicate expenses.
Transaction Expenses
During the five months ended May 28, 2010, we incurred transaction costs of $42.6 million. These direct acquisition costs included investment banking, legal, accounting and other fees for professional services in connection with the Merger as well as certain financing fees that did not qualify for capitalization. In addition, $2.4 million related to our now suspended public offering of our common stock.
Interest Expense
Total interest expense for the five months ended May 28, 2010 was $32.7 million, a $21.7 million or 40.0% decrease compared with fiscal 2009. The decrease was primarily attributable to the comparison of operating results of a five month period with a twelve month period. During the five months ended May 28, 2010, we wrote off $8.0 million of deferred financing fees related to the Predecessor’s existing debt and accreted the carrying amount of the Predecessor’s redeemable preferred stock to the redemption amount at the date of the Merger, which impacted interest expense by $2.1 million. These amounts were partially offset by lower average borrowings under our ABL Facility and termination of the Predecessor’s 2009 swap agreement during the five months ended May 28, 2010.
Provision (Benefit) for Income Taxes
Our income tax benefit was $15.2 million during the five month period ended May 28, 2010 compared with an income tax provision of $7.3 million during fiscal 2009. The benefit recorded during the five months ended May 28, 2010 was based on a pre-tax loss of $51.3 million, primarily resulting from the $42.6 million of transaction expenses recorded during this time period. The provision recorded during fiscal 2009 was based on pre-tax income of $12.3 million. Our effective tax rates for the five month period of 2010 and the twelve month period of 2009 were 29.7% and 59.8%, respectively. The decrease in the effective tax rate is due primarily to changes in pre-tax income levels for the five months ended May 28, 2010 as compared to fiscal 2009 as well as the impact related to certain permanent differences relating to the Merger which were not deductible for income tax purposes.
Liquidity and Capital Resources
Overview
The following table contains several key measures to gauge our financial condition and liquidity:
| Successor | Predecessor | |||||||||||||
| In thousands |
December
31, 2011 |
January
1, 2011 |
January
2, 2010 |
|||||||||||
| Cash and cash equivalents |
$ | 14,979 | $ | 11,971 | $ | 7,290 | ||||||||
| Working capital |
447,133 | 270,332 | 197,317 | |||||||||||
| Total debt |
835,808 | 652,544 | 549,576 | |||||||||||
| Redeemable preferred stock |
— | — | 26,600 | |||||||||||
| Total stockholders’ equity |
655,819 | 651,446 | 230,647 | |||||||||||
| Debt-to-capital ratio |
56.0 | % | 50.0 | % | 70.4 | % | ||||||||
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Debt-to-capital ratio = total debt / (total debt plus total stockholders’ equity)
34
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, restructuring obligations and capital spending during the next twelve month period. In addition, we expect our cash flow from operations and our availability under our newly amended ABL Facility, which now matures on June 6, 2016, to continue to provide sufficient liquidity to fund our ongoing obligations, projected working capital requirements, restructuring obligations and capital spending during the foreseeable future.
As a result of the Merger, we are significantly leveraged. Accordingly, our liquidity obligations are significant, primarily due to our debt service requirements. As of December 31, 2011, our total indebtedness is $835.8 million. Our cash interest payments for fiscal 2011 and the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 and fiscal 2009 for the Predecessor was $61.7 million, $30.2 million, $26.2 million, and $43.0 million respectively. As of December 31, 2011, we have an additional $253.4 million of availability under our ABL Facility. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them.
Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under “Item 1A—Risk Factors.” If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our ABL Facility, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.
Cash Flows
Due to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, generally accepted accounting principles require us to present separately our operating results for the Predecessor and Successor periods. In the following discussion, our cash flow results for the fiscal year ended December 31, 2011 for the Successor are compared and discussed in relation to the seven months ended January 1, 2011 for the Successor as well as with the five months ended May 28, 2010 for the Predecessor.
35
The following table sets forth the major categories of cash flows:
| Successor | Predecessor | |||||||||||||||||
| In thousands |
Fiscal Year 2011 |
Seven
Months Ended January 1, 2011 |
Five
Months Ended May 28, 2010 |
Fiscal Year 2009 |
||||||||||||||
| Cash provided by (used in) operating activities |
$ | (91,006 | ) | $ | (23,439 | ) | $ | 28,106 | $ | 131,105 | ||||||||
| Cash provided by (used in) investing activities |
(92,249 | ) | (17,237 | ) | (7,523 | ) | (4,620 | ) | ||||||||||
| Cash provided by (used in) financing activities |
186,263 | 40,405 | (15,631 | ) | (127,690 | ) | ||||||||||||
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| Net increase (decrease) in cash and cash equivalents |
3,008 | (271 | ) | 4,952 | (1,205 | ) | ||||||||||||
| Cash and cash equivalents—beginning of period |
11,971 | 12,242 | 7,290 | 8,495 | ||||||||||||||
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| Cash and cash equivalents—end of period |
$ | 14,979 | $ | 11,971 | $ | 12,242 | $ | 7,290 | ||||||||||
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| Cash payments for interest |
$ | 61,732 | $ | 30,202 | $ | 26,188 | $ | 42,953 | ||||||||||
| Cash payments (receipts) for taxes, net |
$ | (8,101 | ) | $ | 1,971 | $ | 1,122 | $ | 6,457 | |||||||||
| Capital expenditures financed by debt |
$ | — | $ | — | $ | — | $ | 2,307 | ||||||||||
| Noncash capital expenditures |
$ | — | $ | — | $ | — | $ | 2,876 | ||||||||||
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Operating Activities
Net cash used in operating activities for fiscal 2011 for the Successor was $91.0 million. During the year, working capital requirements resulted in a cash outflow of $175.0 million, primarily driven by the continued expansion of our distribution centers into new domestic geographic markets. The cash outflow of $151.9 million related to inventory reflects our decision to increase manufacturer safety stock amounts as a result of tight supply levels with most of our manufacturers, the impact of manufacturer price increases on the replenishment of our inventory as well as the impact of new, acquired or expanded distribution centers. In addition, the combined impact of stocking new distribution centers and our recent acquisitions also contributed to the inventory increase. As well, higher sales volumes led to a $47.4 million increase to accounts receivable. However, these amounts were partially offset by a $19.1 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor payments and accrued interest on our senior notes.
Net cash used in operating activities for the seven months ended January 1, 2011 for the Successor was $23.4 million. During the seven months, working capital requirements resulted in a cash outflow of $69.1 million. Accounts receivable and inventory increased $4.3 million and $36.8 million, respectively, as the increase in sales volume reflected the seasonal nature of our business. The decrease in accounts payable primarily resulted from the timing of vendor payments.
Net cash provided by operating activities for the five months ended May 28, 2010 for the Predecessor was $28.1 million. During the five months, working capital requirements for the Predecessor resulted in a cash inflow of $31.0 million. The increase, primarily driven by an increase in accounts payable and accrued expenses of $96.4 million, reflects the accrual for transaction costs associated with the Merger of $42.6 million as well as timing of vendor payments. These amounts were partially offset by an increase in accounts receivable and inventory as the increase in sales volume reflected the seasonal nature of our business.
Net cash provided by operating activities for fiscal 2009 for the Predecessor was $131.1 million. During the year, working capital requirements resulted in a cash inflow of $78.3 million, primarily driven by a decrease in inventory of $63.8 million. The decrease in inventories resulted from the consolidation of the acquired Am-Pac distribution centers (finalized in July 2009) and rationalization of their inventories, as well as a reduction in elevated 2008 year-end inventory levels. In addition, an increase in accounts payable and accrued expenses of $32.8 million reflects the timing of vendor payments.
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Investing Activities
Net cash used in investing activities for fiscal 2011 for the Successor was $92.2 million. During the year, cash outflows for acquisitions net of cash acquired totaled $59.7 million. In addition, we invested $31.0 million in property and equipment purchases, which included information technology upgrades, IT application development and warehouse racking. During the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 for the Predecessor, capital expenditures for property and equipment were $12.4 million and $6.4 million, respectively. The expenditures included information technology upgrades, IT application development and leasehold improvements. In addition, fourth quarter 2010 acquisitions net of cash acquired impacted the Successor’s net cash used in investing activities by $11.0 million.
Net cash used in investing activities for fiscal 2009 for the Predecessor was $4.6 million. During the year, capital expenditures of $12.8 million were used to fund information technology upgrades, IT application development and leasehold improvements. In addition, included in fiscal 2009 were proceeds of $9.2 million associated with the sale of certain retail operations acquired in the Am-Pac acquisition that were held for sale.
Financing Activities
Net cash provided by financing activities for fiscal 2011 for the Successor was $186.3 million. The inflow was primarily related to higher net borrowings from our ABL Facility due to the increase in working capital requirements as well as cash paid for acquisitions. In addition, we paid $5.9 million related to the amendment of our ABL Facility.
Net cash provided by financing activities for the seven months ended January 1, 2011 for the Successor was $40.4 million. The inflow was primarily related to the proceeds from the issuance of our Senior Secured Notes and our Senior Subordinated Notes. The proceeds were partially offset by the repayment of our previously outstanding senior notes and redeemable preferred stock as well as payments for transaction fees and deferred financing costs paid in connection with the Merger.
Net cash used in financing activities for the five months ended May 28, 2010 and fiscal 2009 for the Predecessor were $15.6 million and $127.7 million, respectively. During the five months ended May 28, 2010, the outflow primarily related to the timing of outstanding checks. In addition, higher borrowings from our ABL Facility were partially offset by a $6.3 million payment related to the Predecessor’s Senior Notes. During fiscal 2009, the outflow was primarily related to increased repayments of $91.6 million on our revolving credit facility. In addition, $32.5 related to the timing of outstanding checks.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest for fiscal 2011 were $61.7 million compared with cash payments for interest for the seven month period ended January 1, 2011 of $30.2 million. The increase is primarily related to the comparison of a twelve month period to a seven month period. However, as a result of the Merger, the overall debt structure of the Successor has increased along with associated higher interest rates as compared with the Predecessor. Cash payments for interest for the five month period ended May 28, 2010 were $26.2 million. The decrease compared with fiscal 2011 is primarily related to the comparison of a five month period to a twelve month period.
Cash payments for interest for the seven month period ended January 1, 2011 were $30.2 million compared with cash payments for interest for fiscal 2009 of $43.0 million. The decrease is primarily related to the comparison of a seven month period to a twelve month period. However, as a result of the Merger, the overall debt structure of the Successor has increased along with associated higher interest rates as compared with the Predecessor. Cash payments for interest for the five month period ended May 28, 2010 were $26.2 million compared with cash payments for interest for fiscal 2009 of $43.0 million. The decrease is primarily related to the comparison of a five month period to a twelve month period.
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Cash receipts for taxes for fiscal year 2011 were $8.1 million compared with $2.0 million paid during the seven month period ended January 1, 2011. During 2011, we utilized a federal net operating loss to recover a portion of our prior federal income tax paid. As a result, we received a $9.1 million tax refund in the fourth quarter of 2011 based on the use of this net operating loss carryback. Cash payments for taxes for the five month period ended May 28, 2010 were $1.1 million. The decrease compared with fiscal 2011 is primarily related to the comparison of a five month period to a twelve month period as well as the utilization of the federal net operating loss.
Cash payments for taxes for the seven month period ended January 1, 2011 were $2.0 million compared with $6.5 million in the fiscal year ended January 2, 2010. The decrease is primarily due to the number of months in the comparative periods and the related quarterly state and federal tax payment requirements during these months. Cash payments for taxes for the five month period ended May 28, 2010 were $1.1 million compared with $6.5 million in the fiscal year ended January 2, 2010. The decrease is primarily due to the balance and timing of income tax extension payments for fiscal 2008, made during fiscal 2009, as compared to income tax extension payments for fiscal 2009, made in the first five months of 2010.
Indebtedness
The following table summarizes the Successor’s outstanding debt at December 31, 2011:
| In thousands |
Matures | Interest Rate (1) | Outstanding Balance |
|||||||||
| ABL Facility |
2016 | 2.7 | % | $ | 373,255 | |||||||
| Senior Secured Notes |
2017 | 9.75 | 247,425 | |||||||||
| Senior Subordinated Notes |
2018 | 11.50 | 200,000 | |||||||||
| Capital lease obligations |
2012 - 2022 | 7.1 - 14.0 | 14,118 | |||||||||
| Other |
2014 - 2020 | 9.0 - 10.6 | 1,010 | |||||||||
|
|
|
|||||||||||
| Total debt |
835,808 | |||||||||||
| Less—Current maturities |
(158 | ) | ||||||||||
|
|
|
|||||||||||
| Long—term debt |
$ | 835,650 | ||||||||||
| (1) | Interest rate for the ABL Facility is the weighted average interest rate at December 31, 2011. |
ABL Facility
In connection with the acquisition of Holdings on May 28, 2010, ATDI entered into the Fifth Amended and Restated Credit Agreement, as subsequently amended (“ABL Facility”). The agreement provided for a senior secured asset-backed revolving credit facility of up to $450.0 million (of which up to $50.0 million could have been utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default was then existing or would arise therefrom, we had the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to mature on November 28, 2014.
On June 6, 2011, we entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. We maintain the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. At December 31, 2011, we had $373.3 million outstanding under the ABL Facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $8.0 million, leaving $253.4 million available for additional borrowings.
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Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of December 31, 2011 or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of December 31, 2011. The applicable margins under the ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
The borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
| • | 85% of eligible accounts receivable; plus |
| • | The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory and (b) 85% of the net orderly liquidation value of eligible tire inventory; plus |
| • | The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory and (b) 85% of the net orderly liquidation value of eligible non-tire inventory. |
All obligations under the ABL Facility are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The ABL Facility contains customary covenants, including covenants that 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 borrowing under the ABL Facility is less than the greater of (a) 12.5% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the borrowing base and (b) $25.0 million, then we would be subject to an additional covenant requiring us to meet a fixed charge coverage ratio of 1.0 to 1.0. As of December 31, 2011, our additional borrowing availability under the ABL Facility were above the required amount and we were therefore not subject to the additional covenants.
Senior Secured Notes
On May 28, 2010, ATDI issued Senior Secured Notes (“Senior Secured Notes”) due June 1, 2017 in an aggregate principal amount at maturity of $250.0 million. The Senior Secured Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $240.7 million after debt issuance costs (which represents a non-cash financing activity of $9.3 million). The Senior Secured Notes will accrete based on an effective interest rate of 10% to an aggregate accreted value of $250.0 million, the full principal amount at maturity. The Senior Secured Notes bear interest at a fixed rate of 9.75%. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Secured Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Secured Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 107.313% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount if the redemption date occurs between June 1, 2016 and May 31, 2017.
Until June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Secured Notes issued at a redemption price equal to 109.75% of the aggregate
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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. |
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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.
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.
Contractual Commitments
As of December 31, 2011, we had certain cash obligations associated with contractual commitments. The amounts due under these commitments are as follows:
| In millions |
Total | Less than 1 year |
1- 3 years |
4 - 5 years |
After
5 years |
|||||||||||||||
| Long-term debt (variable rate) |
$ | 373.3 | $ | — | $ | — | $ | 373.3 | $ | — | ||||||||||
| Long-term debt (fixed rate) |
448.4 | 0.1 | 0.4 | 0.2 | 447.7 | |||||||||||||||
| Estimated interest payments (1) |
345.5 | 59.6 | 119.2 | 113.4 | 53.3 | |||||||||||||||
| Operating leases, net of sublease income |
367.2 | 60.5 | 105.6 | 79.1 | 122.0 | |||||||||||||||
| Capital leases (2) |
— | — | — | — | — | |||||||||||||||
| Uncertain tax positions |
1.8 | 0.5 | 1.3 | (0.2 | ) | 0.2 | ||||||||||||||
| Deferred compensation obligation |
2.3 | — | — | — | 2.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total contractual cash obligations |
$ | 1,538.5 | $ | 120.7 | $ | 226.5 | $ | 565.8 | $ | 625.5 | ||||||||||
| (1) | Represents the annual interest expense on fixed and variable rate debt. Projections of interest expense on variable rate debt are based on current interest rates. |
| (2) | Excludes capital lease obligation relating to the sale and leaseback of three owned facilities. All cash paid to the lessor is recorded as interest expense and is included in the estimated interest payments amount in the above table. |
Off-Balance Sheet Arrangements
We have no significant off balance sheet arrangements other than liabilities related to certain leases of the Winston Tire Company (Winston). These leases were guaranteed when we sold Winston in 2001. As of December 31, 2011, our total obligations as guarantor on these leases are approximately $3.7 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 $3.3 million. 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
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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 Policies 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 judgment 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. The following is a summary of certain accounting estimates and assumptions made by management that we consider critical.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents the best estimate of probable loss inherent within our accounts receivable balance. Estimates are based upon both the creditworthiness of specific customers and the overall probability of losses based upon an analysis of the overall aging of receivables as well as past collection trends and general economic conditions. Estimating losses from doubtful accounts is inherently uncertain because the amount of such losses depends substantially on the financial condition of our customers. If the financial condition of our customers were to deteriorate beyond estimates, and impair their ability to make payments, we would be required to write off additional accounts receivable balances, which would adversely impact our financial position.
Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value and consist primarily of automotive tires, custom wheels, and related tire supplies and tools. We perform periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and record necessary provisions to reduce such inventories to net realizable value. If actual market conditions are less favorable than those projected by management, we could be required to reduce the value of our inventory or record additional reserves, which would adversely impact our financial position.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and intangible assets with indefinite useful lives are no longer amortized, but 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.
Recoverability of goodwill is determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.
Recoverability of other intangible assets with indefinite useful lives is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
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The determination of estimated fair value requires management to make assumptions about estimated cash flows, including profit margins, long-term forecasts, discount rates, royalty rates and terminal growth rates. Management developed these assumptions based on the best information available as of the date of the assessment. We completed our assessment of goodwill and intangible assets with indefinite useful lives as of November 30, 2011 and determined that no impairment existed at that date. Although no impairment has been recorded to date, there can be no assurances that future impairments will not occur. Future adverse developments in market conditions or our current or projected operating results could cause the fair value of our goodwill and intangible assets with indefinite useful lives to fall below carrying value, which would result in an impairment charge that would adversely affect our financial position.
Long-Lived Assets
Management reviews long-lived assets, which consist of property, leasehold improvements, equipment and definite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. For long-lived assets to be held and used, management evaluates recoverability by comparing the carrying value of the asset to future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. For long-lived assets for which we have committed to a disposal plan, we report such assets at the lower of the carrying value or fair value less the cost to sell.
In determining the fair value of long-lived assets, we make judgments relating to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets. Factors that impact these judgments include the ongoing maintenance and improvements of the assets, changes in the expected use of the assets, changes in economic conditions, changes in operating performance and anticipated future cash flows. If actual fair value is less than our estimates, long-lived assets may be overstated on the balance sheet, which would adversely impact our financial position.
Self-Insured Reserves
We are self-insured for automobile liability, workers’ compensation and the health care claims of our team members, although we maintain stop-loss coverage with third-party insurers to limit our total liability exposure. We establish reserves for losses associated with claims filed, as well as claims incurred but not yet reported, using actuarial methods followed in the insurance industry and our historical claims experience. If amounts ultimately paid differ significantly from our estimates, it could adversely impact our financial position.
Exit Cost Reserves
During the normal course of business, we continually assess the location and size our distribution centers in order to determine our optimal geographic footprint and overall structure. As a result, we have certain facilities that we have closed or intend to close and we record reserves for certain exit costs associated with these facilities. These exit cost reserves are recorded in an amount equal to future minimum lease payments and related ancillary costs from the date of closure to the end of the lease term, net of estimated sublease rentals we reasonably expect to obtain for the property. We estimate future cash flows based on contractual lease terms, the geographic market in which the facility is located, inflation, the ability to sublease the property and other economic conditions. We estimate sublease rentals based on the geographic market in which the property is located, our experience subleasing similar properties and other economic conditions. If actual exit costs associated with closing these facilities differ from our estimates, it could adversely impact our financial position.
Income Taxes and Valuation Allowances
We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision is computed using the asset and liability method of accounting, under which deferred tax assets and
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liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, we recognize future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in our judgment to be more likely than not. Deferred tax assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which those tax items are expected to be realized or settled. We regularly review the recoverability of our deferred tax assets considering historic profitability, projected future taxable income, and timing of the reversals of existing temporary differences as well as the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance if available evidence suggests that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Changes to valuation allowances are recognized in earnings in the period such determination is made.
The application of income tax law is inherently complex and involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdiction in which we operate. In addition, we are required to make certain assumptions regarding our income tax positions and the likelihood that such tax positions will be sustained if challenged. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on amounts we recognize in our consolidated balance sheets and adversely impact our financial position.
Revenue Recognition
Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. We recognize revenue when the title and the risk and rewards of ownership have substantially transferred to the customer, which is upon delivery under free-on-board destination terms.
We permit customers from time to time to return certain products but there is no contractual right of return. We continuously monitor and track such returns and record an estimate of such future returns, based on historical experience and recent trends. While such returns have historically been within management’s expectations and the provisions established have been adequate, we cannot guarantee that we will continue to experience the same return rates that we have in the past. If future returns increase significantly, it could adversely impact our results of operations.
Manufacturer Rebates
We receive rebates from tire manufacturers pursuant to a variety of rebate programs. These rebates are recorded in accordance with accounting standards applicable to cash consideration received from vendors. Many of the tire manufacturer programs provide that we receive rebates when certain measures are achieved, generally related to the volume of our purchases. We account for these rebates as a reduction to the price of the product, which reduces the carrying value of our inventory and our cost of goods sold when product is sold. During the year, we record amounts earned for annual rebates based on purchases management considers probable for the full year. These estimates are periodically revised to reflect rebates actually earned based on actual purchase levels. Tire manufacturers may change the terms of some or all of these programs, which could increase our cost of goods sold and decrease our net income, particularly if these changes are not passed along to the customer.
Customer Rebates
We offer rebates to our customers under a number of different programs. These rebates are recorded in accordance with authoritative guidance related to accounting for consideration given by a vendor to a customer. These programs typically provide customers with rebates, generally in the form of a reduction to the amount they owe us, when certain measures are achieved, generally related to the volume of product purchased from us. We record these rebates through a reduction in the related price of the product, which decreases our net sales. During
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the year, we estimate rebate amounts based on the rebate rates we expect customers will achieve for the full year. These estimates are periodically revised to reflect rebates actually earned by customers.
Cooperative Advertising and Marketing Programs
We participate in cooperative advertising and marketing programs, or co-op advertising, with our vendors. Co-op advertising funds are provided to us generally based on the volume of purchases made with vendors that offer such programs. A portion of the funds received must be used for specific advertising and marketing expenditures incurred by us or our customers. The co-op advertising funds received by us from our vendors are accounted for in accordance with authoritative guidance related to accounting for cash consideration received from a vendor, which requires that we record the funds received as a reduction of cost of sales or as an offset to specific costs incurred in selling the vendor’s products. The co-op advertising funds that are provided to our customers are accounted for in accordance with authoritative guidance related to accounting for cash consideration given by a vendor to a customer, which requires that we record the funds paid as a reduction of revenue since no separate identifiable benefit is received by us.
Stock Based Compensation
We account 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. Our stock-based compensation plans include programs for stock options and restricted stock units. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of subjective assumptions, including the expected life of the awards and stock price volatility. The assumptions used in calculating the fair value of stock-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, “Testing for Goodwill Impairment” which amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow a company to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We have determined that this new guidance will not have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 requires us to present components of other comprehensive income and of net income in one continuous statement of comprehensive income, or in two separate, but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The option to report other comprehensive income within the statement of equity has been removed. This new presentation will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” ASU No. 2011-04 represents converged guidance between U.S. GAAP and IFRS resulting in common requirements for measuring fair value and for disclosing information about fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. We are currently assessing the impact, if any, on our consolidated financial statements.
45
| Item 7A. | Quantitative and Qualitative Disclosure About Market Risk. |
Our ABL Facility is exposed to fluctuations in interest rates which could impact our results of operations and financial condition. Interest on the ABL Facility is tied to Base Rate, as defined, or LIBOR. At December 31, 2011, we had $373.3 million outstanding under our 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 December 31, 2011, $198.3 million of the outstanding balance of our ABL Facility is not hedged by an interest rate swap agreement and thus subject to interest rate changes. Based on this amount, a hypothetical increase of 1% in such interest rate percentages would result in an increase to our annual interest expense by $2.0 million.
46
| Item 8. | Financial Statements and Supplementary Data. |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| American Tire Distributors Holdings, Inc.—Consolidated Financial Statements |
||||
| Management’s Report on Internal Control over Financial Reporting |
48 | |||
| 49 | ||||
| Consolidated Balance Sheets as of December 31, 2011 and January 1, 2011 for the Successor |
51 | |||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 55 | ||||
47
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of American Tire Distributors Holdings, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| • | Provide reasonable assurance that transactions are recorded and necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective at a reasonable assurance level as of December 31, 2011.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of American Tire Distributors Holdings, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and other comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of American Tire Distributors Holdings, Inc. and its subsidiaries (Successor Company) at December 31, 2011 and January 1, 2011, and the results of their operations and their cash flows for the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 12, 2012
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of American Tire Distributors Holdings, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated statements of operations, of stockholders’ equity and other comprehensive income (loss) and of cash flows present fairly, in all material respects, the financial position of American Tire Distributors Holdings, Inc. and its subsidiaries (Predecessor Company) the results of their operations and their cash flows for the five months ended May 28, 2010 and for the year ended January 2, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 15, 2011
50
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
| Successor | ||||||||
| In thousands, except share amounts |
December
31, 2011 |
January
1, 2011 |
||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 14,979 | $ | 11,971 | ||||
| Restricted cash |
1,072 | 250 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $696 and |
268,943 | 213,928 | ||||||
| Inventories |
641,710 | 466,433 | ||||||
| Deferred income taxes |
15,042 | 13,839 | ||||||
| Income tax receivable |
1,601 | 9,646 | ||||||
| Assets held for sale |
6,301 | 203 | ||||||
| Other current assets |
13,203 | 11,488 | ||||||
|
|
|
|
|
|||||
| Total current assets |
962,851 | 727,758 | ||||||
|
|
|
|
|
|||||
| Property and equipment, net |
99,930 | 89,553 | ||||||
| Goodwill |
445,715 | 431,065 | ||||||
| Other intangible assets, net |
737,684 | 754,387 | ||||||
| Other assets |
56,383 | 54,585 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 2,302,563 | $ | 2,057,348 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 469,867 | $ | 430,979 | ||||
| Accrued expenses |
45,693 | 25,791 | ||||||
| Current maturities of long-term debt |
158 | 656 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
515,718 | 457,426 | ||||||
|
|
|
|
|
|||||
| Long-term debt |
835,650 | 651,888 | ||||||
| Deferred income taxes |
282,756 | 283,169 | ||||||
| Other liabilities |
12,620 | 13,419 | ||||||
| Commitments and contingencies (See Note 13) |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock, par value $.01 per share; 1,000 shares authorized, issued and outstanding |
— | — | ||||||
| Additional paid-in capital |
691,951 | 687,537 | ||||||
| Accumulated earnings (deficit) |
(36,195 | ) | (36,312 | ) | ||||
| Accumulated other comprehensive income (loss) |
63 | 221 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
655,819 | 651,446 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 2,302,563 | $ | 2,057,348 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
51
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Successor | Predecessor | |||||||||||||||||
| In thousands |
Fiscal
Year Ended December 31, 2011 |
Seven
Months Ended January 1, 2011 |
Five
Months Ended May 28, 2010 |
Fiscal
Year Ended January 2, 2010 |
||||||||||||||
| Net sales |
$ | 3,050,240 | $ | 1,525,249 | $ | 934,925 | $ | 2,171,787 | ||||||||||
| Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
2,535,020 | 1,316,679 | 775,678 | 1,797,905 | ||||||||||||||
| Selling, general and administrative expenses |
437,110 | 228,513 | 135,146 | 306,189 | ||||||||||||||
| Transaction expenses |
3,946 | 1,315 | 42,608 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Operating income (loss) |
74,164 | (21,258 | ) | (18,507 | ) | 67,693 | ||||||||||||
| Other income (expense): |
||||||||||||||||||
| Interest expense |
(67,580 | ) | (37,391 | ) | (32,669 | ) | (54,415 | ) | ||||||||||
| Other, net |
(2,110 | ) | (958 | ) | (127 | ) | (1,020 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) from operations before income taxes |
4,474 | (59,607 | ) | (51,303 | ) | 12,258 | ||||||||||||
| Income tax provision (benefit) |
4,357 | (23,295 | ) | (15,227 | ) | 7,326 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) |
$ | 117 | $ | (36,312 | ) | $ | (36,076 | ) | $ | 4,932 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
See accompanying notes to consolidated financial statements.
52
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
| In thousands, except share amounts |
Total Stockholders’ Equity |
Common Stock | Additional Paid-In Capital |
Warrants | Accumulated Earnings (Deficit) |
Accumulated Other Comprehensive (Loss) Income |
Treasury Stock at Cost |
Comprehensive Income (Loss) |
||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Predecessor balance, January 3, 2009 |
$ | 224,486 | 999,528 | $ | 10 | $ | 218,022 | $ | 4,631 | $ | 4,990 | $ | (3,067 | ) | $ | (100 | ) | |||||||||||||||||||||
| Net income (loss) |
4,932 | — | — | — | — | 4,932 | — | — | $ | 4,932 | ||||||||||||||||||||||||||||
| Change in value of derivative instrument, net of tax of $0.3 million |
474 | — | — | — | — | — | 474 | — | 474 | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on rabbi trust assets, net of tax of $0.3 million |
429 | — | — | — | — | — | 429 | — | 429 | |||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) |
$ | 5,835 | ||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Stock-based compensation |
326 | — | — | 326 | — | — | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Predecessor balance, January 2, 2010 |
230,647 | 999,528 | 10 | 218,348 | 4,631 | 9,922 | (2,164 | ) | (100 | ) | ||||||||||||||||||||||||||||
| Net income (loss) |
(36,076 | ) | — | — | — | — | (36,076 | ) | — | — | $ | (36,076 | ) | |||||||||||||||||||||||||
| Change in value of derivative instrument, net of tax of $1.4 million |
2,168 | — | — | — | — | — | 2,168 | — | 2,168 | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on rabbi trust assets, net of tax of $0.0 million |
(182 | ) | — | — | — | — | — | (182 | ) | — | (182 | ) | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) |
$ | (34,090 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Stock-based compensation |
5,892 | — | — | 5,892 | — | — | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Predecessor balance, May 28, 2010 |
202,449 | 999,528 | 10 | 224,240 | 4,631 | (26,154 | ) | (178 | ) | (100 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Purchase accounting adjustments |
(202,449 | ) | (999,528 | ) | (10 | ) | (224,240 | ) | (4,631 | ) | 26,154 | 178 | 100 | |||||||||||||||||||||||||
| Net income (loss) |
(36,312 | ) | — | — | — | — | (36,312 | ) | — | — | $ | (36,312 | ) | |||||||||||||||||||||||||
| Unrealized gain (loss) on rabbi trust assets, net of tax of $0.0 million |
221 | — | — | — | — | — | 221 | — | 221 | |||||||||||||||||||||||||||||
| Equity contributions |
683,831 | 1,000 | — | 683,831 | — | — | — | — | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) |
$ | (36,091 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Stock-based compensation |
3,706 | — | — | 3,706 | — | — | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Successor balance, January 1, 2011 |
651,446 | 1,000 | — | 687,537 | — | (36,312 | ) | 221 | — | |||||||||||||||||||||||||||||
| Net income (loss) |
117 | — | — | — | — | 117 | — | — | $ | 117 | ||||||||||||||||||||||||||||
| Unrealized gain (loss) on rabbi trust assets, net of tax of $0.0 million |
(158 | ) | — | — | — | — | — | (158 | ) | — | (158 | ) | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Total comprehensive income (loss) |
$ | (41 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||
| Equity contributions |
500 | — | — | 500 | — | — | — | — | ||||||||||||||||||||||||||||||
| Repurchase of common stock |
(200 | ) | — | — | (200 | ) | — | — | — | — | ||||||||||||||||||||||||||||
| Stock-based compensation |
4,114 | — | — | 4,114 | — | — | — | — | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Successor balance, December 31, 2011 |
$ | 655,819 | 1,000 | $ | — | $ | 691,951 | $ | — | $ | (36,195 | ) | $ | 63 | $ | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
53
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Successor | Predecessor | |||||||||||||||||
| In thousands |
Fiscal
Year Ended December 31, 2011 |
Seven
Months Ended January 1, 2011 |
Five
Months Ended May 28, 2010 |
Fiscal
Year Ended January 2, 2010 |
||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||
| Net income (loss) |
$ | 117 | $ | (36,312 | ) | $ | (36,076 | ) | $ | 4,932 | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||||||||
| Depreciation and amortization of intangibles |
78,071 | 40,905 | 14,707 | 32,078 | ||||||||||||||
| Amortization of other assets |
4,758 | 2,692 | 9,983 | 4,834 | ||||||||||||||
| Provision (benefit) for deferred income taxes |
(6,280 | ) | (27,518 | ) | (3,846 | ) | 5,030 | |||||||||||
| Accretion of 8% cumulative preferred stock |
— | — | 2,537 | 441 | ||||||||||||||
| Accrued dividends on 8% cumulative preferred stock |
— | — | 966 | 2,219 | ||||||||||||||
| Provision for doubtful accounts |
1,911 | 1,762 | 608 | 1,381 | ||||||||||||||
| Inventory step-up amortization |
— | 58,797 | — | — | ||||||||||||||
| Stock-based compensation |
4,114 | 3,706 | 5,892 | 326 | ||||||||||||||
| Other, net |
1,286 | 1,596 | 2,357 | 1,580 | ||||||||||||||
| Change in operating assets and liabilities: |
||||||||||||||||||
| Accounts receivable |
(47,363 | ) | (4,298 | ) | (19,280 | ) | (15,462 | ) | ||||||||||
| Inventories |
(151,945 | ) | (36,832 | ) | (37,751 | ) | 63,773 | |||||||||||
| Income tax receivable |
8,045 | (1,383 | ) | (8,263 | ) | — | ||||||||||||
| Other current assets |
(1,729 | ) | (738 | ) | 972 | 2,706 | ||||||||||||
| Accounts payable and accrued expenses |
19,082 | (7,942 | ) | 96,375 | 32,839 | |||||||||||||
| Other, net |
(1,073 | ) | (17,874 | ) | (1,075 | ) | (5,572 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net cash provided by (used in) operating activities |
(91,006 | ) | (23,439 | ) | 28,106 | 131,105 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Cash flows from investing activities: |
||||||||||||||||||
| Acquisitions, net of cash acquired |
(59,694 | ) | (11,018 | ) | — | 116 | ||||||||||||
| Purchase of property and equipment |
(31,044 | ) | (12,381 | ) | (6,424 | ) | (12,757 | ) | ||||||||||
| Purchase of assets held for sale |
(2,993 | ) | (718 | ) | (1,498 | ) | (1,382 | ) | ||||||||||
| Proceeds from sale of assets held for sale |
1,403 | 6,806 | 185 | 9,232 | ||||||||||||||
| Proceeds from sale of property and equipment |
79 | 74 | 214 | 171 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net cash provided by (used in) investing activities |
(92,249 | ) | (17,237 | ) | (7,523 | ) | (4,620 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Cash flows from financing activities: |
||||||||||||||||||
| Borrowings from revolving credit facility |
2,760,364 | 1,995,596 | 828,727 | 2,056,414 | ||||||||||||||
| Repayments of revolving credit facility |
(2,577,380 | ) | (1,997,413 | ) | (822,005 | ) | (2,147,985 | ) | ||||||||||
| Outstanding checks |
9,981 | 5,328 | (15,369 | ) | (32,524 | ) | ||||||||||||
| Payments of other long-term debt |
(822 | ) | (7,016 | ) | (721 | ) | (3,595 | ) | ||||||||||
| Payments of deferred financing costs |
(5,880 | ) | (24,958 | ) | — | — | ||||||||||||
| Payment for termination of interest rate swap agreements |
— | (2,804 | ) | — | — | |||||||||||||
| Payment of seller fees on behalf of Buyer |
— | (16,792 | ) | — | — | |||||||||||||
| 8% cumulative preferred stock redemption |
— | (30,102 | ) | — | — | |||||||||||||
| Proceeds from issuance of long-term debt |
— | 446,900 | — | — | ||||||||||||||
| Payments of Predecessor senior notes |
— | (340,131 | ) | (6,263 | ) | — | ||||||||||||
| Equity contribution |
— | 11,797 | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net cash provided by (used in) financing activities |
186,263 | 40,405 | (15,631 | ) | (127,690 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net increase (decrease) in cash and cash equivalents |
3,008 | (271 | ) | 4,952 | (1,205 | ) | ||||||||||||
| Cash and cash equivalents—beginning of period |
11,971 | 12,242 | 7,290 | 8,495 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Cash and cash equivalents—end of period |
$ | 14,979 | $ | 11,971 | $ | 12,242 | $ | 7,290 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||
| Supplemental disclosures of cash flow information: |
||||||||||||||||||
| Cash payments for interest |
$ | 61,732 | $ | 30,202 | $ | 26,188 | $ | 42,953 | ||||||||||
| Cash (receipts) payments for taxes, net |
$ | (8,101 | ) | $ | 1,971 | $ | 1,122 | $ | 6,457 | |||||||||
| Supplemental disclosures of noncash activities: |
||||||||||||||||||
| Capital expenditures financed by debt |
$ | — | $ | — | $ | — | $ | 2,307 | ||||||||||
| Noncash capital expenditures |
$ | — | $ | — | $ | — | $ | 2,876 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||
See accompanying notes to consolidated financial statements.
54
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Company:
American Tire Distributors Holdings, Inc. (also referred to herein as “Holdings”) is a Delaware corporation that owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (“ATDI”), a Delaware corporation. Holdings has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its subsidiaries constitute the operations of Holdings presented under accounting principles generally accepted in the United States. Unless the context otherwise requires, “Company” herein refers to Holdings and its consolidated subsidiaries.
The Company is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools, representing 96.6%, 2.0% and 1.4%, respectively, of our net sales. Operating as one operating and reportable segment through a network of 98 distribution centers, including three redistribution centers in the United States, the Company offers access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 60,000 customers. The Company’s customer base is comprised primarily of independent tire dealers with the remainder of other customers representing various national and corporate accounts. The Company serves a majority of the contiguous United States located in the Southeastern and Mid-Atlantic regions, portions of the Northeast, Midwest, Southwest and the West Coast of the United States.
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 will not be exactly comparable to the prior and subsequent 52-week fiscal years. The fiscal year ended December 31, 2011 for the Successor contains operating results for 52 weeks. The seven months ended January 1, 2011 for the Successor contains operating results for 31 weeks while the five months ended May 28, 2010 for the Predecessor contains operating results for 21 weeks. The fiscal year ended January 2, 2010 contains operating results for 52 weeks.
2. Summary of Significant Accounting Policies:
A summary of significant accounting policies used in the preparation of the accompanying financial statements follows:
Basis of Preparation
The accompanying 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 consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated results for the periods presented.
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010 (as amended and supplemented, the “Merger Agreement”), among Holdings, Accelerate Holdings Corp., a Delaware corporation (the “Buyer”), Accelerate Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”), and Investcorp International, Inc., solely in its capacity as a representative of the stockholders, optionholders and warrantholders of Holdings, Merger Sub merged with and into Holdings with Holdings being the surviving corporation (the “Merger” or the “Acquisition”). As a result of the Merger, Holdings became a wholly-owned subsidiary of the Buyer and an indirect wholly-owned subsidiary of Accelerate Parent Corp. (“Accelerate Parent”), substantially all of whose outstanding capital stock is owned by investment entities affiliated with TPG Capital, L.P. (“TPG” or the “Sponsor”). Under the guidance provided by the
55
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Under push-down accounting, certain transactions incurred by the Buyer, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of common stock of Holdings have been pushed down from the Buyer to Holdings.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiaries. Partially-owned investments are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are based on several factors including the facts and circumstances available at the time of the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probably future outcome. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of operations in the period that they are determined.
Cash and Cash Equivalents
The Company considers all deposits with an original maturity of three months or less to be cash equivalents in its consolidated financial statements. Outstanding checks are presented as a financing cash outflow in the statement of cash flows because they are funded by drawing on the revolving credit facility as they are presented for payment.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents the best estimate of probable loss inherent within the Company’s accounts receivable balance. Estimates are based upon both the creditworthiness of specific customers and the overall probability of losses based upon an analysis of the overall aging of receivables as well as past collection trends and general economic conditions.
Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value and consist primarily of automotive tires, custom wheels, and related tire supply and tool products. 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.
56
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, assets placed in service are recorded at cost and depreciated using the straight-line method at annual rates sufficient to amortize the cost of the assets less estimated salvage values over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of their economic useful life or the related lease term. The range of useful lives used to depreciate property and equipment is as follows:
| Buildings |
25 to 31 years | |
| Leasehold improvements |
9 years | |
| Machinery and equipment |
2 to 7 years | |
| Furniture and fixtures |
8 years | |
| Internal use software |
3 to 5 years | |
| Vehicles and other |
4 to 6 years |
Major expenditures for replacements and significant improvements that increase asset values and extend useful lives are capitalized. Repairs and maintenance expenditures that do not extend the useful life of the asset are charged to expense as incurred. The carrying amounts of assets that are sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is reflected in the statement of operations.
The Company capitalizes costs, including interest, incurred to develop or acquire internal-use software. These costs are capitalized subsequent to the preliminary project stage once specific criteria are met. Costs incurred in the preliminary project planning stage are expensed. Other costs, such as maintenance and training, are also expensed as incurred. Capitalized costs are amortized over their estimated useful lives using the straight-line method.
The Company assesses the recoverability of the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite useful lives are no longer amortized, but 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.
Recoverability of goodwill is measured at the reporting unit level and determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.
Recoverability of other indefinite-lived intangible assets is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
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Intangible assets such as customer-related intangible assets and noncompete agreements with finite useful lives are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:
| Customer list |
19 years | |
| Tradenames |
1 to 5 years | |
| Noncompete agreements |
2 to 5 years |
The Company assesses the recoverability of the carrying value of its intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets.
Deferred Financing Costs
Deferred financing costs are expenditures associated with obtaining financings that are capitalized in the consolidated balance sheets and amortized over the term of the loans to which such costs relate. Amounts capitalized are recorded within other assets in the consolidated balance sheets and amortized to interest expense in the consolidated statements of operations. At December 31, 2011, the unamortized balance of deferred financing costs was $23.4 million, which includes $5.9 million incurred to increase the borrowing capacity and extend the maturity date of the Company’s revolving credit facility. At January 1, 2011, the unamortized balance was $22.3 million. Amortization for the Successor was $4.8 million and $2.7 million for fiscal year 2011 and the seven months ended January 1, 2011, respectively. Amortization for the Predecessor five months ended May 28, 2010 was $10.0 million, of which $8.0 million related to the write-off of deferred financing costs associated with the old debt structure eliminated as a result of the Merger. In addition, the Predecessor amortized $4.8 million during the fiscal year 2009.
Equity Method Investment
The Company has a 52% equity investment in American Car Care Centers (“ACCC”), an association of independent tire and automotive service dealers with over 1,100 locations nationwide. ACCC engages in a program to assist its stockholders and their customers in the promotion, marketing, distribution and sale of tires, tire supplies, accessories and equipment. Although we hold a majority ownership interest, our interest does not provide us with the ability to exercise significant influence. Accordingly, the investment is accounted for under the equity method and is included in other assets in the accompanying consolidated balance sheet at December 31, 2011.
Derivative Instruments and Hedging Activities
For derivative instruments, the Company applies FASB authoritative guidance which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.
Self Insurance
The Company is self-insured with respect to employee health liability claims and maintains a large deductible program on both workers’ compensation and auto insurance. The Company has stop-loss insurance coverage for individual claims in excess of $0.3 million for employee health insurance and deductibles of $0.3
58
million on the workers’ compensation and auto on a per claim basis. Aggregate stop-loss limits for workers’ compensation and auto are $7.8 million. There is no aggregate stop-loss limit on employee health insurance. A reserve for liabilities associated with losses is established for claims filed and claims incurred but not yet reported using actuarial methods followed in the insurance industry as well as the Company’s historical claims experience.
Revenue Recognition
Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. The Company recognizes revenue when the title and the risks and rewards of ownership have substantially transferred to the customer, which is upon delivery under free on board (“FOB”) destination terms. The Company permits customers from time to time to return certain products, but there is no contractual right of return. The Company continuously monitors and tracks such returns and records an estimate of such future returns, which is based on historical experience and recent trends.
In the normal course of business, the Company extends credit, on open accounts, to its customers after performing a credit analysis based on a number of financial and other criteria. The Company performs ongoing credit evaluations of its customers’ financial condition and does not normally require collateral; however, letters of credit and other security are occasionally required for certain new and existing customers.
Customer Rebates
The Company offers rebates to its customers under a number of different programs. These rebates are recorded in accordance with the accounting standards for consideration given by a vendor to a customer. The majority of these programs provide for the customer to receive rebates, generally in the form of a reduction in the related accounts receivable balance, when certain measures are achieved, generally related to the volume of product purchased from the Company. These rebates are recorded as a reduction of the related price of the product, which reduces the amount of revenue recorded. Throughout the year, the amount of rebates is estimated based on the expected level of purchases to be made by customers that participate in the rebate programs. These estimates are periodically revised to reflect rebates earned by customers based on actual purchases made.
Manufacturer Rebates
The Company receives rebates from its vendors under a number of different programs. These rebates are recorded in accordance with the accounting standards for cash consideration received from a vendor. Many of the vendor programs provide for the Company to receive rebates when any of a number of measures are achieved, generally related to the volume of purchases. These rebates are accounted for as a reduction to the price of the product, which reduces the carrying value of inventory until the product is sold. Throughout the year, the amount recognized for annual rebates is based on purchases management considers probable for the full year. These estimates are continually revised to reflect rebates earned based on actual purchase levels.
Cooperative Advertising and Marketing Programs
The Company participates in cooperative advertising and marketing programs (“co-op”) with its vendors. Co-op funds are provided to the Company generally based on the volume of purchases made with vendors that offer such programs. A portion of the funds received must be used for specific advertising and marketing expenditures incurred by the Company or its customers. The co-op funds received by the Company from its vendors are accounted for in accordance with the accounting standards related to accounting for cash consideration received from a vendor, which requires that the Company record the funds received as a reduction of cost of sales or as an offset to specific costs incurred in selling the vendor’s products. The co-op funds that are provided to the Company’s customers are accounted for in accordance with authoritative guidance related to
59
accounting for cash consideration given by a vendor to a customer, which requires that the Company record the funds paid as a reduction of revenue since no separate identifiable benefit is received by the Company.
Shipping and Handling Fees and Costs
In accordance with current accounting standards, the Company determined that shipping fees shall be reported on a gross basis. As a result, all amounts billed to a customer in a sale transaction related to shipping fees represent revenues earned for the goods provided and therefore recorded within net sales in the consolidated statement of operations. Handling costs include expenses incurred to store, move, and prepare products for shipment. The Company classifies these costs as selling, general and administrative expenses within the consolidated statement of operations, and includes a portion of internal costs such as salaries and overhead related to these activities. For fiscal 2011 and the seven months ended January 1, 2011, the Successor incurred $140.8 million and $64.5 million, respectively, related to these expenses. For the Predecessor, such expenses totaled $43.1 million and $99.6 million for the five months ended May 28, 2010 and fiscal 2009, respectively.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision is computed using the asset and liability method of accounting, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, the Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. Deferred tax assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which those tax items are expected to be realized or settled. The Company regularly reviews the recoverability of its deferred tax assets considering historic profitability, projected future taxable income, and timing of the reversals of existing temporary differences as well as the feasibility of our tax planning strategies. Where appropriate, a valuation allowance is recorded if available evidence suggests that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Changes to valuation allowances are recognized in earnings in the period such determination is made.
The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is more-likely-than-not that the position will be sustained upon examination. The tax impacts recognized in the financial statements from such positions are then measured based on the largest impact that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions as a component of the provision for income taxes.
Recently Issued Accounting Pronouncements
In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, “Testing for Goodwill Impairment” which amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow a company to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company has determined that this new guidance will not have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 requires the Company to present components of other comprehensive income and of net income in one continuous statement of comprehensive income, or in two separate, but consecutive statements. While the
60
new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The option to report other comprehensive income within the statement of equity has been removed. This new presentation will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” ASU No. 2011-04 represents converged guidance between U.S. GAAP and IFRS resulting in common requirements for measuring fair value and for disclosing information about fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The Company is currently assessing the impact, if any, on its consolidated financial statements.
3. Acquisitions:
Acquisition of Holdings
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by affiliates of TPG for an aggregate purchase price of $1,287.5 million in cash, less the amount of the Company’s funded indebtedness, transaction expenses, aggregate redemption payments with respect to the Company’s outstanding preferred stock, certain holdback amounts plus the amount of estimated cash, plus or minus certain working capital adjustments. The Merger was financed by $635.0 million in aggregate principle of debt financing as well as common equity capital. In addition, the Company tendered its existing outstanding debt which was subsequently purchased and retired.
The fair value of consideration transferred was as follows:
| In thousands |
May 28, 2010 |
|||
| Aggregate purchase price |
$ | 1,287,500 | ||
| Redemption of Funded Indebtedness |
(529,176 | ) | ||
| Redemption of Preferred Stock |
(30,102 | ) | ||
| Termination of Interest Rate Swaps |
(2,804 | ) | ||
| Transaction fees |
(66,234 | ) | ||
| Holdback amount |
(13,000 | ) | ||
| Cash on hand |
7,273 | |||
| Working capital adjustments |
(7,000 | ) | ||
|
|
|
|||
| Total Fair Value of Consideration Paid |
$ | 646,457 | ||
|
|
|
|||
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The Merger was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of merger. The allocation of the purchase price is as follows:
| In thousands |
May 28, 2010 |
|||
| Cash |
$ | 12,242 | ||
| Restricted cash |
9,750 | |||
| Accounts receivable |
207,561 | |||
| Inventory |
485,448 | |||
| Other current assets |
20,489 | |||
| Property and equipment |
91,150 | |||
| Intangible assets |
781,324 | |||
| Other assets |
48,100 | |||
|
|
|
|||
| Total assets acquired |
1,656,064 | |||
| Debt |
612,638 | |||
| Accounts payable |
422,245 | |||
| Accrued and other liabilities |
108,456 | |||
| Deferred income taxes |
296,549 | |||
|
|
|
|||
| Total liabilities assumed |
1,439,888 | |||
| Net assets acquired |
216,176 | |||
| Goodwill |
430,281 | |||
|
|
|
|||
| Purchase price allocation |
$ | 646,457 | ||
|
|
|
|||
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. Inventories were 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.
The Company recorded intangible assets based on their estimated fair value and consisted of the following:
| In thousands |
Estimated Useful Life |
Estimated Fair Value |
||||
| Customer list |
19 years | $ | 527,898 | |||
| Tradenames—Infinite |
Indefinite | 249,893 | ||||
| Tradenames—Finite |
1 -5 years | 3,168 | ||||
| Noncompete agreement |
2 years | 365 | ||||
|
|
|
|||||
| Total |
$ | 781,324 | ||||
|
|
|
|||||
The Company allocated $249.9 million to a tradename related to ATDI. Management considered many factors in the determination that it will account for the asset as indefinite-lived, including the current market leadership position of the name as well as the recognition in the industry. Therefore, in accordance with current accounting guidance, the indefinite-lived intangible asset will not be amortized, but instead tested for impairment at least annually (more frequently if certain indicators are present).
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The following unaudited pro forma supplementary data for the five months ended May 28, 2010 and the fiscal year ended January 2, 2010 give effect to the Merger as if it had occurred on January 4, 2009 (the first day of the Company’s 2009 fiscal year).
| Pro Forma | ||||||||
| Five
Months Ended |
Fiscal
Year Ended |
|||||||
| In thousands |
May
28, 2010 |
January
2, 2010 |
||||||
| Net sales |
$ | 934,925 | $ | 2,171,787 | ||||
| Net (loss) income |
(17,835 | ) | (22,740 | ) | ||||
|
|
|
|
|
|||||
The pro forma supplementary data for the five months ended May 28, 2010 and fiscal year ended January 2, 2010 includes $16.4 million and $38.5 million, respectively, as an adjustment to historical amortization expense as a result of the valuation of $531.4 million allocated to amortizable intangible assets acquired in the Merger, primarily associated with a customer relationship intangible asset. In addition, the Company has included a reduction in non-recurring transaction expenses related to the Merger of $40.2 million for the five months ended May 28, 2010.
The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company’s results of operations had the Merger been consummated on the date assumed and does not project the Company’s results of operations for any future date.
2011 Acquisition
On April 15, 2011, the Company entered into a Stock Purchase Agreement with the Bowlus Service Company d/b/a North Central Tire (“NCT”) to acquire 100% of the outstanding capital stock of NCT. NCT owned and operated three distribution centers in Canton, Ohio, Cincinnati, Ohio and Rochester, New York, serving over 2, 700 customers. The acquisition was completed on April 29, 2011 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of NCT is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805 – Business Combinations. As a result, the information is not presented.
The acquisition of NCT was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. A majority of the net assets acquired relates to a customer list intangible asset, which had an acquisition date fair value of $38.2 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $26.2 million. The premium in the purchase price paid for the acquisition of NCT reflects the anticipated realization of significant operational and cost synergies. The purchase of NCT expanded the Company’s market position in Ohio and Western New York.
2010 Acquisitions
On December 10, 2010, the Company completed the purchase of substantially all the assets of Lisac’s of Washington, Inc. (“Lisac’s”) pursuant to an Asset Purchase Agreement dated as of December 10, 2010. Lisac’s operated tire distribution centers in Portland, Oregon and Spokane, Washington, serving over 1,400 customers in the area. The acquisition was funded through the Company’s ABL Facility. The Company does not believe the acquisition of Lisac’s 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.
63
The acquisition of Lisac’s 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 relates to a customer list intangible asset, which had an acquisition date fair value of $4.4 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $0.5 million. The purchase of Lisac’s expanded the Company’s market position in the Northwestern United States.
On December 10, 2010, the Company completed the purchase of 100% of the capital stock of Tire Wholesalers, Inc. (“Tire Wholesalers”) pursuant to a Stock Purchase Agreement dated as of December 10, 2010. Tire Wholesalers operated one distribution center in Kent, Washington, which serviced over 750 customers in the area. The acquisition was funded through the Company’s ABL Facility. The Company does not believe the acquisition of Tire Wholesalers 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 Tire Wholesalers 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 relates to a customer list intangible asset, which had an acquisition date fair value of $1.7 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $0.4 million. The purchase of Tire Wholesalers expanded the Company’s market position in the Northwestern United States.
4. Inventories:
Inventories consist primarily of automotive tires, custom wheels, tire supplies and tools and are valued at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. A majority of the Company’s tire vendors allow for the return of tire products, subject to certain limitations, specified in supply arrangements with the vendors. In addition, the Company’s inventory is collateral under the ABL Facility. See Note 9 for further information.
During the quarter ended October 2, 2010, the Company made the decision to discontinue selling certain products within its equipment product offering. As a result of the decision, the Company recognized a $1.0 million impairment charge, which is included in cost of goods sold in the accompanying consolidated statement of operations, related to the estimated write-down of related inventory to their fair market values as the Company moved to dispose of the residual equipment in these product offerings. Sales related to these products accounted for 1.7% of the Company’s combined net sales during 2010.
As a result of the Merger, the carrying value of inventory was increased by $58.8 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 in the accompanying consolidated statement of operations over the period of the Company’s normal inventory turns, which approximated two months.
5. Assets Held for Sale:
In accordance with current accounting standards, the Company classifies assets as held for sale in the period in which all held for sale criteria is met. Assets held for sale are reported at the lower of their carrying amount or fair value less cost to sell and are no longer depreciated. At December 31, 2011, assets held for sale totaled $6.3 million, of which $1.3 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.
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During the first quarter of 2011, the Company classified a distribution center and former headquarters for Am-Pac Tire Dist., Inc. located in Simi Valley, CA as held for sale. The building had a fair value of $5.0 million and was previously used as a warehouse within the Company’s distribution operations. The distribution operations have been consolidated into other ATDI facilities that are currently being leased. The Company is actively marketing this property and anticipates that the property will be sold within a twelve-month period from the date in which it was classified as held for sale.
6. Property and Equipment:
The following table represents the major classes of property and equipment at December 31, 2011 and January 1, 2011 for the Successor:
| Successor | ||||||||
| In thousands |
December
31, 2011 |
January
1, 2011 |
||||||
| Land |
$ | 3,578 | $ | 5,538 | ||||
| Buildings and leasehold improvements |
20,361 | 21,357 | ||||||
| Machinery and equipment |
11,191 | 8,470 | ||||||
| Furniture and fixtures |
31,692 | 22,571 | ||||||
| Software |
54,576 | 35,567 | ||||||
| Vehicles and other |
2,698 | 3,957 | ||||||
|
|
|
|
|
|||||
| Total property and equipment |
124,096 | 97,460 | ||||||
| Less—Accumulated depreciation |
(24,166 | ) | (7,907 | ) | ||||
|
|
|
|
|
|||||
| Property and equipment, net |
$ | 99,930 | $ | 89,553 | ||||
|
|
|
|
|
|||||
Depreciation expense for the Successor was $16.5 million for the fiscal year ended December 31, 2011 and $8.0 million for the seven months ended January 1, 2011. The Predecessor recorded depreciation expense of $7.0 million for the five months ended May 28, 2010 and $14.0 million for the fiscal year ended January 2, 2010. Depreciation expense is classified in selling, general and administrative expense in the accompanying consolidated statements of operations.
In connection with the Merger, the Company recorded a step-up of $28.6 million in the carrying value of its property and equipment to fair value. The following table sets forth the step-up in the carrying value by category as well as the estimated useful lives for the Successor and Predecessor periods:
| (In thousands) |
Successor Estimated Useful Lives (years) |
Predecessor Estimated Useful Lives (years) |
Step-up to FMV at May 28, 2010 |
|||||||
| Land |
n/a | n/a | $ | 220 | ||||||
| Buildings |
25 – 31 | 25 – 40 | (2,351 | ) | ||||||
| Leasehold improvements |
9 | 7 | 3,347 | |||||||
| Machinery and equipment |
2 – 7 | 3 – 4 | 2,404 | |||||||
| Furniture and fixtures |
8 | 7 | 10,886 | |||||||
| Software |
3 – 5 | 3 | 12,574 | |||||||
| Vehicles and other |
4 – 6 | 3 | 1,510 | |||||||
|
|
|
|||||||||
| Total |
$ | 28,590 | ||||||||
|
|
|
|||||||||
The change in the fair value of select assets recorded at the acquisition date was based on management’s assessment of the acquired assets’ condition, as well as an evaluation of the current market value for such assets. The increase in fair value primarily consisted of changes in internal use software and furniture and fixtures of
65
$10.9 million and $12.6 million, respectively. The increase from net book value to fair value of these asset types was primarily the result of increased flexibility and adaptability in their respective uses, including implementation of common software and warehousing platforms across our business, as well as our evaluation of current market conditions. In addition, the Company also considered the length of time over which the economic benefit of these assets is expected to be realized and adjusted the useful life of such assets accordingly as of the valuation date.
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:
| Successor | Predecessor | |||||||||||||
| In thousands |
December
31, 2011 |
January
1, 2011 |
May
28, 2010 |
|||||||||||
| Beginning balance |
$ | 431,065 | $ | — | $ | 375,734 | ||||||||
| Purchase accounting adjustments |
(11,563 | ) | — | 4,275 | ||||||||||
| Elimination of Predecessor goodwill |
— | — | (380,009 | ) | ||||||||||
| Acquisition of Holdings |
— | 430,281 | — | |||||||||||
| Acquisitions |
26,213 | 784 | — | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 445,715 | $ | 431,065 | $ | — | ||||||||
|
|
|
|
|
|
|
|||||||||
As of December 31, 2011, the Company has recorded goodwill of $445.7 million, of which approximately $23 million of net goodwill is deductible for income tax purposes in future periods. The balance primarily relates to the Merger on May 28, 2010, in which $430.3 million was recorded as goodwill. In addition, the Company completed the purchase of substantially all the assets of Lisac’s and 100% of the capital stock of Tire Wholesalers during 2010. The aggregate purchase price of these two businesses was funded through the Company’s ABL Facility. As a result of the acquisition, the Company recorded $0.9 million of goodwill.
On April 15, 2011, the Company entered into a Stock Purchase Agreement to acquire 100% of the outstanding capital stock of NCT. The acquisition was completed on April 29, 2011 and was funded through the Company’s ABL Facility. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $26.2 million as goodwill. See Note 3 for additional information.
During the fourth quarter of 2011, the Company recorded an out of period correction to purchase accounting for $11.7 million related to deferred income taxes for carryover basis in tax-deductible goodwill.
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 basis or accelerated basis over periods ranging from one to nineteen years.
66
The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at December 31, 2011 and January 1, 2011 for the Successor:
| Successor | ||||||||||||||||
| December 31, 2011 | January 1, 2011 | |||||||||||||||
| Gross | Accumulated | Gross | Accumulated | |||||||||||||
| In thousands |
Amount | Amortization | Amount | Amortization | ||||||||||||
| Customer list |
$ | 572,209 | $ | 92,635 | $ | 533,998 | $ | 32,466 | ||||||||
| Noncompete agreement |
6,320 | 1,143 | 365 | 135 | ||||||||||||
| Tradenames |
4,104 | 1,064 | 3,168 | 436 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total finite-lived intangible assets |
582,633 | 94,842 | 537,531 | 33,037 | ||||||||||||
| Tradenames (indefinite-lived) |
249,893 | — | 249,893 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total intangible assets |
$ | 832,526 | $ | 94,842 | $ | 787,424 | $ | 33,037 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
At December 31, 2011, the Company had $737.7 million of intangible assets. The balance primarily relates to the Merger on May 28, 2010, in which $781.3 million was recorded as intangible assets. As a result of the acquisition of NCT on April 29, 2011, the Company allocated $43.4 million to finite-lived intangible assets, including $38.2 million associated with a customer list as well as $5.2 million associated with a noncompete agreement. The intangible assets had a useful life of nineteen years and five years, respectively. In addition, the Company allocated $6.1 million to customer lists associated with the acquisition of Lisac’s and Tire Wholesalers in the fourth quarter of 2010.
Amortization of intangible assets for the Successor was $61.8 million in fiscal 2011 and $33.0 million in the seven months ended January 1, 2011. The Predecessor recorded amortization of intangible assets of $7.7 million in the five months ended May 28, 2010 and $18.0 million in fiscal 2009. Estimated amortization expense on existing intangible assets is expected to approximate $64 million in 2012, $61 million in 2013, $57 million in 2014, $49 million in 2015 and $41 million in 2016.
9. Long-term Debt:
The following table presents the Successor’s long-term debt at December 31, 2011 and at January 1, 2011:
| Successor | ||||||||
| December 31, | January 1, | |||||||
| In thousands |
2011 | 2011 | ||||||
| ABL Facility |
$ | 373,255 | $ | 190,271 | ||||
| Senior Subordinated Notes |
200,000 | 200,000 | ||||||
| Senior Secured Notes |
247,425 | 247,084 | ||||||
| Capital lease obligations |
14,118 | 14,290 | ||||||
| Other |
1,010 | 899 | ||||||
|
|
|
|
|
|||||
| Total debt |
835,808 | 652,544 | ||||||
| Less—Current maturities |
(158 | ) | (656 | ) | ||||
|
|
|
|
|
|||||
| Long-term debt |
$ | 835,650 | $ | 651,888 | ||||
|
|
|
|
|
|||||
The fair value of the Company’s long-term senior notes was $463.5 million at December 31, 2011 and $470.6 million at January 1, 2011. 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.
67
Aggregate maturities of long-term debt at December 31, 2011, are as follows:
| In thousands |
||||
| 2012 |
$ | 158 | ||
| 2013 |
202 | |||
| 2014 |
215 | |||
| 2015 |
114 | |||
| 2016 |
373,369 | |||
| Thereafter |
461,750 | |||
|
|
|
|||
| Total |
$ | 835,808 | ||
|
|
|
|||
ABL Facility
In connection with the acquisition of Holdings on May 28, 2010, ATDI entered into the Fifth Amended and Restated Credit Agreement, as subsequently amended (“ABL Facility”). The agreement provided for a senior secured asset-backed revolving credit facility of up to $450.0 million (of which up to $50.0 million could have been utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default was then existing or would arise therefrom, the Company had the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to mature on November 28, 2014.
On June 6, 2011, the Company entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. The Company maintains the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. At December 31, 2011, the Company had $373.3 million outstanding under the ABL Facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $8.0 million, leaving $253.4 million available for additional borrowings.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of December 31, 2011 or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of December 31, 2011. The applicable margins under the ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
The borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
| • | 85% of eligible accounts receivable; plus |
| • | The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory and (b) 85% of the net orderly liquidation value of eligible tire inventory; plus |
| • | The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory and (b) 85% of the net orderly liquidation value of eligible non-tire inventory. |
All obligations under the ABL Facility are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
68
The ABL Facility contains customary covenants, including covenants that restricts the Company’s ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates or change the Company’s fiscal year. If the amount available for additional borrowing under the ABL Facility is less than the greater of (a) 12.5% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the borrowing base and (b) $25.0 million, then the Company would be subject to an additional covenant requiring them to meet a fixed charge coverage ratio of 1.0 to 1.0. As of December 31, 2011, the Company’s additional borrowing availability under the ABL Facility was above the required amount and the Company was therefore not subject to the additional covenants.
Senior 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 be 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
69
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 be 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.
70
Capital Lease Obligations
As of December 31, 2011, the Company has a capital lease obligation of $14.1 million relating to a prior sale and subsequent leaseback of three of its owned facilities. The initial term of the lease is for 20 years, followed by two 10-year renewal options. Due to continuing involvement with the properties, the Company reports this transaction as a capital lease using direct financing lease accounting. As a result, all cash paid to the lessor is recorded as interest expense and the capital lease obligation will be reduced when the lease is ultimately terminated. There was no gain or loss recognized as a result of the initial sales transaction. The current annual rent paid under the terms of the lease is $2.0 million, paid quarterly, and is adjusted for Consumer Price Index changes every two years. The next scheduled annual rent expense increase is April 25, 2012.
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 its 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 consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of contracts that qualify for hedge accounting treatment are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in the statement of operations at the time earnings are affected by the hedged transaction. For other derivatives, changes in the fair value of the contract are recognized immediately in the statement of operations.
On September 23, 2011, the Company entered into two interest rate swap agreements (“3Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 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 counterpart 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 consolidated statement of operations.
On February 24, 2011, the Company entered into two interest rate swap agreements (“1Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $75.0 million, of which $25.0 million is at a fixed interest rate of 0.585% and will expire in February 2012 and $50.0 million is at a fixed interest rate of 1.105% and will expire in February 2013. The counterparty to each swap is a major financial institution. The 1Q 2011 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in the consolidated statement of operations.
The following table presents the fair value of the Company’s derivative instruments included within the consolidated balance sheet as of December 31, 2011 and January 1, 2011 for the Successor:
| Liability Derivatives | ||||||||||||
| Balance Sheet | December 31, | January 1, | ||||||||||
| In thousands |
Location | 2011 | 2011 | |||||||||
| Derivatives not designated as hedges: |
||||||||||||
| 1Q 2011 swaps—$75 million notional |
Accrued expenses | $ | 315 | $ | — | |||||||
| 3Q 2011 swaps—$100 million notional |
Accrued expenses | 551 | — | |||||||||
|
|
|
|
|
|||||||||
| Total |
$ | 866 | $ | — | ||||||||
|
|
|
|
|
|||||||||
On June 4, 2009, the Predecessor entered into an interest rate swap agreement (the “2Q 2009 Swap”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swap in place
71
covered a notional amount of $100.0 million at a fixed interest rate of 1.45% and was set to expire on June 8, 2011. The counterparty to the swap was a major financial institution. The 2Q 2009 Swap did not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value were recognized in the consolidated statement of operations.
On October 11, 2005, the Predecessor entered into an interest rate swap agreement (the “4Q 2005 Swap”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swap in place covered a notional amount of $85.0 million at a fixed interest rate of 4.79% and was set to expire on September 30, 2010. The counterparty to the swap was a major financial institution. The 4Q 2005 Swap met the criteria to qualify for hedge accounting treatment and was designated as a cash flow hedge, resulting in no ineffectiveness in the hedging relationship. Accordingly, changes in fair value of the 4Q 2005 Swap were deferred in accumulated other comprehensive income (loss).
The pre-tax effect of the Company’s derivative instruments not designated as hedges on the consolidated statement of operations for the Successor and the Predecessor periods was as follows:
| (Gain) Loss Recognized in Interest Expense | ||||||||||||||||||
| Successor | Predecessor | |||||||||||||||||
| Fiscal Year | Seven Months | Five Months | Fiscal Year | |||||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||||
| December 31, | January 1, | May 28, | January 2, | |||||||||||||||
| In thousands |
2011 | 2011 | 2010 | 2010 | ||||||||||||||
| Derivatives not designated as hedges: |
||||||||||||||||||
| 1Q 2011 swaps—$75 million notional |
$ | 315 | $ | — | $ | — | $ | — | ||||||||||
| 3Q 2011 swaps—$100 million notional |
551 | — | — | — | ||||||||||||||
| 2Q 2009 swap—$100 million notional |
— | — | 68 | 870 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 866 | $ | — | $ | 68 | $ | 870 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The pre-tax effect of the Company’s derivative instruments designated as hedges on the consolidated statement of operations for the Predecessor periods was as follows:
| Predecessor | ||||||||||||
| Location of Gain | Amount of Gain | |||||||||||
| Amount of Gain | (Loss) Reclassified | (Loss) Reclassified | ||||||||||
| (Loss) Deferred | from AOCI into | from AOCI into | ||||||||||
| In thousands |
in AOCI | Income | Income | |||||||||
| Derivatives designated as hedges: |
||||||||||||
| 4Q 2005 Swap—Five months ended May 28, 2010 |
$ | (1,140 | ) | Interest Expense | $ | 4,710 | ||||||
| 4Q 2005 Swap—Fiscal year ended January 2, 2010 |
(2,608 | ) | Interest Expense | 3,388 | ||||||||
|
|
|
|
|
|
|
|||||||
On May 28, 2010, in connection with the Merger, the Company terminated the 4Q 2005 Swap agreement and the 2Q 2009 Swap agreement for $1.9 million $0.9 million, respectively.
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 based on quoted prices in active markets for identical assets or liabilities. |
| • | Level 2—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. |
72
| • | Level 3—Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities. |
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents the fair value and hierarchy levels for the Successor’s assets and liabilities, which are measured at fair value on a recurring basis as of December 31, 2011:
| Fair Value Measurements | ||||||||||||||||
| In thousands |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: |
||||||||||||||||
| Benefit trust assets |
$ | 2,276 | $ | 2,276 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 2,276 | $ | 2,276 | $ | — | $ | — | ||||||||
| Liabilities: |
||||||||||||||||
| Derivative instruments |
$ | 866 | $ | — | $ | 866 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 866 | $ | — | $ | 866 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
ASC 820—Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines fair value of its financial assets and liabilities using the following methodologies:
| • | Benefit trust assets—These assets include money market and mutual funds that are the underlying for deferred compensation plan assets, held in a rabbi trust. The fair value of the assets is based on observable market prices quoted in readily accessible and observable markets. |
| • | Derivative instruments—These instruments consist of interest rate swaps. The fair value is based upon quoted prices for similar instruments from a financial institution that is counterparty to the transaction. |
The methodologies used by the Company to determine the fair value of its financial assets and liabilities at December 31, 2011 are the same as those used at January 1, 2011. As a result, there have been no transfers between Level 1and Level 2 categories.
12. Employee Benefits:
The Company accounts for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Company’s stock-based compensation plans include programs for stock options and restricted stock units.
Stock Options
The Predecessor adopted the 2005 Management Stock Incentive Plan (the “2005 Plan”) in order to attract, retain and motivate directors, officers, employees and consultants of the Company and its subsidiaries. The 2005 Plan authorized the issuance of up to 190,857 shares of voting common stock under terms and conditions set by the Predecessor’s Board of Directors. A committee appointed by the Predecessor’s Board of Directors administered the plan and had sole authority to select those individuals to whom options may be granted and to
73
determine the number of shares of the Predecessor’s Series A Common Stock that would be issuable upon exercise of the options granted. Options granted under the 2005 Plan generally vested based on performance or the occurrence of specified events, such as an initial public offering or company sale. Performance-based options vested at the end of each year based on the achievement of annual or cumulative EBITDA targets for the year. Options that vested on the basis of events such as an initial public offering or company sale did so only to the extent that the initial shareholders earned a specified return on its initial investment in the Predecessor’s shares.
Changes in options outstanding under the 2005 Plan are as follows:
| Options Outstanding |
Weighted Average Exercise Price |
Options Exercisable |
Weighted Average Exercise Price |
|||||||||||||
| January 3, 2009 |
177,504 | $ | 175.63 | 66,871 | $ | 114.97 | ||||||||||
| Granted |
1,875 | 339.30 | n/a | n/a | ||||||||||||
| Amendment |
(30,364 | ) | 211.50 | n/a | n/a | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| January 2, 2010 |
149,015 | 170.38 | 67,468 | 117.65 | ||||||||||||
| Forfeited |
(4,296 | ) | 211.50 | n/a | n/a | |||||||||||
| Termination |
(144,719 | ) | 169.16 | 108,785 | 155.17 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| May 28, 2010 |
— | $ | — | — | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
In October 2009, the Predecessor amended certain stock option agreements such that the number of unvested stock options was reduced and the vesting performance targets for these unvested stock options were modified. This amendment was evaluated in conjunction with the accounting standard for stock compensation and management concluded that no additional compensation expense should be recognized as a result of this modification.
In March 2010, Holdings board of directors approved a discretionary vesting of certain previously unvested stock options. The average fair value of these stock options using the Black-Scholes option-pricing model was $363.34. The following assumptions were used:
| March 2010 | ||||
| Risk-free interest rate |
1.26 | % | ||
| Dividend yield |
— | |||
| Expected remaining life |
2.25 years | |||
| Volatility |
44 | % | ||
This discretionary vesting was evaluated in conjunction with the accounting standard for modification of stock options. As the Predecessor did not have sufficient historical volatility data for Holdings own common stock, the stock price volatility utilized in the fair value calculation was based on the Predecessor’s peer group in the industry in which it does business. As a result of this evaluation, the Predecessor recorded non-cash compensation expense of $5.9 million in first quarter 2010.
On May 28, 2010, as a result of the Acquisition, all Holdings stock options that were already vested were converted into the right to receive the excess of $596.65 per share over the exercise price of each of the options. As a consequence, subsequent to the May 28, 2010 transaction date, all options to purchase previously existing Holdings common stock ceased to exist and the existing stock option plans were terminated.
In August 2010, the Company’s indirect parent company adopted a Management Equity Incentive Plan (the “2010 Plan”), pursuant to which the indirect parent company will grant options to selected employees and directors of the Company. The 2010 Plan provides that a maximum of 48.6 million shares of common stock of the indirect parent company are issuable pursuant to the exercise of options, of which 4.0 million options remain available as of December 31, 2011 for future incentive awards.
74
Changes in options outstanding under the 2010 Plan are as follows:
| Options Outstanding |
Weighted Average Exercise Price |
Options Exercisable |
Weighted Average Exercise Price |
|||||||||||||
| May 28, 2010 |
— | $ | — | — | $ | — | ||||||||||
| Granted |
44,448,000 | 1.00 | n/a | n/a | ||||||||||||
| Cancelled |
— | — | n/a | n/a | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| January 1, 2011 |
44,448,000 | 1.00 | — | — | ||||||||||||
| Granted |
1,900,000 | 1.00 | n/a | n/a | ||||||||||||
| Cancelled |
(1,749,600 | ) | 1.00 | n/a | n/a | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2011 |
44,598,400 | $ | 1.00 | 8,710,401 | $ | 1.00 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Options granted under the 2010 Plan expire no later than 10 years from the date of grant and vest based on the passage of time and/or the achievement of certain performance targets in equal installments over three or five years. The fair value of each of the Company’s time-based stock option awards is expensed on a straight-line basis over the required service period, which is generally the three or five-year vesting period of the options. However, for options granted with performance target requirements, compensation expense is recognized when it is probable that the performance target will be achieved.
The weighted average fair value of the stock options granted during the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 for the Successor was $0.44 and $0.42, respectively, using the Black-Scholes option pricing model. The following weighted average assumptions were used:
| Fiscal
Year Ended December 31, 2011 |
Seven
Months Ended January 1, 2011 |
|||||||
| Risk-free interest rate |
2.41 | % | 1.97 | % | ||||
| Dividend yield |
— | — | ||||||
| Expected life |
6.4 years | 6.5 years | ||||||
| Volatility |
40.75 | % | 39.45 | % | ||||
As the Company does not have sufficient historical volatility data for Holdings own common stock, the stock price volatility utilized in the fair value calculation is based on the Company’s peer group in the industry in which it does business. The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Because the Company does not have relevant data available regarding the expected life of the award, the expected life of the award is derived from the Simplified Method as allowed under SAB Topic 14.
Restricted Stock Units (RSUs)
In October 2010, the Company’s indirect parent company adopted the Non-Employee Director Restricted Stock Plan (the “2010 RSU Plan”), pursuant to which the indirect parent company will grant restricted stock units to non-employee directors of the Company. The 2010 RSU Plan provides that a maximum of 0.8 million shares of common stock of the indirect parent company may be granted to non-employee directors of the Company, of which 0.5 million RSUs remain available as of December 31, 2011 for future incentive awards.
75
The following table summarizes RSU activity under the 2010 RSU Plan:
| Number of Shares |
Weighted Average Exercise Price |
|||||||
| Outstanding and unvested at May 28, 2010 |
— | $ | — | |||||
| Granted |
150,000 | 1.00 | ||||||
| Cancelled |
— | — | ||||||
|
|
|
|
|
|||||
| Outstanding and unvested at January 1, 2011 |
150,000 | $ | 1.00 | |||||
| Granted |
100,000 | 1.00 | ||||||
| Vested |
(75,000 | ) | 1.00 | |||||
| Cancelled |
— | — | ||||||
|
|
|
|
|
|||||
| Outstanding and unvested at December 31, 2011 |
175,000 | $ | 1.00 | |||||
|
|
|
|
|
|||||
The fair value of each of the RSU awards is measured as the grant-date price of the common stock and is expensed on a straight- line basis over a two year vesting period.
Compensation Expense
Stock-based compensation expense is included in selling general and administrative expenses within the accompanying consolidated statement of operations. The following table summarizes the expense recognized:
| Successor | Predecessor | |||||||||||||||||
| Fiscal 2011 |
Seven
Months Ended January 1, 2011 |
Five
Months Ended May 28, 2010 |
Fiscal 2009 |
|||||||||||||||
| In thousands |
||||||||||||||||||
| Stock Options |
$ | 3,999 | $ | 3,687 | $ | 5,892 | $ | 326 | ||||||||||
| Restricted Stock Units |
115 | 19 | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 4,114 | $ | 3,706 | $ | 5,892 | $ | 326 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
Deferred Compensation Plan
The Company has a deferred compensation plan for its top executives and divisional employees covered by the executive bonus plan to encourage each participant to promote the long-term interests of the Company. Each participant is allowed to defer portions of their annual salary as well as bonuses received into the plan. In addition to employee deferrals, the Company makes contributions on behalf of its top executives and certain of the divisional employees in varying amounts. The plan provides that an employee who becomes a participant on or before November 23, 1998, shall be fully vested in all amounts credited to such participant’s account. An employee who becomes a participant after November 23, 1998 shall be at all times fully vested in elective deferrals into such participant’s account and, as to contributions made by the Company, shall vest at a rate of twenty percent (20%) per year as long as such participant is an employee on January 1 of each year. The deferred compensation plan may be altered and amended by the Company’s Board of Directors.
At December 31, 2011, the Company’s obligation related to its deferred compensation plan was $2.3 million, recorded in the consolidated balance sheet within other non-current liabilities. At January 1, 2011, the obligation was $2.5 million. The Company provides for funding of the obligation through a Rabbi Trust, which holds various investments, including mutual funds and money market funds. Amounts related to the Rabbi Trust were $2.3 million and $2.5 million at December 31, 2011 and January 1, 2011, respectively, and are recorded in the consolidated balance sheets within other non-current assets. Contributions made by the Company on behalf of its employees were less than $0.1 million during fiscal 2011 and 2010. The Company did not make any contributions during fiscal 2009.
76
401(k) Plans
The Company maintains a qualified profit sharing and 401(k) plan for eligible employees. All accounts are funded based on employee contributions to the plan, with the limits of such contributions determined by the Board of Directors. Effective January 1, 2002, the benefit formula for all participants was determined to be a match of 50% of participant contributions, up to 6% of their compensation. The plan also provides for contributions in such amounts as the Board of Directors may annually determine for the profit sharing portion of the plan. Employees vest in the 401(k) match and profit sharing contribution over a 5-year period.
The Company match of participant contributions is recorded within selling, general and administrative expense. For the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011, the Successor contributed $2.1 million and $1.2 million, respectively. The Predecessor contributed $0.7 million during the five months ended May 28, 2010 and $0.4 million during the fiscal year ended January 2, 2010.
13. Commitments and Contingencies:
Leases
The Company leases land, buildings, equipment and vehicles under various noncancellable operating leases, which expire between 2012 and 2026. Future minimum lease commitments, net of sublease income, at December 31, 2011 are as follows:
| In thousands |
||||
| 2012 |
$ | 60,514 | ||
| 2013 |
54,992 | |||
| 2014 |
50,603 | |||
| 2015 |
42,169 | |||
| 2016 |
36,880 | |||
| Thereafter |
122,019 | |||
|
|
|
|||
| Total |
$ | 367,177 | ||
|
|
|
|||
The Successor’s rent expense, net of sublease income, under these operating leases was $59.1 million in fiscal 2011 and $29.5 million for the seven months ended January 1, 2011. The Predecessor’s rent expense, net of sublease income, under these operating leases was $20.0 million in the five months ended May 28, 2010 and $47.9 million in fiscal year 2009.
On March 27, 2002, the Company completed an agreement for the sale and leaseback of three of its owned facilities generating cash proceeds of $13.9 million. The Company reports this transaction as a capital lease using direct financing lease accounting. As such, the Company recorded a $14.1 million capital lease obligation during fiscal 2002. See Note 9 for more information on this capital lease. Obligations under the Company’s other capital leases are not material.
The Company remains liable as a guarantor on certain leases related to Winston Tire Company. As of December 31, 2011, the Company’s total obligations, as guarantor on these leases, are approximately $3.7 million extending over seven years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $3.3 million. A provision has been made for the net present value of the estimated shortfall.
Legal and Tax Proceedings
The Company is involved from time to time in various lawsuits, including class action lawsuits as well as various audits and reviews regarding its federal, state and local tax filings, arising out of the ordinary conduct of
77
its business. Management does not expect that any of these matters will have a material adverse effect on the Company’s business or financial condition. As to tax filings, the Company believes that the various tax filings have been made in a timely fashion and in accordance with applicable federal, state and local tax code requirements. Additionally, the Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with FASB authoritative guidance. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in accordance with the accounting standards for income taxes. See Note 14 for further description of the accounting standards for income taxes and the related impacts.
14. Income Taxes:
The Company’s income tax provision (benefit) consisted of the following components:
| Successor | Predecessor | |||||||||||||||||
| Fiscal
Year Ended December 31, 2011 |
Seven
Months Ended January 1, 2011 |
Five
Months Ended May 28, 2010 |
Fiscal
Year Ended January 2, 2010 |
|||||||||||||||
| In thousands |
||||||||||||||||||
| Federal: |
||||||||||||||||||
| Current provision (benefit) |
$ | 8,668 | $ | 792 | $ | 3,203 | $ | 1,713 | ||||||||||
| Deferred provision (benefit) |
(7,327 | ) | (20,078 | ) | (16,693 | ) | 2,565 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
1,341 | (19,286 | ) | (13,490 | ) | 4,278 | ||||||||||||
| State: |
||||||||||||||||||
| Current provision (benefit) |
3,278 | 960 | — | 1,472 | ||||||||||||||
| Deferred provision (benefit) |
(262 | ) | (4,969 | ) | (1,737 | ) | 1,576 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
3,016 | (4,009 | ) | (1,737 | ) | 3,048 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total provision (benefit) |
$ | 4,357 | $ | (23,295 | ) | $ | (15,227 | ) | $ | 7,326 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The provision (benefit) for income taxes differs from the amount of income taxes computed by applying the applicable U.S. statutory federal income tax rate of 35% to pretax income (loss), as a result of the following differences:
| Successor | Predecessor | |||||||||||||||||
| Fiscal
Year Ended December 31, 2011 |
Seven
Months Ended January 1, 2011 |
Five
Months Ended May 28, 2010 |
Fiscal
Year Ended January 2, 2010 |
|||||||||||||||
| In thousands |
||||||||||||||||||
| Income tax provision (benefit) computed at the federal statutory rate |
$ | 1,566 | $ | (20,862 | ) | $ | (17,957 | ) | $ | 4,292 | ||||||||
| State income taxes, net of federal income tax benefit |
613 | (2,203 | ) | (1,069 | ) | 1,184 | ||||||||||||
| Increase in state effective tax rate |
2,073 | — | — | — | ||||||||||||||
| Permanent differences |
505 | 75 | 325 | 166 | ||||||||||||||
| Non-deductible debt issuance costs |
(200 | ) | — | — | — | |||||||||||||
| Non-deductible transaction costs |
— | (364 | ) | 2,237 | — | |||||||||||||
| Non-deductible preferred stock dividends |
— | — | 338 | 777 | ||||||||||||||
| Tax settlements and other adjustments to uncertain tax positions |
(376 | ) | 462 | 1,457 | — | |||||||||||||
| Increase (decrease) in valuation allowance |
176 | (403 | ) | (558 | ) | 907 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Income tax provision (benefit) |
$ | 4,357 | $ | (23,295 | ) | $ | (15,227 | ) | $ | 7,326 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
78
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes and (b) operating loss and tax credit carry-forwards. As of December 31, 2011 and January 1, 2011, amounts related to deferred income taxes have been classified in the accompanying consolidated balance sheet as follows:
| Successor | ||||||||
| December 31, | January 1, | |||||||
| In thousands |
2011 | 2011 | ||||||
| Deferred tax assets (liabilities): |
||||||||
| Current |
$ | 15,042 | $ | 13,839 | ||||
| Noncurrent |
(282,756 | ) | (283,169 | ) | ||||
|
|
|
|
|
|||||
| Total |
$ | (267,714 | ) | $ | (269,330 | ) | ||
|
|
|
|
|
|||||
The tax effects of the significant temporary differences that comprise deferred tax assets and liabilities at December 31, 2011 and January 1, 2011 for the Successor are as follows:
| Successor | ||||||||
| December 31, | January 1, | |||||||
| In thousands |
2011 | 2011 | ||||||
| Deferred tax assets: |
||||||||
| Accrued expenses and liabilities |
$ | 7,583 | $ | 7,604 | ||||
| Net operating loss carry-forwards |
3,486 | 13,127 | ||||||
| Employee benefits |
4,894 | 3,247 | ||||||
| Inventory cost capitalization |
7,605 | 8,659 | ||||||
| Other assets |
3,228 | 4,820 | ||||||
| Other |
5,399 | 5,191 | ||||||
|
|
|
|
|
|||||
| Gross deferred tax assets |
32,195 | 42,648 | ||||||
| Less: Deferred tax valuation allowances |
(840 | ) | (596 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax assets |
31,355 | 42,052 | ||||||
|
|
|
|
|
|||||
| Deferred tax liabilities: |
||||||||
| Depreciation and amortization of intangibles |
(298,134 | ) | (310,539 | ) | ||||
| Other |
(935 | ) | (843 | ) | ||||
|
|
|
|
|
|||||
| Gross deferred tax liabilities |
(299,069 | ) | (311,382 | ) | ||||
|
|
|
|
|
|||||
| Net deferred tax assets (liabilities) |
$ | (267,714 | ) | $ | (269,330 | ) | ||
|
|
|
|
|
|||||
As part of the Merger, the Predecessor generated substantial tax deductions relating to the exercise of stock options and payments made for transaction bonuses and transaction expenses. At December 31, 2011, the balance of this acquired non-current deferred tax asset is $8.2 million, which represents the anticipated tax benefits that the Company expects to achieve in future years from such deductions. The remaining net deferred tax liability primarily relates to the expected future tax liability associated with the non-deductible, identified, intangible assets that were recorded during the purchase price allocation less existing tax deductible intangibles, assuming an effective tax rate of 39.6%. The increase to 39.6% from the prior year rate of 39.3% is primarily attributable to a greater presence in tax jurisdictions with higher-than-average state tax rates.
Management regularly reviews the recoverability of deferred tax assets, and where appropriate, establishes a valuation allowance against them. The Company concluded that certain deferred tax assets related to certain state net operating losses (“NOLs”) and certain capital losses do not meet the requirement of being more likely than not that they will be realized. As a result, the Company established a valuation allowance against them.
79
At December 31, 2011, the Company had $3.0 million of NOLs available for federal tax purposes as well as $36.6 million available for state tax purposes. The NOLs are available to offset taxable income in future years and expire between 2012 and 2029. Except as discussed above, the Company expects to utilize these NOLs prior to their expiration date.
At December 31, 2011, the Successor had unrecognized tax benefits of $1.8 million, of which $0.5 million is included within accrued expenses and $1.3 million is included within other liabilities. The net decrease is primarily due to a reduction in tax positions taken for acquisition costs during the prior period. The total amount of unrecognized tax benefits that, if recognized, would affect the Successor’s effective tax rate is $1.5 million as of December 31, 2011. In addition, $0.3 million related to temporary timing differences.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Successor | Predecessor | |||||||||||||||||
| December 31, | January 1, | May 28, | January 2, | |||||||||||||||
| In thousands |
2011 | 2011 | 2010 | 2010 | ||||||||||||||
| Beginning balance |
$ | 2,181 | $ | 2,329 | $ | 904 | $ | 1,949 | ||||||||||
| (Reductions) additions based on tax positions related to the current year, net |
(366 | ) | — | 1,425 | (1,026 | ) | ||||||||||||
| Settlements |
— | — | — | — | ||||||||||||||
| Reductions for lapse in statute of limitations |
— | (148 | ) | — | (19 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Ending balance |
$ | 1,815 | $ | 2,181 | $ | 2,329 | $ | 904 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
During the next 12 months, management does not believe that it is reasonably possible that any of the unrecognized tax benefits will be recognized. During the year ended December 31, 2011, the Company accrued an additional $0.1 million of interest and penalties related to its uncertain tax positions, all of which is recorded as a component of income tax provision (benefit).
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—2010 remain open to examination by the taxing jurisdictions to which the Company is subject.
15. Stockholders’ Equity
In connection with the Merger on May 28, 2010, all existing shares of American Tire Distributors Holdings, Inc. common stock and redeemable preferred stock was redeemed for a portion of the merger consideration. In addition, options or warrants to acquire shares of Holdings common stock were converted into the right to receive consideration in excess of the respective exercise price in complete satisfaction of the option or warrant.
In addition, TPG and certain co-investors contributed $675.4 million through the purchase of common stock in Holdings indirect parent company. In accordance with push-down accounting, the basis in these shares of common stock has been pushed down from the indirect parent company to Holdings and recorded in additional paid-in capital. Subsequent to May 28, 2010, certain members of Holdings management and certain board members purchased common stock in Holdings indirect parent company. At December 31, 2011 and January 1, 2011, these amounts totaled $8.7 million and $8.4 million respectively. Accordingly, the Company recorded the basis in these shares in additional paid-in capital.
80
Common Stock
The authorized share capital of Holdings is $10, consisting of 1,000 common shares, par value $0.01. At December 31, 2011, Accelerate Holdings Corp. owns 100% of Holdings issued and outstanding common stock.
Accumulated Other Comprehensive Income (Loss)
The Company maintains a deferred compensation plan for certain eligible employees, in which the obligation is funded through a Rabbi Trust. Unrealized gains and losses on Rabbi Trust assets are recorded net of tax in accumulated other comprehensive income (loss) and amounted to $0.1 and $0.2 million at December 31, 2011 and January 1, 2011, respectively.
16. Related Party Transaction:
Upon the closing of the Merger, the Company entered into a transaction and monitoring fee letter agreement with TPG pursuant to which the Company retained TPG to provide certain management, consulting, and financial services to the Company, when and as requested by the Company. The Company agreed to pay TPG a monitoring fee equal to 2.0% of adjusted earnings before interest, taxes, depreciation, amortization and other adjustments (Adjusted EBITDA). The monitoring fee is payable in quarterly installments in arrears at the end of each fiscal quarter. In the event of an initial public offering, sale of all or substantially all of the Company’s assets or a change of control transaction, TPG is entitled to receive, on its request and in lieu of any continuing payment of the monitoring fee, an aggregate termination fee of $12.5 million. For the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011, the Successor recorded $4.6 million and $2.4 million, respectively in expense related to the monitoring fee for fiscal 2011 and fiscal 2010 which is included in selling, general and administrative expense in the accompanying consolidated statements of operations.
17. Subsidiary Guarantor Financial Information:
The following condensed consolidating financial statements are presented pursuant to Rule 3-10 of Regulation S-X and reflect the financial position, results of operations and cash flows of the Predecessor for periods prior to May 28, 2010 and the financial position, results of operations and cash flows of the Successor for periods after May 28, 2010.
As a result of the Merger on May 28, 2010, the Company repurchased and cancelled all of the Predecessor’s outstanding 10.75% Senior Notes, Floating Rate Notes, and 13% Senior Discount Notes. In addition, ATDI issued $250.0 million in aggregate principal amount of its Senior Secured Notes and $200.0 million in aggregate principal amount of its Senior Subordinated Notes. The Senior Secured Notes and the Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, by Holdings, Am-Pac, and Tire Wholesalers. ATDI, Am-Pac, and Tire Wholesalers are also borrowers and primary obligors under the ABL Facility, which is guaranteed by Holdings. Tire Pros Francorp is not a guarantor of the Senior Secured Notes, the Senior Subordinated Notes or the ABL Facility. A guarantor subsidiary’s guarantee can be released in certain customary circumstances.
Accordingly, the Company updated the guarantor structure as of May 28, 2010 which resulted in the following revised column headings:
| • | Parent Company (Holdings), |
| • | Subsidiary Issuer (ATDI), |
| • | Subsidiary Guarantor (Am-Pac and Tire Wholesalers) and |
| • | Non-Guarantor Subsidiary (Tire Pros FranCorp). |
81
ATDI is a direct wholly-owned subsidiary of Holdings and Am-Pac, Tire Wholesalers and Tire Pros FranCorp are indirect wholly-owned subsidiaries of Holdings. As a result of the Merger, all periods presented have been retroactively adjusted to reflect the post-merger guarantor structure. In addition, during the third quarter of 2011, the Company merged a subsidiary guarantor (NCT) into the subsidiary issuer (ATDI).
The condensed consolidating financial information for the Company is as follows:
Condensed Consolidating Balance Sheets as of December 31, 2011 and January 1, 2011 for the Successor are as follows:
| Successor | ||||||||||||||||||||||||
| In thousands |
As of December 31, 2011 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantor | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||||
| Cash and cash equivalents |
$ | — | $ | 14,118 | $ | — | $ | 861 | $ | — | $ | 14,979 | ||||||||||||
| Restricted cash |
— | 1,072 | — | — | — | 1,072 | ||||||||||||||||||
| Accounts receivable, net |
— | 268,937 | 1 | 5 | — | 268,943 | ||||||||||||||||||
| Inventories |
— | 641,710 | — | — | — | 641,710 | ||||||||||||||||||
| Assets held for sale |
— | 6,301 | — | — | — | 6,301 | ||||||||||||||||||
| Income tax receivable |
— | 1,601 | — | — | — | 1,601 | ||||||||||||||||||
| Intercompany receivables |
— | — | 60,037 | — | (60,037 | ) | — | |||||||||||||||||
| Other current assets |
— | 23,030 | 4,941 | 274 | — | 28,245 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
— | 956,769 | 64,979 | 1,140 | (60,037 | ) | 962,851 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Property and equipment, net |
— | 99,276 | 639 | 15 | — | 99,930 | ||||||||||||||||||
| Goodwill and other intangible assets, net |
418,592 | 761,888 | 1,852 | 1,067 | — | 1,183,399 | ||||||||||||||||||
| Investment in subsidiaries |
252,214 | 60,798 | — | — | (313,012 | ) | — | |||||||||||||||||
| Other assets |
8,691 | 47,754 | (68 | ) | 6 | — | 56,383 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 679,497 | $ | 1,926,485 | $ | 67,402 | $ | 2,228 | $ | (373,049 | ) | $ | 2,302,563 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||||
| Accounts payable |
$ | — | $ | 468,389 | $ | 2,153 | $ | (675 | ) | $ | — | $ | 469,867 | |||||||||||
| Accrued expenses |
— | 45,516 | 177 | — | — | 45,693 | ||||||||||||||||||
| Current maturities of long-term debt |
— | 141 | 17 | — | — | 158 | ||||||||||||||||||
| Intercompany payables |
23,678 | 32,009 | — | 4,350 | (60,037 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current liabilities |
23,678 | 546,055 | 2,347 | 3,675 | (60,037 | ) | 515,718 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Long-term debt |
— | 835,635 | 15 | — | — | 835,650 | ||||||||||||||||||
| Deferred income taxes |
— | 280,088 | 587 | 2,081 | — | 282,756 | ||||||||||||||||||
| Other liabilities |
— | 12,493 | 127 | — | — | 12,620 | ||||||||||||||||||
| Stockholders’ equity: |
||||||||||||||||||||||||
| Intercompany investment |
— | 280,622 | 64,935 | — | (345,557 | ) | — | |||||||||||||||||
| Common stock |
— | — | — | — | — | — | ||||||||||||||||||
| Additional paid-in capital |
691,951 | 7,724 | — | — | (7,724 | ) | 691,951 | |||||||||||||||||
| Accumulated earnings (deficit) |
(36,195 | ) | (36,195 | ) | (609 | ) | (3,528 | ) | 40,332 | (36,195 | ) | |||||||||||||
| Accumulated other comprehensive income (loss) |
63 | 63 | — | — | (63 | ) | 63 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total stockholders’ equity |
655,819 | 252,214 | 64,326 | (3,528 | ) | (313,012 | ) | 655,819 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and stockholders’ equity |
$ | 679,497 | $ | 1,926,485 | $ | 67,402 | $ | 2,228 | $ | (373,049 | ) | $ | 2,302,563 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
82
| In thousands |
Successor As of January 1, 2011 |
|||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantor | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||||
| Cash and cash equivalents |
$ | — | $ | 11,304 | $ | 132 | $ | 535 | $ | — | $ | 11,971 | ||||||||||||
| Restricted cash |
— | 250 | — | — | — | 250 | ||||||||||||||||||
| Accounts receivable, net |
— | 214,547 | 673 | (1,292 | ) | — | 213,928 | |||||||||||||||||
| Inventories |
— | 465,350 | 1,083 | — | — | 466,433 | ||||||||||||||||||
| Assets held for sale |
— | 203 | — | — | — | 203 | ||||||||||||||||||
| Income tax receivable |
— | 9,646 | — | — | — | 9,646 | ||||||||||||||||||
| Intercompany receivables |
— | 942 | 56,490 | — | (57,432 | ) | — | |||||||||||||||||
| Other current assets |
— | 19,427 | 5,132 | 768 | — | 25,327 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
— | 721,669 | 63,510 | 11 | (57,432 | ) | 727,758 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Property and equipment, net |
— | 83,743 | 5,790 | 20 | — | 89,553 | ||||||||||||||||||
| Goodwill and other intangible assets, net |
448,080 | 733,933 | 2,099 | 1,340 | — | 1,185,452 | ||||||||||||||||||
| Investment in subsidiaries |
248,140 | 61,053 | — | — | (309,193 | ) | — | |||||||||||||||||
| Other assets |
8,391 | 46,192 | 2 | — | — | 54,585 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 704,611 | $ | 1,646,590 | $ | 71,401 | $ | 1,371 | $ | (366,625 | ) | $ | 2,057,348 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Liabilities and Stockholders’ Equity |
||||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||||
| Accounts payable |
$ | — | $ | 428,686 | $ | 3,979 | $ | (1,686 | ) | $ | — | $ | 430,979 | |||||||||||
| Accrued expenses |
— | 24,351 | 1,440 | — | — | 25,791 | ||||||||||||||||||
| Current maturities of long-term debt |
— | 641 | 15 | — | — | 656 | ||||||||||||||||||
| Intercompany payables |
53,165 | — | — | 4,267 | (57,432 | ) | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current liabilities |
53,165 | 453,678 | 5,434 | 2,581 | (57,432 | ) | 457,426 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Long-term debt |
— | 651,849 | 39 | — | — | 651,888 | ||||||||||||||||||
| Deferred income taxes |
— | 280,501 | 587 | 2,081 | — | 283,169 | ||||||||||||||||||
| Other liabilities |
— | 12,422 | 997 | — | — | 13,419 | ||||||||||||||||||
| Stockholders’ equity: |
||||||||||||||||||||||||
| Intercompany investment |
— | 280,622 | 64,935 | — | (345,557 | ) | — | |||||||||||||||||
| Common stock |
— | — | — | — | — | — | ||||||||||||||||||
| Additional paid-in capital |
687,537 | 3,609 | — | — | (3,609 | ) | 687,537 | |||||||||||||||||
| Accumulated deficit |
(36,312 | ) | (36,312 | ) | (591 | ) | (3,291 | ) | 40,194 | (36,312 | ) | |||||||||||||
| Accumulated other comprehensive income (loss) |
221 | 221 | — | — | (221 | ) | 221 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total stockholders’ equity |
651,446 | 248,140 | 64,344 | (3,291 | ) | (309,193 | ) | 651,446 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and stockholders’ equity |
$ | 704,611 | $ | 1,646,590 | $ | 71,401 | $ | 1,371 | $ | (366,625 | ) | $ | 2,057,348 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
83
Condensed Consolidating Statements of Operations for the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 and fiscal year ended January 2, 2010 for the Predecessor are as follows:
| Successor | ||||||||||||||||||||||||
| In thousands |
For the Fiscal Year Ended December 31, 2011 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Net sales |
$ | — | $ | 3,052,718 | $ | 488 | $ | (2,966 | ) | $ | — | $ | 3,050,240 | |||||||||||
| Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
— | 2,534,697 | $ | 282 | 41 | — | 2,535,020 | |||||||||||||||||
| Selling, general and administrative expenses |
— | 430,095 | 906 | 6,109 | — | 437,110 | ||||||||||||||||||
| Transaction expenses |
— | 3,946 | — | — | — | 3,946 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income (loss) |
— | 83,980 | (700 | ) | (9,116 | ) | — | 74,164 | ||||||||||||||||
| Other (expense) income: |
||||||||||||||||||||||||
| Interest expense |
— | (67,580 | ) | — | — | — | (67,580 | ) | ||||||||||||||||
| Other, net |
— | (2,109 | ) | (1 | ) | — | — | (2,110 | ) | |||||||||||||||
| Equity earnings of subsidiaries |
117 | (255 | ) | — | — | 138 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) from operations before income taxes |
117 | 14,036 | (701 | ) | (9,116 | ) | 138 | 4,474 | ||||||||||||||||
| Income tax provision (benefit) |
— | 13,919 | (683 | ) | (8,879 | ) | — | 4,357 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
$ | 117 | $ | 117 | $ | (18 | ) | $ | (237 | ) | $ | 138 | $ | 117 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Successor | ||||||||||||||||||||||||
| In thousands |
For the Seven Months Ended January 1, 2011 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Net sales |
$ | — | $ | 1,526,617 | $ | 443 | $ | (1,811 | ) | $ | — | $ | 1,525,249 | |||||||||||
| Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
— | 1,316,286 | 387 | 6 | — | 1,316,679 | ||||||||||||||||||
| Selling, general and administrative expenses |
— | 223,901 | 1,014 | 3,598 | — | 228,513 | ||||||||||||||||||
| Transaction expenses |
— | 1,315 | — | — | — | 1,315 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income (loss) |
— | (14,885 | ) | (958 | ) | (5,415 | ) | — | (21,258 | ) | ||||||||||||||
| Other (expense) income: |
||||||||||||||||||||||||
| Interest expense |
— | (37,390 | ) | (1 | ) | — | — | (37,391 | ) | |||||||||||||||
| Other, net |
— | (959 | ) | (11 | ) | 12 | — | (958 | ) | |||||||||||||||
| Equity earnings of subsidiaries |
(36,312 | ) | (3,882 | ) | — | — | 40,194 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) from operations before income taxes |
(36,312 | ) | (57,116 | ) | (970 | ) | (5,403 | ) | 40,194 | (59,607 | ) | |||||||||||||
| Income tax provision (benefit) |
— | (20,804 | ) | (379 | ) | (2,112 | ) | — | (23,295 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
$ | (36,312 | ) | $ | (36,312 | ) | $ | (591 | ) | $ | (3,291 | ) | $ | 40,194 | $ | (36,312 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
84
| Predecessor | ||||||||||||||||||||||||
| In thousands |
For the Five Months Ended May 28, 2010 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Net sales |
$ | — | $ | 935,400 | $ | 39 | $ | (514 | ) | $ | — | $ | 934,925 | |||||||||||
| Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
— | 775,671 | (2 | ) | 9 | — | 775,678 | |||||||||||||||||
| Selling, general and administrative expenses |
5,892 | 123,483 | 3,230 | 2,541 | — | 135,146 | ||||||||||||||||||
| Transaction expenses |
— | 42,608 | — | — | — | 42,608 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income (loss) |
(5,892 | ) | (6,362 | ) | (3,189 | ) | (3,064 | ) | — | (18,507 | ) | |||||||||||||
| Other (expense) income: |
||||||||||||||||||||||||
| Interest expense |
(7,588 | ) | (25,081 | ) | — | — | — | (32,669 | ) | |||||||||||||||
| Other, net |
— | (77 | ) | (67 | ) | 17 | — | (127 | ) | |||||||||||||||
| Equity earnings of subsidiaries |
(26,597 | ) | (4,432 | ) | — | — | 31,029 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) from operations before income taxes |
(40,077 | ) | (35,952 | ) | (3,256 | ) | (3,047 | ) | 31,029 | (51,303 | ) | |||||||||||||
| Income tax provision (benefit) |
(4,001 | ) | (9,355 | ) | (966 | ) | (905 | ) | — | (15,227 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
$ | (36,076 | ) | $ | (26,597 | ) | $ | (2,290 | ) | $ | (2,142 | ) | $ | 31,029 | $ | (36,076 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Predecessor | ||||||||||||||||||||||||
| In thousands |
For the Fiscal Year Ended January 2, 2010 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Net sales |
$ | — | $ | 2,058,459 | $ | 112,652 | $ | 676 | $ | — | $ | 2,171,787 | ||||||||||||
| Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
— | 1,712,476 | 85,422 | 7 | — | 1,797,905 | ||||||||||||||||||
| Selling, general and administrative expenses |
344 | 269,110 | 32,605 | 4,130 | — | 306,189 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income (loss) |
(344 | ) | 76,873 | (5,375 | ) | (3,461 | ) | — | 67,693 | |||||||||||||||
| Other (expense) income: |
||||||||||||||||||||||||
| Interest expense |
(9,706 | ) | (44,705 | ) | (4 | ) | — | — | (54,415 | ) | ||||||||||||||
| Other, net |
(2 | ) | (346 | ) | (673 | ) | 1 | — | (1,020 | ) | ||||||||||||||
| Equity earnings of subsidiaries |
8,993 | (3,830 | ) | — | — | (5,163 | ) | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) from operations before income taxes |
(1,059 | ) | 27,992 | (6,052 | ) | (3,460 | ) | (5,163 | ) | 12,258 | ||||||||||||||
| Income tax provision (benefit) |
(5,991 | ) | 18,999 | (3,616 | ) | (2,066 | ) | — | 7,326 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
$ | 4,932 | $ | 8,993 | $ | (2,436 | ) | $ | (1,394 | ) | $ | (5,163 | ) | $ | 4,932 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
85
Condensed Consolidating Statements of Cash Flows for the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 and fiscal year ended January 2, 2010 for the Predecessor are as follows:
| Successor | ||||||||||||||||||||||||
| In thousands |
For the Fiscal Year Ended December 31, 2011 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash provided by (used in) operations |
$ | — | $ | (91,233 | ) | $ | (99 | ) | $ | 326 | $ | — | $ | (91,006 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Acquisitions, net of cash acquired |
— | (59,694 | ) | — | — | — | (59,694 | ) | ||||||||||||||||
| Purchase of property and equipment |
— | (31,044 | ) | — | — | — | (31,044 | ) | ||||||||||||||||
| Purchase of assets held for sale |
— | (2,975 | ) | (18 | ) | — | — | (2,993 | ) | |||||||||||||||
| Proceeds from sale of property and equipment |
— | 72 | 7 | — | — | 79 | ||||||||||||||||||
| Proceeds from disposal of assets held for sale |
— | 1,403 | — | — | — | 1,403 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by (used in) investing activities |
— | (92,238 | ) | (11 | ) | — | — | (92,249 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Borrowings from revolving credit facility |
— | 2,760,364 | — | — | — | 2,760,364 | ||||||||||||||||||
| Repayments of revolving credit facility |
— | (2,577,380 | ) | — | — | — | (2,577,380 | ) | ||||||||||||||||
| Outstanding checks |
— | 9,981 | — | — | — | 9,981 | ||||||||||||||||||
| Payments of other long-term debt |
— | (800 | ) | (22 | ) | — | — | (822 | ) | |||||||||||||||
| Payments of deferred financing costs |
— | (5,880 | ) | — | — | — | (5,880 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by (used in) financing activities |
— | 186,285 | (22 | ) | — | — | 186,263 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase (decrease) in cash and cash equivalents |
— | 2,814 | (132 | ) | 326 | — | 3,008 | |||||||||||||||||
| Cash and cash equivalents—beginning of period |
— | 11,304 | 132 | 535 | — | 11,971 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents—end of period |
$ | — | $ | 14,118 | $ | — | $ | 861 | $ | — | $ | 14,979 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
86
| Successor | ||||||||||||||||||||||||
| In thousands |
For the Seven Months Ended January 1, 2011 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash provided by (used in) operations |
$ | (11,797 | ) | $ | (11,633 | ) | $ | (197 | ) | $ | 188 | $ | — | $ | (23,439 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Acquisitions, net of cash acquired |
— | (11,042 | ) | 24 | — | — | (11,018 | ) | ||||||||||||||||
| Purchase of property and equipment |
— | (12,381 | ) | — | — | — | (12,381 | ) | ||||||||||||||||
| Purchase of assets held for sale |
— | (718 | ) | — | — | — | (718 | ) | ||||||||||||||||
| Proceeds from sale of property and equipment |
— | 74 | — | — | — | 74 | ||||||||||||||||||
| Proceeds from disposal of assets held for sale |
— | 6,806 | — | — | — | 6,806 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by (used in) investing activities |
— | (17,261 | ) | 24 | — | — | (17,237 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Borrowings from revolving credit facility |
— | 1,995,596 | — | — | — | 1,995,596 | ||||||||||||||||||
| Repayments of revolving credit facility |
— | (1,997,413 | ) | — | — | — | (1,997,413 | ) | ||||||||||||||||
| Outstanding checks |
— | 5,328 | — | — | — | 5,328 | ||||||||||||||||||
| Payments of other long-term debt |
— | (6,988 | ) | (28 | ) | — | — | (7,016 | ) | |||||||||||||||
| Payments of deferred financing costs |
— | (24,958 | ) | — | — | — | (24,958 | ) | ||||||||||||||||
| Payments for termination of interest rate swap agreements |
— | (2,804 | ) | — | — | — | (2,804 | ) | ||||||||||||||||
| Payment of seller fees on behalf of Buyer |
— | (16,792 | ) | — | — | — | (16,792 | ) | ||||||||||||||||
| 8% cumulative preferred stock redemption |
— | (30,102 | ) | — | — | — | (30,102 | ) | ||||||||||||||||
| Payments of predecessor senior notes |
— | (340,131 | ) | — | — | — | (340,131 | ) | ||||||||||||||||
| Equity contribution |
11,797 | — | — | — | — | 11,797 | ||||||||||||||||||
| Proceeds from issuance of long-term debt |
— | 446,900 | — | — | — | 446,900 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by (used in) financing activities |
11,797 | 28,636 | (28 | ) | — | — | 40,405 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase (decrease) in cash and cash equivalents |
— | (258 | ) | (201 | ) | 188 | — | (271 | ) | |||||||||||||||
| Cash and cash equivalents—beginning of period |
— | 11,562 | 333 | 347 | — | 12,242 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents—end of period |
$ | — | $ | 11,304 | $ | 132 | $ | 535 | $ | — | $ | 11,971 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
87
| Predecessor | ||||||||||||||||||||||||
| In thousands |
For the Five Months Ended May 28, 2010 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash provided by (used in) operations |
$ | 6,263 | $ | 21,901 | $ | (155 | ) | $ | 97 | $ | — | $ | 28,106 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Purchase of property and equipment |
— | (6,424 | ) | — | — | — | (6,424 | ) | ||||||||||||||||
| Purchase of assets held for sale |
— | (1,498 | ) | — | — | — | (1,498 | ) | ||||||||||||||||
| Proceeds from sale of property and equipment |
— | 194 | 20 | — | — | 214 | ||||||||||||||||||
| Proceeds from disposal of assets held for sale |
— | 185 | — | — | — | 185 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash (used in) provided by investing activities |
— | (7,543 | ) | 20 | — | — | (7,523 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Borrowings from revolving credit facility |
— | 828,727 | — | — | — | 828,727 | ||||||||||||||||||
| Repayments of revolving credit facility |
— | (822,005 | ) | — | — | — | (822,005 | ) | ||||||||||||||||
| Outstanding checks |
— | (15,369 | ) | — | — | — | (15,369 | ) | ||||||||||||||||
| Payment of Discount Notes |
(6,263 | ) | — | — | — | — | (6,263 | ) | ||||||||||||||||
| Payments of other long-term debt |
— | (715 | ) | (6 | ) | — | — | (721 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by (used in) financing activities |
(6,263 | ) | (9,362 | ) | (6 | ) | — | — | (15,631 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase (decrease) in cash and cash equivalents |
— | 4,996 | (141 | ) | 97 | — | 4,952 | |||||||||||||||||
| Cash and cash equivalents—beginning of period |
— | 6,566 | 474 | 250 | — | 7,290 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents—end of period |
$ | — | $ | 11,562 | $ | 333 | $ | 347 | $ | — | $ | 12,242 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
88
| Predecessor | ||||||||||||||||||||||||
| In thousands |
For the Fiscal Year Ended January 2, 2010 | |||||||||||||||||||||||
| Parent | Subsidiary | Subsidiary | Non-Guarantor | |||||||||||||||||||||
| Company | Issuer | Guarantors | Subsidiary | Eliminations | Consolidated | |||||||||||||||||||
| Cash flows from operating activities: |
||||||||||||||||||||||||
| Net cash (used in) provided by operations |
$ | (72 | ) | $ | 132,197 | $ | (1,141 | ) | $ | 121 | $ | — | $ | 131,105 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from investing activities: |
||||||||||||||||||||||||
| Acquisitions, net of cash acquired |
— | (128 | ) | 244 | — | — | 116 | |||||||||||||||||
| Purchase of property and equipment |
— | (12,532 | ) | (221 | ) | (4 | ) | — | (12,757 | ) | ||||||||||||||
| Purchase of assets held for sale |
— | (1,382 | ) | — | — | — | (1,382 | ) | ||||||||||||||||
| Proceeds from sale of property and equipment |
— | 133 | 38 | — | — | 171 | ||||||||||||||||||
| Proceeds from disposal of assets held for sale |
— | 1,116 | 8,116 | — | — | 9,232 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash (used in) provided by investing activities |
— | (12,793 | ) | 8,177 | (4 | ) | — | (4,620 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash flows from financing activities: |
||||||||||||||||||||||||
| Borrowings from revolving credit facility |
— | 2,056,414 | — | — | — | 2,056,414 | ||||||||||||||||||
| Repayments of revolving credit facility |
— | (2,147,985 | ) | — | — | — | (2,147,985 | ) | ||||||||||||||||
| Outstanding checks |
— | (23,989 | ) | (8,535 | ) | — | — | (32,524 | ) | |||||||||||||||
| Payments of other long-term debt |
— | (3,583 | ) | (12 | ) | — | — | (3,595 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net cash provided by (used in) financing activities |
— | (119,143 | ) | (8,547 | ) | — | — | (127,690 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase (decrease) in cash and cash equivalents |
(72 | ) | 261 | (1,511 | ) | 117 | — | (1,205 | ) | |||||||||||||||
| Cash and cash equivalents—beginning of period |
72 | 6,305 | 1,985 | 133 | — | 8,495 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents—end of period |
$ | — | $ | 6,566 | $ | 474 | $ | 250 | $ | — | $ | 7,290 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
89
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | 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 Annual Report on Form 10-K, we have 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 Controls Over Financial Reporting
During the fiscal year ended December 31, 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are, however, currently implementing a conversion of our remaining legacy computer systems to Oracle. We believe we are maintaining and monitoring appropriate internal controls during the implementation period.
| Item 9B. | Other Information. |
None.
90
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The following table contains information regarding our current directors and executive officers. The table also contains information regarding the current directors of Accelerate Parent, our indirect parent. We have included information about the directors of Accelerate Parent because certain decisions relating to our business are made by the Board of Directors of Accelerate Parent, or the Accelerate Parent Board. Certain of our executive officers also serve in the same capacity as executive officers of ATDI, Accelerate Parent and Accelerate Holdings Corp., our direct parent. Directors hold their positions until the annual meeting of the stockholders at which their term expires or until their respective successors are elected and qualified. Executive officers hold their positions until the annual meeting of the board of directors or until their respective successors are elected and qualified.
| Name |
Age |
Position | ||
| William E. Berry |
57 | President and Chief Executive Officer; Director, Accelerate Parent and Holdings | ||
| J. Michael Gaither |
59 | Executive Vice President, General Counsel and Secretary; Director, Holdings | ||
| David L. Dyckman |
47 | Executive Vice President and Chief Operating Officer; Director, Holdings | ||
| Jason T. Yaudes |
38 | Executive Vice President and Chief Financial Officer | ||
| Daniel K. Brown |
58 | Executive Vice President and President, Tire Pros | ||
| Phillip E. Marrett |
61 | Executive Vice President, Product Planning and Positioning | ||
| James M. Micali |
63 | Director, Accelerate Parent | ||
| Kevin Burns |
47 | Director, Accelerate Parent | ||
| Jeffrey Liaw |
35 |
Director, Accelerate Parent | ||
| W. James Farrell |
69 | Director, Accelerate Parent | ||
| Gary M. Kusin |
60 | Director, Accelerate Parent | ||
| Carl Sewell |
68 | Director, Accelerate Parent | ||
| David Krantz |
42 | Director, Accelerate Parent |
Director and Nominee Experience and Qualifications
The Board of Directors of Holdings, or Holdings Board and Accelerate Parent Board each believe that they should possess a combination of skills, professional experience, and diversity of viewpoints necessary to oversee our business. In addition, the Holdings Board and Accelerate Parent Board believe that there are certain attributes that every director should possess, as reflected in its membership criteria. Accordingly, the Holdings Board and Accelerate Parent Board consider the qualifications of directors and director candidates individually and in the broader context of its overall composition and our current and future needs.
Among other things, the Holdings Board and Accelerate Parent Board have determined that it is important to have individuals with the following skills and experiences:
| • | Leadership experience, as directors with experience in significant leadership positions possess strong abilities to motivate and manage others and to identify and develop leadership qualities in others. |
| • | Knowledge of our industry, particularly distribution strategy and vendor and customer relations, which is relevant to understanding our business and strategy. |
| • | Operations experience, as it gives directors a practical understanding of developing, implementing and assessing our business strategy and operating plan. |
| • | Risk management experience, which is relevant to oversight of the risks facing our business. |
| • | Financial/accounting experience, particularly knowledge of finance and financial reporting processes, which is relevant to understanding and evaluating our capital structure, financial statements and reporting requirements. |
91
| • | Strategic planning experience, which is relevant to the Holdings Board’s and Accelerate Parent Board’s review of our strategies and monitoring their implementation and results. |
William E. Berry—President and Chief Executive Officer; Director, Accelerate Parent and Holdings. Mr. Berry has served on the Board of Directors of Accelerate Parent since May 2010 and has served on the Holdings Board and as our Chief Executive Officer since April 2009 and has been our President since May 2003. He was our Chief Operating Officer from May 2003 to April 2009, Executive Vice President and Chief Financial Officer from January 2002 to May 2003, and Senior Vice President of Finance for the Southeast Division from May 1998 to January 2002. Mr. Berry joined us in May 1998 as a result of our merger with Itco, where he served as Controller from 1984 to 1998, Executive Vice President in charge of business development and sales and marketing from 1996 to 1998 and prior to that was Senior Vice President of Finance. Prior to that, Mr. Berry held a variety of financial management positions for a subsidiary of the Dr Pepper Company and also spent three years in a public accounting firm. He holds a bachelor’s degree in business administration from Virginia Tech. As our President and Chief Executive Officer, Mr. Berry brings to the Holdings Board and Accelerate Parent Board leadership, industry, operations, risk management, financial and accounting and strategic planning experience, as well as in-depth knowledge of our business.
J. Michael Gaither—Executive Vice President, General Counsel and Secretary; Director, Holdings. Mr. Gaither has served on the Holdings Board since May 2010 and has been our General Counsel and Secretary since 1991 and has been an Executive Vice President since May 1999. He was our Treasurer from February 2001 to June 2003, and Senior Vice President from 1991 to May 1999. Prior to joining us, he was a lawyer in private practice. He holds a bachelor’s degree from Duke University and a JD from the University of North Carolina-Chapel Hill. Mr. Gaither brings to the Holdings Board industry, legal and risk management experience, as well as in-depth knowledge of our business.
David L. Dyckman—Executive Vice President and Chief Operating Officer; Director, Holdings. Mr. Dyckman has served on the Holdings Board since May 2010 and has been our Executive Vice President and Chief Operating Officer since January 2012. He was our Executive Vice President and Chief Financial Officer from January 2006 to January 2012. Prior to joining us, Mr. Dyckman was Executive Vice President and Chief Financial Officer of Thermadyne Holdings Corporation from January 2005 to December 2005, and Chief Financial Officer and Vice President of Corporate Development for NN, Inc. from April 1998 to December 2004. Mr. Dyckman holds a bachelor’s degree and an MBA from Cornell University. Mr. Dyckman brings to the Holdings Board financial and accounting and strategic planning experience, as well as in-depth knowledge of our business.
Jason T. Yaudes—Executive Vice President and Chief Financial Officer. Mr. Yaudes has been our Executive Vice President and Chief Financial Officer since January 2012. Mr. Yaudes joined us in September 2006 as Vice President and Controller and has been Senior Vice President and Controller since December 2011. Prior to joining us, Mr. Yaudes worked with Timco Aviation Services, Inc. holding several positions ranging from Senior Financial Reporting Manager to Chief Accounting Officer. Between 1996 and 2002, Mr. Yaudes worked with the accounting firm of Arthur Andersen as a Manager in the Audit and Business Advisory Services group. Mr. Yaudes holds a bachelor’s degree from Appalachian State University and holds the designation as a Certified Public Accountant.
Daniel K. Brown—Executive Vice President and President, Tire Pros. Mr. Brown has been our Executive Vice President and President, Tire Pros since December 2010. He was our Executive Vice President of Sales from March 2008 until November 2010, our Senior Vice President of Procurement from March 2001 until March 2008 and our Senior Vice President of Sales and Marketing from 1997 to March 2001. Prior to that time, he held a variety of positions with us, including Vice President of Marketing, Director of Marketing and Marketing Manager. Mr. Brown holds a bachelor’s degree from Western Carolina University.
Phillip E. Marrett—Executive Vice President, Product Planning and Positioning. Mr. Marrett has been our Executive Vice President, Product Planning and Positioning since July 2011. He was our Executive Vice
92
President of Procurement from March 2008 until June 2011 and our Regional Vice President in the Southeast Division from 1998 to March 2008. Prior to joining American Tire, he was employed by Itco from 1997 to 1998 and Dunlop Tire from 1976 to 1996.
James M. Micali—Director, Accelerate Parent. Mr. Micali has served on the Board of Directors of Accelerate Parent since May 2010 and was previously a member of the Holdings Board from February 2009 until his resignation on May 28, 2010. Mr. Micali is Of Counsel with the law firm Ogletree Deakins LLC and Senior Advisor to Azalea Fund III of the private equity firm Azalea Capital LLC. He was Chairman and President of Michelin North America, Inc. from 1996 until his retirement in August 2008 and was a member of Michelin Group’s Executive Council from 2001 to 2008. Prior to that time, he was Executive Vice President, Legal and Finance, of Michelin North America from 1990 to 1996 and General Counsel and Secretary from 1985 to 1990. Mr. Micali is a director of SCANA Corporation, Ritchie Bros. Auctioneers, Inc. and Sonoco Products Company. Mr. Micali holds a bachelor’s degree from Lake Forest College and a JD from Boston College Law School. Through his executive positions, including as Chairman and President of Michelin North America and his work as a lawyer, Mr. Micali brings to the Accelerate Parent Board leadership, industry, legal, risk management, financial and strategic planning experience. Mr. Micali also possesses company board experience.
Kevin Burns—Director, Accelerate Parent. Mr. Burns has served on the Board of Directors of Accelerate Parent since May 2010. Mr. Burns has been a partner in TPG Capital since 2003. In March 2008, he became the Partner responsible for TPG Capital’s Manufacturing/Industrials Sector within the North American Buyout Group. Prior to joining TPG Capital, from 1998 to 2003 he served as Executive Vice President and Chief Materials Officer of Solectron Corporation, a $12 billion electronics manufacturing services provider. Prior to joining Solectron, Mr. Burns served as Vice President of Worldwide Operations of the Power Generation Business Unit of Westinghouse Corporation, and President of Westinghouse Security Systems. Prior to Westinghouse, Mr. Burns was a consultant at McKinsey & Co., Inc. and spent three years at the General Electric Corporation in various operating roles. Mr. Burns holds a B.S. in Mechanical and Metallurgical Engineering (cum laude) from the University of Connecticut and an MBA from the Wharton School of Business. He currently serves as Chairman of the Board of Isola Group and is on the Board of Freescale Semiconductor and Graphic Packaging. Mr. Burns brings to the Accelerate Parent Board leadership, operations, financial and strategic planning experience. Mr. Burns also possesses company board experience.
Jeffrey Liaw—Director, Accelerate Parent. Mr. Liaw has served on the Board of Directors of Accelerate Parent since May 2010. Mr. Liaw is a member of TPG Capital’s North American Buyouts Group, which is focused on the firm’s efforts in industrials/manufacturing and energy & power investments. Mr. Liaw previously worked in the industrials group of Bain Capital in New York City and the Boston Consulting Group in San Francisco. He received his MBA from Harvard Business School with high distinction and is a Phi Beta Kappa graduate of the University of Texas. He is a member of the board of directors of Graphic Packaging, a NYSE-listed consumer packaging company, and serves on its nominating and corporate governance committee. He serves on the board of directors of Energy Future Holdings (formerly TXU Corp), a leading integrated power company based in Dallas. Mr. Liaw brings to the Accelerate Parent Board risk management, financial and strategic planning experience. Mr. Liaw also possesses company board experience.
W. James Farrell—Director, Accelerate Parent. Mr. Farrell has served on the Board of Directors of Accelerate Parent since October 2010. Mr. Farrell retired as Chairman & CEO of Illinois Tool Works Inc. (ITW), based in Glenview, Illinois on May 5, 2006. ITW is a multi-national manufacturer of highly engineered fasteners, components, assemblies and systems. ITW is comprised of approximately 875 decentralized operations in 54 countries with more than 65,000 employees and 2008 Revenues of approximately $16 billion. Mr. Farrell currently serves on the board of directors of Abbott, Allstate Insurance Company, UAL Corporation, and 3M. Mr. Farrell holds a bachelor’s degree in Electrical Engineering from the University of Detroit. Mr. Farrell brings to the Accelerate Parent Board leadership, risk management, operations, financial and strategic planning experience. Mr. Farrell also possesses company board experience.
93
Gary M. Kusin—Director, Accelerate Parent. Mr. Kusin has served on the Board of Directors of Accelerate Parent since October 2010. Mr. Kusin has been a Senior Advisor at TPG Capital since 2006. Mr. Kusin previously served as a President and Chief Executive Officer of FedEx Kinko’s Office and Print Services from 2001 to 2006. Mr. Kusin was responsible for the strategic growth and transformation of Kinko’s and oversaw the ultimate sale to FedEx. Mr. Kusin then assisted FedEx in the transition of Kinko’s into FedEx Kinko’s. During that two year transition Mr. Kusin served on the nine person Strategic Management Committee for FedEx Corporation worldwide. Prior to joining Kinko’s in 2001, Mr. Kusin was chief executive officer of HQ Global Workplaces, the world leader in serviced offices, now a part of Regus. In 1995, Mr. Kusin co-founded Laura Mercier Cosmetics, a makeup line now sold through leading specialty and department stores worldwide, which he sold to Neiman-Marcus in 1998. Prior to co-founding Laura Mercier Cosmetics, starting in 1983, Mr. Kusin was president and co-founder of Babbage’s Inc., the leading consumer software specialty store chain in the United States, which now operates under the name GameStop. Earlier in his career, he was vice president and general merchandise manager for the Sanger-Harris division of Federated Department Stores, today operating as Macy’s. Mr. Kusin currently serves on the board of directors of Petco, Sabre Holdings and Republic (a UK-based fashion apparel retailer). Mr. Kusin served as a Director of Electronic Arts Inc. from 1995 to 2011 and as a Director of RadioShack Corporation from 2004 to 2005. Mr. Kusin holds a bachelor’s degree from the University of Texas and an MBA from the Harvard Business School. Mr. Kusin brings to the Accelerate Parent Board leadership, risk management, operations, financial and strategic planning experience. Mr. Kusin also possesses company board experience.
Carl Sewell—Director, Accelerate Parent. Mr. Sewell has served on the Board of Directors of Accelerate Parent since March 2011. He is the Chairman of Sewell automotive Companies. In addition, Mr. Sewell currently serves on the Board of Trustees for Southern Methodist University and the Southern Methodist University, Cox School of Business, having served as past chairman for both. He holds a B.B.A. from Southern Methodist University. Mr. Sewell brings to the Accelerate Parent Board leadership, industry, financial and strategic planning experience.
David Krantz—Director, Accelerate Parent. Mr. Krantz has served on the Board of Directors of Accelerate Parent since March 2011. He is President & CEO of AT&T Interactive. In addition to AT&T Interactive, Mr. Krantz has held several other senior leadership positions with AT&T. Prior to joining AT&T, Mr. Krantz held senior leadership positions at GoDigital Networks, a telecommunications equipment company, AOL/Netscape, Pacific Bell, and Sprint. Mr. Krantz holds a bachelor’s degree in Finance and Management from the University of Virginia’s McIntire School of Commerce and earned an MBA from Harvard University. Mr. Krantz brings to the Accelerate Parent Board leadership, industry, financial and strategic planning experience.
Board Composition and Independence
The Holdings Board consists of three directors, all of whom are executive officers of Holdings and so are not independent. The Accelerate Parent Board consists of eight directors. Our Sponsor has the right to nominate, and has nominated, all of the directors that serve on the Accelerate Parent Board. Because of their affiliations with the Sponsor and us, none of the directors of the Accelerate Parent Board other than Mr. Micali, Mr. Sewell and Mr. Krantz are independent.
Code of Conduct
We have adopted a code of conduct that applies to all of our employees, including our principal executive officer and principal financial officer. A copy of our code of conduct is available, free of charge, upon written request sent to the legal department at our corporate offices located at 12200 Herbert Wayne Court, Suite 150, Huntersville, NC 28078.
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| Item 11. | Executive Compensation. |
Introduction
On April 20, 2010, Holdings, Accelerate Holdings Corp., Merger Sub and Investcorp International, Inc., as Stockholders Representative, entered into the Merger Agreement pursuant to which Merger Sub merged with and into Holdings, with Holdings being the surviving corporation of the Merger. As a result of the Merger, Holdings became a direct wholly-owned subsidiary of Accelerate Holdings Corp. and an indirect wholly-owned subsidiary of Accelerate Parent, substantially all of whose outstanding capital stock is owned by investment entities affiliated with the Sponsor. Holdings is the sole stockholder of ATDI.
Prior to the Merger, the compensation committee of the Holdings Board was charged with establishing and reviewing our executive compensation program. Following the Merger, executive compensation and related decisions are made by the Accelerate Parent Board, which does not currently have a compensation committee. In connection with the Merger, Accelerate Parent adopted a new equity incentive plan applicable to key employees, directors, service providers and consultants, as well as a restricted stock plan for non-employee directors. As discussed in more detail below, our executive compensation program, and the philosophy underlying the program, did not otherwise change significantly as a result of the Merger.
Compensation Committee Report
The Accelerate Parent Board performs equivalent functions of a compensation committee since the Accelerate Parent Board does not have a compensation committee. The Accelerate Parent Board has reviewed and discussed with management the following Compensation Discussion and Analysis. Based on such review and discussions, the Accelerate Parent Board approved the inclusion of the following Compensation Discussion and Analysis in this Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
| THE ACCELERATE PARENT BOARD |
| William E. Berry |
| James M. Micali |
| Kevin Burns |
| Jeffrey Liaw |
| W. James Farrell |
| Gary M. Kusin |
| Carl Sewell |
| David Krantz |
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Compensation Discussion and Analysis
Overview
This section provides an analysis of our compensation program and policies, the material compensation decisions made under those programs and policies, and the material factors considered in making those decisions. This section also includes a series of tables containing specific information about the compensation earned in fiscal 2011 by the following individuals, referred to as our named executive officers:
| • | William E. Berry, President and Chief Executive Officer; |
| • | J. Michael Gaither, Executive Vice President and General Counsel; |
| • | David L. Dyckman, Executive Vice President and Chief Financial Officer; |
| • | Daniel K. Brown, Executive Vice President and President, Tire Pros; and |
| • | Phillip E. Marrett, Executive Vice President, Product Planning and Positioning. |
The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.
Compensation Philosophy and Objectives
Our overall goal in compensating executive officers is to attract, retain and motivate key executives of superior ability who are critical to our future success. We believe that both short-term and long-term incentive compensation paid to executive officers should be directly aligned with our performance, and that compensation should be structured to ensure that a significant portion of executives’ compensation opportunities is directly related to achievement of financial and operational goals and other factors that impact stockholder value.
Our compensation decisions with respect to executive officer salaries, annual incentives and long-term incentive compensation opportunities are influenced by: (i) our executive’s level of responsibility and function, (ii) our overall performance and profitability and (iii) our assessment of the competitive marketplace. Our philosophy is to focus on total direct compensation opportunities through a mix of base salary, annual cash bonus and long-term incentives, including stock-based awards.
We also believe that the best way to directly align the interests of our executives with the interests of our stockholders is to make sure that our executives retain an appropriate level of equity ownership throughout their tenure with us. Our compensation program pursues this objective through our equity-based long-term incentive awards.
These programs are continually evaluated for effectiveness in achieving our stated objectives as well as to reflect the economic environment within which we operate. In this vein, recent events roiling the world’s economies provide a backdrop for the continued review of our compensation strategies. Accordingly, we adjusted shorter term compensation and incentives to help manage through the difficult 2009 economic environment while at the same time addressing alternative long-term strategies to reward long-term success and execution. This included freezing all salaries and compensation effective January 4, 2009, the first day of our 2009 fiscal year. The salary freeze continued for fiscal 2010 for our executive officers but has been discontinued for fiscal 2011.
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Overview of Executive Compensation Components
In fiscal 2011, our executive compensation program consists of several compensation elements, as illustrated in the table below.
| Pay Element |
What the Pay Element Rewards |
Purpose of the Pay Element | ||
| Base Salary |
Core competence of the executive relative to skills, experience and contributions to us. | Provides fixed compensation based on competitive market practice. | ||
| Annual Cash Incentive |
Contributions toward our achievement of specified financial targets and other key performance criteria. | Provides focus on meeting annual goals that lead to our long-term success.
• Provides annual performance-based cash incentive compensation.
• Motivates achievement of critical annual performance metrics. | ||
| Long-Term Incentives |
Stock Option Program | |||
| Vesting program based primarily on achievement of specified financial targets, thereby aligning executive’s interests with those of stockholders.
Continued employment with us during a 5-year vesting period. |
Executive focus on our performance.
• Executive ownership of our security.
• Retention of the executives. | |||
| Retirement Benefits |
Our executive officers are eligible to participate in employee benefit plans available to our eligible employees, including both tax qualified and nonqualified retirement plans.
The Deferred Compensation Plan is a nonqualified plan comprised of a voluntary deferral program that allows the named executive officers to defer a portion of their annual salary and bonus and a noncontributory program that provides for certain contributions to be made on behalf of certain executives by us according to a Board approved schedule. We suspended contributions to this plan for fiscal 2009, but reintroduced them for fiscal 2010 and 2011. While our funds are set aside to fund this plan, they remain available to our general creditors. |
Provides a tax-deferred retirement savings alternative to certain eligible executives. | ||
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| Pay Element |
What the Pay Element Rewards |
Purpose of the Pay Element | ||
| Welfare Benefits |
Executives participate in employee benefit plans generally available to our employees, including medical, health, life insurance and disability plans.
Continuation of welfare benefits may occur as part of severance upon certain terminations of employment.
In addition, we sponsor an executive medical program for our executive officers, which provides for reimbursement for certain executive officers and eligible dependents for medical expenses not covered by the Group Medical Plan. |
These benefits are part of our broad-based total compensation program.
We believe we benefit from these perquisites by encouraging our executive officers to protect their health. | ||
| Additional Benefits and Perquisites |
Certain executive officers: Four club memberships.
Vehicle Allowance |
Consistent with offering our executives a competitive compensation program. | ||
| Termination Benefits |
Termination benefits are agreements with certain officers, including our named executive officers. The agreements provide severance benefits if an officer’s employment is terminated without cause or the officer leaves for good reason, each defined in the agreements. | Termination benefits are designed to retain executives and provide continuity to management. | ||
The use of these programs enables us to reinforce our pay for performance philosophy, as well as strengthen our ability to attract and retain highly qualified executives. We believe that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operations performance with long-term stockholder value, and encourages executive recruitment and retention.
Determination of Appropriate Pay Levels
Pay Philosophy and Competitive Standing
In general, we seek to provide on overall compensation package that rewards for performance above our targets. Our executive compensation package consists of salary, target annual bonus, and long-term incentives, as well as additional benefits and perquisites. To achieve competitive positioning for the annual cash compensation component, we set base salaries to be competitive but provide high target annual bonus opportunities. Thus, our compensation is focused less on fixed pay and more on performance-based opportunities, while still remaining competitive overall. Targeted annual cash bonus opportunities are based on, among other things, our budgeted financial goals and other factors, which may fluctuate from year to year.
We also focus on the executive’s tenure, individual performance and changes in responsibility as well as our overall annual budget goals. Additionally, we take factors such as changes in cost of living into account.
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Base Salary
Historically, base salary levels have reflected a combination of factors including the executive’s experience and tenure, our overall annual budget, the executive’s individual performance, and changes in responsibility. We did not target base salary at any particular percent of total compensation. Prior to the Merger, our compensation committee reviewed salary levels annually using the factors described above. The Chief Executive Officer participated with other senior management in preparing salary recommendations for the compensation committee, including that of the Chief Executive Officer. These recommendations were reviewed, modified and approved by the compensation committee and submitted to the Holdings Board for final ratification. The Accelerate Parent Board reviews salary levels annually using substantially the same factors as described above. The Chief Executive Officer and other senior management continue to participate in preparing salary recommendations for presentation to the Accelerate Parent Board.
In fiscal 2011, base pay increases granted to Messrs. Berry, Gaither, Dyckman, Brown and Marrett ranged from 20.0% to 20.7% and were established after considering job performance, internal pay alignment and equity, and marketplace competitiveness. Base pay increases were not granted in either fiscal 2009 or fiscal 2010 to Messrs. Gaither, Dyckman, Brown or Marrett. Mr. Berry’s salary was increased to $500,000 in connection with his appointment as Chief Executive Officer in April 2009 to reflect the increased responsibilities and duties commensurate with that position. Mr. Berry did not receive a base pay increase in fiscal 2010.
Annual Incentive Plan
Our annual incentive plan, which we refer to as the annual incentive plan, provides our executive officers an opportunity to earn annual cash bonuses based on our achievement of certain pre-established performance goals.
As in setting base salaries, we have historically considered a combination of factors in establishing the annual target bonus opportunities for our named executive officers. Budgeted Adjusted EBITDA is a primary factor, as target bonus opportunities are adjusted annually when we set our budgeted Adjusted EBITDA goals for the year. Adjusted EBITDA refers to earnings before interest, taxes, depreciation and amortization further adjusted to exclude certain non-cash, non-recurring, cost reduction and other adjustment items permitted in calculating covenant compliance under the indentures governing our senior notes. We do not target annual bonus opportunities at any particular percentage of total compensation.
Once our performance goals have been set and approved, the Accelerate Parent Board then sets a bonus pool for all executives covered by the annual incentive plan, whose size is equal to a designated percentage of Adjusted EBITDA actually achieved by us. No bonus pool is funded if actual performance falls below 85% of the Adjusted EBITDA goal. The pool grows pro-rata for actual performance between 85% and 100% of the Adjusted EBITDA goal. Above 100% of the Adjusted EBITDA goal, the pool grows by approximately 20% of each incremental Adjusted EBITDA dollar. The bonus pool is divided among participants in the annual incentive plan based on each participant’s designated percentage of the bonus pool, which percentages were established by the Accelerate Parent Board.
Payment under the annual incentive plan for fiscal 2011 was based on achievement of performance goals relating to Adjusted EBITDA, which we believe has a strong correlation with stockholder value and other key performance criteria. We set the Adjusted EBITDA goals for fiscal 2011 bonus opportunities at levels that were intended to reflect improvement in performance over the prior fiscal year, specific market conditions and better than average growth within our competitive industry. For fiscal 2011, the targeted bonus pool was $8.9 million, subject to adjustment, based upon an Adjusted EBITDA target of $165.0 million. In fiscal 2011, we achieved 100% of the Adjusted EBITDA goal. The percentage of the bonus pool designated for each named executive officer for fiscal 2011 was: Mr. Berry, 17.5%; Mr. Dyckman, 8.0%; Messrs. Gaither, Brown and Marrett, 6.0% each. Actual bonuses to be paid to the named executive officers are included in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation”.
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Stock Option Plans
Prior to the Merger, we had one stock option plan in effect, the 2005 Management Stock Incentive Plan, which we refer to as the 2005 Plan. In connection with the Merger, the 2005 Plan was terminated and all outstanding options granted under the 2005 Plan were cancelled. Unvested options were cancelled without payment to the holders. Holders of vested options with an exercise price less than the per share merger consideration received an option cancellation payment equal to the difference between the per share merger consideration and the exercise price of the cancelled option.
Following the Merger, on August 30, 2010, Accelerate Parent adopted the Accelerate Parent Corp. Management Equity Incentive Plan, which we refer to as the 2010 Plan. The 2010 Plan was amended and restated on October 14, 2010. The 2010 Plan is designed to promote the interests of Accelerate Parent and its direct and indirect affiliates and stockholders by providing key employees, directors, service providers and consultants incentives to encourage them (i) to continue working for Accelerate Parent and its affiliates; and (ii) to work to improve Accelerate Parent’s growth and profitability.
The 2010 Plan authorizes Accelerate Parent to issue options to purchase up to 48,600,000 shares of common stock of Accelerate Parent, or Accelerate Common Stock. As of March 5, 2012, Accelerate Parent has granted 44,598,400 options to our key employees and certain directors. The named executive officers have received the following grants: 8,640,000 options to Mr. Berry, 4,860,000 to Mr. Dyckman, and 4,320,000 to each of Messrs. Gaither, Brown and Marrett.
Options granted pursuant to the 2010 Plan may be either (i) time-based or (ii) performance-based. In general, time-based options vest ratably on each of the first through fifth anniversaries of the grant date until 100% of the time-based options are fully vested and exercisable, provided the participant remains continuously employed by us through each such vesting date. Each performance-based option vests ratably on each of the first through fifth anniversaries of the grant date if, as of the end of the most recent fiscal year ending on or prior to each such anniversary, we have achieved the EBITDA target established for such fiscal year by the terms of the option. If the EBITDA target is not met for the relevant fiscal year, the performance-based option remains outstanding until terminated and immediately vests upon (i) achievement of cumulative EBITDA targets for the fiscal year and the first fiscal year following that fiscal year; or (ii) the occurrence of a liquidity event in which the Sponsor receives a cash return on its investment of at least 220%. Similar to the time-based options, the participant must remain employed through the vesting date in order to exercise the performance-based options. Under the 2010 Plan, all options, vested or not, expire on the tenth anniversary of their grant date unless otherwise provided.
Under the 2010 Plan, upon termination of a participant’s employment for any reason, subject to the terms of the participant’s option agreement, all unvested options are forfeited and the vested portion of any options expire on the earlier of (i) the date the participant is terminated for cause; (ii) 30 days after the date employment is terminated by the participant for other than good reason; (iii) 90 days after (A) the date the participant is terminated by the Company for any reason other than cause, death or disability; or (B) the date employment is terminated by the participant for good reason; (iv) one year after the date the participant’s employment is terminated by reason of death or disability; and (v) the tenth anniversary of the grant date for the options. However, if a participant’s employment is terminated within two years of a change of control transaction either by us without cause or by the participant for good reason, 100% of the participant’s outstanding time-based options become immediately vested and exercisable. In addition, the option grant agreements for each of the named executive officers provide that in the event of termination by us without cause or by the participant for good reason, whether following a change of control transaction or not, (i) any time-based options that would have vested within six months of termination will become immediately vested on the termination date; and (ii) any performance-based options that would have vested within six months of termination if the employee had continued to be employed will vest upon the date the applicable performance criteria are determined to have been achieved.
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Summary Compensation Table for Fiscal 2011, 2010 and 2009
The following table summarizes compensation for our named executive officers for fiscal years 2011, 2010 and 2009.
| Name and Principal Position |
Fiscal Year |
Salary ($) |
Option Awards ($)(3) |
Non-Equity Incentive Plan Compensation ($) |
All Other Compensation ($) |
Total ($) | ||||||||||||||||
| William E. Berry |
2011 | $ | 600,000 | $ | — | $ | 1,584,000 | $ | 57,959 | $ | 2,241,959 | |||||||||||
| President and Chief Executive Officer |
2010 | 500,000 | 3,668,635 | 2,277,000 | 12,380,100 | 18,825,735 | ||||||||||||||||
| 2009 | 480,769 | — | 875,200 | 29,305 | 1,385,274 | |||||||||||||||||
| J. Michael Gaither |
2011 | 350,000 | — | 545,000 | 56,276 | 951,276 | ||||||||||||||||
| Executive Vice President, General Counsel and Secretary |
2010 | 290,000 | 1,834,318 | 810,900 | 5,947,889 | 8,883,107 | ||||||||||||||||
| 2009 | 290,000 | — | 250,100 | 33,654 | 573,754 | |||||||||||||||||
| David L. Dyckman (1) (2) |
2011 | 350,000 | — | 727,000 | 28,430 | 1,105,430 | ||||||||||||||||
| Executive Vice President and Chief Financial Officer |
2010 | 290,000 | 2,063,607 | 810,900 | 2,302,285 | 5,466,792 | ||||||||||||||||
| 2009 | 290,000 | — | 250,100 | 18,041 | 558,141 | |||||||||||||||||
| Daniel K. Brown |
2011 | 325,000 | — | 545,000 | 52,400 | 922,400 | ||||||||||||||||
| Executive Vice President and President, Tire Pros |
2010 | 270,000 | 1,834,318 | 810,900 | 1,324,507 | 4,239,725 | ||||||||||||||||
| 2009 | 270,000 | — | 250,100 | 30,262 | 550,362 | |||||||||||||||||
| Phillip E. Marrett |
2011 | 325,000 | — | 545,000 | 39,051 | 909,051 | ||||||||||||||||
| Executive Vice President, Product Planning and Positioning |
2010 | 270,000 | 1,834,318 | 810,900 | 1,316,610 | 4,231,828 | ||||||||||||||||
| 2009 | 270,000 | — | 250,100 | 21,828 | 541,928 | |||||||||||||||||
| (1) | Effective January 23, 2012, Mr. Dyckman was appointed Executive Vice President and Chief Operating Officer. Mr. Dyckman remains subject to the same employment agreement he had in 2011. |
| (2) | Jason T. Yaudes was appointed Executive Vice President and Chief Financial Officer effective January 23, 2012. Mr. Yaudes will receive an annual base salary of $350,000 and will be eligible to participate in the benefit plans and programs generally maintained by us for senior executives from time to time, including our annual performance-based cash bonus program. |
| (3) | Represents the aggregate grant date fair value of option awards granted during the fiscal year ended January 1, 2011 calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The fair value of the options was calculated using a Black-Scholes option pricing model. For a discussion of the assumptions used in the valuation, see Note 12 in our Notes to Consolidated Financial Statements. |
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All Other Compensation from Summary Compensation Table for Fiscal 2011, 2010 and 2009
The following table contains a breakdown of the compensation and benefits included under “All Other Compensation” in the Summary Compensation Table above.
| Name |
Fiscal Year |
Registrant Contributions to Non- Qualified Deferred Compensation Plan |
Vehicle Allowance |
401K Company Match |
Club Dues |
Life Insurance |
Executive Medical Benefits |
Long- term Disability |
Payments Related to Merger (1) |
Total ($) | ||||||||||||||||||||||||||||
| William E. Berry |
2011 | $ | 20,000 | $ | 19,200 | $ | 8,250 | $ | 5,544 | $ | 3,612 | $ | 596 | $ | 757 | $ | — | $ | 57,959 | |||||||||||||||||||
| 2010 | 20,000 | 18,400 | 8,250 | 5,544 | 2,108 | 3,676 | 605 | 12,321,517 | 12,380,100 | |||||||||||||||||||||||||||||
| 2009 | — | 16,800 | 2,191 | 6,006 | 2,034 | 1,064 | 1,210 | — | 29,305 | |||||||||||||||||||||||||||||
| J. Michael Gaither |
2011 | 17,000 | 16,800 | 8,250 | 6,000 | 3,612 | 3,757 | 857 | — | 56,276 | ||||||||||||||||||||||||||||
| 2010 | 17,000 | 16,800 | 8,250 | 6,015 | 3,462 | 2,295 | 907 | 5,893,160 | 5,947,889 | |||||||||||||||||||||||||||||
| 2009 | — | 16,800 | 1,797 | 6,000 | 3,310 | 4,537 | 1,210 | — | 33,654 | |||||||||||||||||||||||||||||
| David L. Dyckman |
2011 | — | 14,400 | 8,250 | 2,760 | 1,260 | 903 | 857 | — | 28,430 | ||||||||||||||||||||||||||||
| 2010 | — | 14,400 | 8,250 | 1,840 | 795 | 599 | 907 | 2,275,494 | 2,302,285 | |||||||||||||||||||||||||||||
| 2009 | — | 14,400 | 1,673 | — | 758 | — | 1,210 | — | 18,041 | |||||||||||||||||||||||||||||
| Daniel K. Brown |
2011 | 16,000 | 14,400 | 8,250 | 5,544 | 3,612 | 3,737 | 857 | — | 52,400 | ||||||||||||||||||||||||||||
| 2010 | 16,000 | 14,400 | 8,100 | 5,544 | 3,347 | 715 | 907 | 1,275,494 | 1,324,507 | |||||||||||||||||||||||||||||
| 2009 | — | 14,400 | 1,558 | 6,006 | 3,136 | 3,952 | 1,210 | — | 30,262 | |||||||||||||||||||||||||||||
| Phillip E. Marrett |
2011 | 10,000 | 14,400 | 8,250 | — | 5,544 | — | 857 | — | 39,051 | ||||||||||||||||||||||||||||
| 2010 | 10,000 | 14,400 | 8,100 | — | 3,309 | 4,400 | 907 | 1,275,494 | 1,316,610 | |||||||||||||||||||||||||||||
| 2009 | — | 14,400 | 1,558 | — | 3,151 | 1,509 | 1,210 | — | 21,828 | |||||||||||||||||||||||||||||
| (1) | As described below under “Payments Received by Directors and Named Executive Officers in Connection with the Merger,” for any vested options under the 2005 Option Plan with an exercise price per share less than $596.65, our named executive officers received an option cancellation payment for each share underlying the vested options equal to the difference between $596.65 and the per-share exercise price. Mr. Dyckman also received a discretionary cash bonus of $1.0 million in connection with the Merger. |
Grants of Plan-Based Awards During Fiscal 2011
The following table sets forth certain information regarding the grant of plan-based awards made during fiscal 2011 to the named executive officers:
| Estimated Possible Payouts Under | ||||||||||||
| Non-Equity Incentive Plan Awards | ||||||||||||
| Threshold | Target | Maximum | ||||||||||
| Name |
($) (1) | ($) (2) | ($) (3) | |||||||||
| William E. Berry |
$ | 750,888 | $ | 1,584,000 | $ | — | ||||||
| J. Michael Gaither |
268,500 | 545,000 | — | |||||||||
| David L. Dyckman |
358,000 | 727,000 | — | |||||||||
| Daniel K. Brown |
268,500 | 545,000 | — | |||||||||
| Phillip E. Marrett |
268,500 | 545,000 | — | |||||||||
| (1) | Represents the minimum payment under the annual incentive plan if we achieve the threshold level of 85% of the Adjusted EBITDA goal during fiscal 2011. |
| (2) | Represents payments under the annual incentive plan if 100% of plan performance was achieved during fiscal 2011. In fiscal 2011, we met plan targets, which resulted in the payments listed above. These payments are included in the Summary Compensation Table under the heading "Non-Equity Incentive Plan Compensation." |
| (3) | There is no limit to the maximum amount payable under the annual incentive plan. |
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Outstanding Equity Awards at Fiscal 2011 Year End
The following table provides information concerning unexercised options for our named executive officers as of December 31, 2011, the last day of our 2011 fiscal year.
| Name |
Number of Securities Underlying Unexercised Options Exercisable (#) |
Number of Securities Underlying Unexercised Options Unexercisable (#) (1) |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) (2) |
Option Exercise Price ($) |
Option Expiration Date |
|||||||||||||||
| William E. Berry |
1,728,000 | 3,456,000 | 3,456,000 | $ | 1.00 | 08/30/20 | ||||||||||||||
| J. Michael Gaither |
864,000 | 1,728,000 | 1,728,000 | 1.00 | 08/30/20 | |||||||||||||||
| David L. Dyckman |
972,000 | 1,944,000 | 1,944,000 | 1.00 | 08/30/20 | |||||||||||||||
| Daniel K. Brown |
864,000 | 1,728,000 | 1,728,000 | 1.00 | 08/30/20 | |||||||||||||||
| Phillip E. Marrett |
864,000 | 1,728,000 | 1,728,000 | 1.00 | 08/30/20 | |||||||||||||||
| (1) | Represents the number of unexercised time-based options held by our named executive officers as of December 31, 2011. These time-based options, all of which were granted under the 2010 Plan, vest ratably on each of the first through fifth anniversaries of the grant date, provided that the participant remains continuously employed by us through each vesting date. If that condition is met, these options will fully vest on May 28, 2015. |
| (2) | Represents the number of unexercised performance-based options held by our named executive officers as of December 31, 2011. All of these performance-based options were granted under the 2010 Plan. Each performance-based option vests ratably on each of the first through fifth anniversaries of the grant date if, as of the end of the most recent fiscal year ending on or prior to each such anniversary, the Company has achieved the EBITDA target established for such fiscal year by the terms of the options. If the EBITDA target is not met for the relevant fiscal year, the performance-based option remains outstanding until terminated and immediately vest upon (i) achievement of cumulative EBITDA targets for the relevant fiscal year and the first fiscal year following that fiscal year, or (ii) the occurrence of a liquidity event in which the Sponsor receives a cash return on its investment of at least 220%. The participant much remain employed through the vesting date in order to exercise any performance-based options. |
Nonqualified Deferred Compensation for Fiscal Year 2011
The following table sets forth information regarding the nonqualified deferred compensation plans, showing, with respect to each named executive officer, the aggregate contributions made by such executive officer during the fiscal year ended December 31, 2011, the aggregate contributions made the Company during the fiscal year ended December 31, 2011, the aggregate earnings accrued during the fiscal year ended December 31, 2011, the aggregate value of withdrawals and distributions to the executive officer during the fiscal year ended December 31, 2011 and the balance of account as of December 31, 2011.
| Name |
Executive Contributions in 2011 ($) (1) |
Registrant Contributions in 2011 ($) (2) |
Aggregate Earnings in 2011 ($) (3) |
Aggregate Withdrawals/ Distributions ($) |
Aggregate Balance at December 31, 2011 ($) (4) |
|||||||||||||||
| William E. Berry |
$ | 23,077 | $ | 20,000 | $ | 2,337 | $ | (186,127 | ) | $ | 304,705 | |||||||||
| J. Michael Gaither |
577 | 17,000 | (1 | ) | (15,622 | ) | 300,016 | |||||||||||||
| David L. Dyckman |
— | — | — | — | — | |||||||||||||||
| Daniel K. Brown |
— | 16,000 | (23,385 | ) | — | 353,610 | ||||||||||||||
| Phillip E. Marrett |
— | 10,000 | 208 | — | 59,994 | |||||||||||||||
| (1) | Amounts in this column are included in the amounts reported as "Salary" or "Non-Equity Incentive Plan Compensation" in the Summary Compensation Table for Fiscal Year 2011 for each of the named executive officers. |
103
| (2) | Amounts in this column reflect company contributions and are included in the Summary Compensation Table under the heading “All Other Compensation.” |
| (3) | Earnings on balances in the nonqualified deferred compensation plan equal the rate of return on investments elected by each participant in the plan. These amounts are not included in the Summary Compensation Table because the earnings are credited at a market rate of return. |
| (4) | The amounts in the table below are also being reported as compensation in the Summary Compensation Table in the years indicated: |
| Name |
Fiscal Year | Reported Amounts ($) |
||||||
| William E. Berry |
2011 | $ | 43,077 | |||||
| 2010 | 43,490 | |||||||
| 2009 | 18,625 | |||||||
| J. Michael Gaither |
2011 | 17,577 | ||||||
| 2010 | 19,490 | |||||||
| 2009 | 168 | |||||||
| David L. Dyckman |
2011 | — | ||||||
| 2010 | — | |||||||
| 2009 | — | |||||||
| Daniel K. Brown |
2011 | 16,000 | ||||||
| 2010 | 16,000 | |||||||
| 2009 | — | |||||||
| Phillip E. Marrett |
2011 | 10,000 | ||||||
| 2010 | 12,490 | |||||||
| 2009 | — | |||||||
Potential Payments upon Termination
Employment Agreements
We currently have employment agreements with each of Messrs. Berry, Gaither, Dyckman, Brown and Marrett. The employment agreements provide for the payment of an annual base salary and bonus opportunities, as well as participation by each of them in the benefit plans and programs generally maintained by us for senior executives from time to time.
We or the employee may terminate the applicable employment agreement at any time. Upon termination of employment for any reason other than for “cause,” the employee is entitled to receive (1) a basic termination payment equal to (i) his base salary earned through the date of termination and (ii) the previous year’s bonus if the termination is after December 31 and before bonus has been awarded; and (2) continuation of health benefits for a specified period of time after termination of employment at the same rate that was paid by the employee before termination of employment. In addition, if we terminate the employee without “cause” or if the employee resigns for “good reason” (each as defined in his employment agreement), then he is entitled to an additional severance payment based on a multiple of his base salary and plan bonus. The employment agreements each contain confidentiality and non-compete provisions.
The specific severance payments and continuation periods for health benefits provided by the employment agreements for the named executive officers are as follows:
| • | Mr. Berry is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $25,000 for a period of two years and (ii) continuation of health benefits for Mr. Berry and his family until he reaches the age of 65. |
104
| • | Mr. Gaither is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $22,222.22 for a period of 18 months and (ii) continuation of health benefits for a period of 18 months. |
| • | Mr. Dyckman is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $20,833.34 for a period of 12 months and (ii) continuation of health benefits for a period of 12 months. |
| • | Mr. Brown is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $20,833.33 for a period of 12 months and (ii) continuation of health benefits for a period of 12 months. |
| • | Mr. Marrett is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $19,583.33 for a period of 12 months and (ii) continuation of health benefits for a period of 12 months. |
Payment Summary
The table below reflects the amount of compensation payable to each named executive officer in the event of termination of the executive’s employment for various reasons. The table does not include nonqualified deferred compensation for which the named executive officers are fully vested or payments that would be made to a named executive officer under benefit plans or employment terms generally available to other salaried employees similarly situated, such as group life or disability insurance. The amounts shown assume termination of employment or a change in control as of December 31, 2011, the last day of our 2011 fiscal year.
| Name |
Payments upon Termination |
Termination without Cause or Resignation for Good Reason |
Termination for Cause or Resignation without Good Reason |
Death
or Disability (1) |
Change in Control (2) |
|||||||||||||
| William E. Berry |
Severance and Noncompetition Agreement | $ | 1,800,001 | $ | — | $ | — | $ | — | |||||||||
| Bonus | 1,584,000 | 1,584,000 | 1,584,000 | — | ||||||||||||||
| Health Benefits | 91,974 | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total | $ | 3,475,975 | $ | 1,584,000 | $ | 1,584,000 | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| J. Michael Gaither |
Severance and Noncompetition Agreement | $ | 925,000 | $ | — | $ | — | $ | — | |||||||||
| Bonus | 545,000 | 545,000 | 545,000 | — | ||||||||||||||
| Health Benefits | 13,258 | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total | $ | 1,483,258 | $ | 545,000 | $ | 545,000 | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| David L. Dyckman |
Severance and Noncompetition Agreement | $ | 600,000 | $ | — | $ | — | $ | — | |||||||||
| Bonus | 727,000 | 727,000 | 727,000 | — | ||||||||||||||
| Health Benefits | 11,497 | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total | $ | 1,338,497 | $ | 727,000 | $ | 727,000 | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Daniel K. Brown |
Severance and Noncompetition Agreement | $ | 575,000 | $ | — | $ | — | $ | — | |||||||||
| Bonus | 545,000 | 545,000 | 545,000 | — | ||||||||||||||
| Health Benefits | 11,497 | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total | $ | 1,131,497 | $ | 545,000 | $ | 545,000 | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Phillip E. Marrett |
Severance and Noncompetition Agreement | $ | 560,000 | $ | — | $ | — | $ | — | |||||||||
| Bonus | 545,000 | 545,000 | 545,000 | — | ||||||||||||||
| Health Benefits | 7,338 | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total | $ | 1,112,338 | $ | 545,000 | $ | 545,000 | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | In the event of the death or disability of a named executive officer, the named executive officer will receive benefits under our disability plan or payments under our life insurance plan, as appropriate. These payments are generally available to all employees and are therefore not included in the above table. |
105
| (2) | We do not provide our named executive officers with change in control benefits. If a named executive officer was terminated following a change in control, such officer would receive payments pursuant to the employment and severance agreements described above. |
Compensation of Directors
Holdings Board
The current members of the Holdings Board are employees of Holdings and do not receive separate compensation for their service as directors of Holdings.
Accelerate Parent Board
For their service as members of the Accelerate Parent Board, each of James Farrell, Gary Kusin, James Micali, Carl Sewell, and David Krantz (the “Outside Directors”) will receive an annual fee of $150,000 in cash, payable in quarterly installments. Upon their appointment to the Accelerate Parent Board, each of the Outside Directors also received a one-time grant of options under the 2010 Plan to purchase 200,000 shares of Accelerate Common Stock at the fair market value on the date of grant. These options vest in three equal installments on each of the first three anniversaries of the date of grant. In October 2010, we adopted the Accelerate Parent Corp. Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”). Each Outside Director receives an annual grant under the Restricted Stock Plan of restricted shares of Accelerate Common Stock valued at $50,000, with vesting to occur in two equal installments on each of the first two anniversaries of the date of grant. Each Outside Director also received a one-time opportunity to purchase up to $1,000,000 in Accelerate Common Stock, at a per share price equal to the fair market value on the date of purchase. These equity arrangements were to further align our Outside Directors’ interests with the interests of our stockholders. The members of the Accelerate Parent Board other than the Outside Directors do not receive separate compensation for their service as directors of Accelerate Parent.
The following table sets forth the compensation paid to the Outside Directors in fiscal 2011:
| Name |
Fees Earned or Paid in Cash ($) |
Stock Awards ($) (1) |
Option Awards ($) (2) |
Total ($) |
||||||||||||
| James Farrell |
$ | 150,000 | $ | — | $ | — | $ | 150,000 | ||||||||
| Gary Kusin |
150,000 | — | — | 150,000 | ||||||||||||
| James M. Micali |
150,000 | — | — | 150,000 | ||||||||||||
| Carl Sewell |
125,000 | 50,000 | 87,072 | 262,072 | ||||||||||||
| David Krantz |
115,732 | 50,000 | 86,924 | 252,656 | ||||||||||||
| (1) | Represents the aggregate grant date fair value for restricted stock granted during fiscal 2011 calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The fair value of the restricted stock was based on the stock price of Accelerate Common Stock on the grant date of $1.00 per share. |
| (2) | Represents the aggregate grant date fair value for option awards granted during fiscal 2011 calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The fair value of the options was calculated using a Black-Scholes option pricing model. The assumptions used in the Black-Scholes Model were: (i) an expected life of 6.0 years, (ii) no dividend yield, (iii) an expected stock price volatility of 40.75% and (iv) a risk-free interest rate of 2.86% for Mr. Sewell and (i) an expected life of 6.0 years, (ii) no dividend yield, (iii) an expected stock price volatility of 40.75% and (iv) a risk-free interest rate of 2.82% for Mr. Krantz. |
106
Payments Received by Directors and Named Executive Officers in Connection with the Merger
None of our directors and none of our named executive officers other than Mr. Brown and Mr. Marrett held any shares in Holdings at the time of the Merger. Mr. Brown and Mr. Marrett each held 2,364 shares of Holding’s Series A common stock at the time of the Merger. Under the terms of the Merger Agreement, in consideration for those shares, they each received $596.65 per share, which we refer to as the per share merger consideration, or $1,412,873.19 in the aggregate.
In connection with the Merger, holders of vested options under the 2005 Plan with an exercise price less than the per share merger consideration received an option cancellation payment equal to the difference between the per share merger consideration and the exercise price of the cancelled option. Our named executive officers received aggregate option cancellation payments as follows: (i) $12,321,516.67 for Mr. Berry, (ii) $5,893,159.71 for Mr. Gaither, (iii) $1,275,493.59 for Mr. Dyckman, (iv) $1,275,493.59 for Mr. Marrett, and (v) $1,275,493.59 for Mr. Brown. Mr. Dyckman also received a discretionary cash bonus of $1.0 million in connection with the Merger.
Compensation Committee Interlocks and Insider Participation
Executive compensation and related decisions are made by the Accelerate Parent Board, which does not currently have a compensation committee.
Indemnification of Officers and Directors
The articles of incorporation of Holdings and Accelerate Parent provide for the release of any person serving as our director from liability to us or our stockholders for damages for breach of fiduciary duty and for the indemnification by us of any person serving as a director, officer, employee or agent or other authorized person to the fullest extent permissible under the Delaware General Corporation Law. In addition, we have purchased a directors’ and officers’ insurance policy covering our officers and directors for liabilities that they may incur as a result of any action, or failure to act, by such officers and directors in their capacity as officers and directors.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Accelerate Holdings Corp., or Accelerate Holdings, directly owns all our issued and outstanding stock. All of Accelerate Holdings’ issued and outstanding stock is directly owned by Accelerate Parent Corp., or Accelerate Parent. All equity interests in Accelerate Parent are owned, directly or indirectly, by the Sponsor, certain co-investors and certain of our employees, including certain of our named executive officers and directors.
The following table sets forth information with respect to the ownership as of March 1, 2012 for (a) each person known by us to own beneficially more than a 5% equity interest in Accelerate Parent, (b) each member of our board of directors, (c) each member of Accelerate Parent’s board of directors, (d) each of our named executive officers, and (e) all of the named executive officers and directors as a group. We have 1,000 shares of common stock outstanding, all of which are owned indirectly by Accelerate Parent. Share amounts indicated below reflect beneficial ownership, through Accelerate Parent, by such entities or individuals of these 1,000 shares of American Tire Distributors Holdings, Inc.
The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days.
107
Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated shares. Unless otherwise noted, the address of each beneficial owner is c/o American Tire Distributors Holdings, Inc., 12200 Herbert Wayne Court, Suite 150, Huntersville, North Carolina 28078.
| Shares of Common Stock Beneficially Owned |
||||||||
| Number | Percent | |||||||
| 5% Stockholders |
||||||||
| TPG Capital (1) |
949.68 | 94.968 | % | |||||
| Executive Officers and Directors |
||||||||
| William E. Berry (2) |
3.83 | * | ||||||
| J. Michael Gaither (3) |
* | * | ||||||
| David L. Dyckman (4) |
* | * | ||||||
| Daniel K. Brown (5) |
* | * | ||||||
| Phillip E. Marrett (6) |
* | * | ||||||
| Jason T. Yaudes (7) |
* | * | ||||||
| W. James Farrell (8) |
1.53 | * | ||||||
| Gary Kusin (9) |
* | * | ||||||
| James Micali (10) |
* | * | ||||||
| Carl Sewell (11) |
* | * | ||||||
| David Krantz (12) |
* | * | ||||||
| Kevin Burns (13) |
949.68 | 94.968 | % | |||||
| Jeffrey Liaw (13) |
949.68 | 94.968 | % | |||||
| All directors and executive officers as a group (13 persons) |
960.56 | 96.056 | % | |||||
| * | Represents less than one percent or one share, as applicable. |
| (1) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by TPG Capital reflect an aggregate of the following record ownership: (i) 324,969,701 shares of Accelerate Parent held by TPG Accelerate VI, LP and (ii) 324,969,701 shares of Accelerate Parent held by TPG Accelerate V, LP. The address of TPG Capital is 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. |
| (2) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by William E. Berry reflect (i) 1,833,790 shares of Accelerate Parent held directly by Mr. Berry, (ii) 392,955 shares of Accelerate Parent held by the Trust FBO Meredith Elaine Berry U/A, a trust established for the benefit of Mr. Berry's minor daughter, and (iii) 392,955 shares of Accelerate Parent held by the Trust FBO Michael Dolan Berry U/A, a trust established for the benefit of Mr. Berry's minor son. Mr. Berry's wife, Marianne Dolan Berry, is the trustee of each trust and has sole investment and dispositive power over the shares held by the trusts. Mr. Berry disclaims beneficial ownership of such shares. |
| (3) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by J. Michael Gaither reflect his ownership of 632,500 shares of Accelerate Parent. |
| (4) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by David L. Dyckman reflect his ownership of 496,800 shares of Accelerate Parent. |
| (5) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by Daniel K. Brown reflect his ownership of 572,700 shares of Accelerate Parent. |
| (6) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by Phillip E. Marrett reflect his ownership of 572,700 shares of Accelerate Parent. |
108
| (7) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by Jason T. Yaudes reflect his ownership of 57,500 shares of Accelerate Parent. |
| (8) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by W. James Farrell reflect his ownership of 1,000,000 shares of Accelerate Parent and 50,000 shares of restricted stock of Accelerate Parent. |
| (9) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by Gary Kusin reflect his ownership of 500,000 shares of Accelerate Parent and 50,000 shares of restricted stock of Accelerate Parent. |
| (10) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by James Micali reflect his ownership of 250,000 shares of Accelerate Parent and 50,000 shares of restricted stock of Accelerate Parent. |
| (11) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by Carl Sewell reflect his ownership of 500,000 shares of Accelerate Parent and 50,000 shares of restricted stock of Accelerate Parent. |
| (12) | American Tire Distributors Holdings, Inc. shares shown as beneficially owned by David Krantz reflect his ownership 50,000 shares of restricted stock of Accelerate Parent. |
| (13) | Includes all shares held by TPG Accelerate V, LP and TPG Accelerate VI, LP. Each of Kevin Burns and Jeffrey Liaw may be deemed to be a beneficial owner of these interest due to his status as an employee of TPG Capital, and each such person disclaims beneficial ownership of any such interests in which he does not have a pecuniary interest. The address of each of Messrs. Burns and Liaw is c/o TPG Capital, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. |
Equity Compensation Plan Information
| Plan category |
Number of securities
to be issued upon the exercise of outstanding options, warrants and rights (a) |
Weighted- average exercise price of outstanding options, warrants ands rights (b) |
Number of securities remaining available for future issuance under equity compensation plans excluding securities reflected in column (a) (c) |
|||||||||
| Equity compensation plans approved by shareholders |
44,598,400 | $ | 1.00 | 4,001,600 | ||||||||
| Equity compensation plans not approved by shareholders |
— | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
44,598,400 | $ | 1.00 | 4,001,600 | ||||||||
|
|
|
|
|
|
|
|||||||
| Item 13. | Certain Relationships and Related Transactions and Director Independence. |
See Note 16 of Notes to Consolidated Financial Statements for discussion of our related party transactions. During fiscal 2011 and as of December 31, 2011, none all of our directors meet the standard of independence as defined by the Securities and Exchange Commission. Management has evaluated all activities and transactions that have transpired with our directors and deem each to be at an arms length and no more favorable than transactions that we would have entered into with an independent third party.
109
| Item 14. | Principal Accountant Fees and Services. |
The following table sets forth the fees billed by our independent registered public accounting firm, PricewaterhouseCoopers LLP, during fiscal years 2011 and 2010.
| In thousands |
2011 | 2010 | ||||||
| Audit Fees (a) |
$ | 491 | $ | 1,883 | ||||
| Audit-Related Fees (b) |
58 | — | ||||||
|
|
|
|
|
|||||
| Total |
$ | 549 | $ | 1,883 | ||||
|
|
|
|
|
|||||
| (a) | Audit fees relate to professional services rendered for the audits of the annual consolidated financial statements of the Company and include quarterly reviews, statutory audits, issuance of consents, comfort letters and assistance with, and review of, documents filed with the SEC. |
| (b) | Audit-related fees include payment for services in connection with our acquisitions as well as consultation on accounting standards or transactions. |
Accelerate Parent Board Pre-Approval Policies and Procedures
In accordance with policies adopted by our board of directors, the Accelerate Parent Board has sole authority to approve all audit engagement fees and terms of our independent registered public accounting firm. The Accelerate Parent Board may delegate authority to pre-approve audit and non-audit services to any member of the Accelerate Parent Board whose decisions should be reviewed at the next scheduled meeting. The Accelerate Parent Board may not delegate pre-approval authority to management.
110
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
| (a) | Documents filed as part of this Report: |
| 1. | The following items, including our consolidated financial statements, are set forth at Item 8 of this report: |
| • | Management’s Report on Internal Control over Financial Reporting |
| • | Reports of Independent Registered Public Accounting Firm |
| • | Consolidated Balance Sheets as of December 31, 2011 and January 1, 2011 for the Successor |
| • | Consolidated Statements of Operations for the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 and fiscal year ended January 2, 2010 for the Predecessor |
| • | Consolidated Statements of Stockholder’s Equity and Other Comprehensive Income (Loss) for the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 for the Successor and for the five months ended May 28, 2010 and fiscal year ended January 2, 2010 for the Predecessor |
| • | Consolidated Statements of Cash Flows for the fiscal year ended December 31, 2011 and the seven months ended January 1, 2011 for the Successor and for the five months ended May 28, 2010 and fiscal year ended January 2, 2010 for the Predecessor |
| • | Notes to Consolidated Financial Statements |
| 2. | Financial Statement Schedule |
111
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year ended December 31, 2011 and Seven Months Ended January 1, 2011 for the Successor and the Five Months Ended May 28, 2010 and Fiscal Year Ended January 2, 2010 for the Predecessor
| Additions | ||||||||||||||||||||
| In thousands |
Balance Beginning of Year |
Charged to Costs and Expenses |
Charged to Other Accounts |
Deductions | Balance End of Year |
|||||||||||||||
| Successor 2011 |
||||||||||||||||||||
| Allowance for doubtful accounts |
$ | 340 | $ | 1,911 | $ | — | $ | (1,555 | )(1) | $ | 696 | |||||||||
| Acquisition exit cost reserves (2) |
6,975 | (498 | ) | — | (2,612 | ) | 3,865 | |||||||||||||
| Inventory reserves |
192 | 480 | — | (158 | ) | 514 | ||||||||||||||
| Sales returns and allowances |
29 | 2,996 | — | (1,043 | ) | 1,982 | ||||||||||||||
| Valuation allowance on deferred tax assets |
596 | 244 | — | — | 840 | |||||||||||||||
| Successor Seven Months ended January 1, 2011 |
||||||||||||||||||||
| Allowance for doubtful accounts |
$ | — | $ | 1,762 | $ | — | $ | (1,422 | )(1) | $ | 340 | |||||||||
| Acquisition exit cost reserves (2) |
6,820 | 257 | 2,273 | (3) | (2,375 | ) | 6,975 | |||||||||||||
| Inventory reserves |
— | 192 | (4) | — | — | 192 | ||||||||||||||
| Sales returns and allowances |
— | (35 | ) | — | 64 | 29 | ||||||||||||||
| Valuation allowance on deferred tax assets |
999 | — | — | (403 | ) | 596 | ||||||||||||||
| Predecessor Five Months Ended May 28, 2010 |
||||||||||||||||||||
| Allowance for doubtful accounts |
$ | 2,280 | $ | 608 | $ | — | $ | (1,428 | )(1) | $ | 1,460 | |||||||||
| Acquisition exit cost reserves (2) |
8,704 | (109 | ) | — | (1,775 | ) | 6,820 | |||||||||||||
| Inventory reserves |
1,001 | 111 | (4) | — | — | 1,112 | ||||||||||||||
| Sales returns and allowances |
1,255 | 732 | — | (882 | ) | 1,105 | ||||||||||||||
| Valuation allowance on deferred tax assets |
1,558 | — | — | (559 | ) | 999 | ||||||||||||||
| Predecessor 2009 |
||||||||||||||||||||
| Allowance for doubtful accounts |
$ | 2,314 | $ | 1,381 | $ | — | $ | (1,415 | )(1) | $ | 2,280 | |||||||||
| Acquisition exit cost reserves (2) |
15,273 | (2,699 | ) | 1,643 | (3) | (5,513 | ) | 8,704 | ||||||||||||
| Inventory reserves |
865 | 136 | (4) | — | — | 1,001 | ||||||||||||||
| Sales returns and allowances |
1,679 | 2,892 | — | (3,316 | ) | 1,255 | ||||||||||||||
| Valuation allowance on deferred tax assets |
651 | 907 | — | — | 1,558 | |||||||||||||||
| (1) | Accounts written off during the year, net of recoveries. |
| (2) | Amounts represent facilities closing cost of acquired distribution centers due to existing distribution centers being located in close proximity to the acquired distribution facilities. |
| (3) | Represents the fair value of closed facilities costs recorded in connection with acquisitions. |
| (4) | Amounts represent net changes in reserve levels for additionally calculated requirements or reductions resulting from sale of or scrapping of obsolete inventories. |
112
| 3. | Exhibits: |
| 2.1 | Agreement and Plan of Merger, dated as of April 20, 2010, by and among American Tire Distributors Holdings, Inc., Accelerate Holdings Corp., Accelerate Acquisition Corp. and Investcorp International, Inc., in its capacity as a representative of the stockholders, optionholders and warrantholders of American Tire Distributors Holdings, Inc. (incorporated by reference to exhibit 2.1 to American Tire Distributors Holdings, Inc.’s Form 8-K filed April 23, 2010). | |
| 3.1 | Fifth Restated Certificate of Incorporation of American Tire Distributors, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 3.2 | Amended and Restated Bylaws of American Tire Distributors, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 3.3 | Second Amended and Restated Certificate of Incorporation of American Tire Distributors Holdings, Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 3.4 | Amended and Restated Bylaws of American Tire Distributors Holdings, Inc. (incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 3.5 | Articles of Incorporation of Am-Pac Tire Dist. Inc., as amended (incorporated by reference to Exhibit 3.5 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 3.6 | Bylaws of Am-Pac Tire Dist. Inc., as amended (incorporated by reference to Exhibit 3.6 to the Registrant’s Registration Statement on Form S-4/A filed January 24, 2011). | |
| 4.1 | Senior Secured Notes Indenture, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., as Subsidiary Guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of the 9.750% Senior Secured Notes due 2017 (incorporated by reference to exhibit 4.1 to American Tire Distributors Holdings, Inc.’s Form 8-K filed June 2, 2010). | |
| 4.2 | Senior Subordinated Notes Indenture, dated as of May 28, 2010 among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., as Subsidiary Guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of the 11.50% Senior Subordinated Notes due 2018 (incorporated by reference to exhibit 4.2 to American Tire Distributors Holdings, Inc.’s Form 8-K filed June 2, 2010). | |
| 4.3 | Form of 9.750% Senior Secured Notes due 2017 (included in Exhibit 4.1). | |
| 4.4 | Security Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc. American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc. and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 4.5 | Lien Subordination and Intercreditor Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Bank of America, N.A. and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 4.6 | Intercreditor and Collateral Agency Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc. and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 4.7 | Form of 11.50% Senior Subordinated Notes due 2018 (included in Exhibit 4.2). | |
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| 4.8 | Registration Rights Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc. and Banc of America Securities LLC, Barclays Capital Inc., RBC Capital Markets Corporation and UBS Securities LLC (incorporated by reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.1 | Fifth Amended and Restated Credit Agreement, dated as of May 28, 2010 (incorporated by reference to exhibit 10.1 to American Tire Distributors Holdings, Inc.’s Form 8-K filed June 2, 2010). | |
| 10.2 | First Amendment to Fifth Amended and Restated Credit Agreement, effective as of May 28, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.3 | Second Amendment to Fifth Amended and Restated Credit Agreement, dated as of June 6, 2011, among American Tire Distributors Holdings, Inc., American Tire Distributors, Inc., Am-Pac Tire Dist. Inc., The Bowlus Service Company, Tire Wholesalers, Inc., ATD Acquisition Co. III, Inc., Lenders party thereto and Bank of America, N.A. as Administrative and Collateral Agent and Lender (incorporated by reference to Exhibit 10.1 to American Tire Distributors Holdings, Inc.’s Form 8-K filed June 9, 2011). | |
| 10.4 | Amended and Restated Pledge and Security Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc. and the Bank of New York Mellon trust Company, N.A. (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.5 | Amended and Restated Accelerate parent Corp. Management Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.6 | Form of Option Grant Agreement under the 2010 Amended and Restated Accelerate Parent Corp. Management Equity Incentive Plan for directors (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.7 | Form of Option Grant Agreement under the 2010 Amended and Restated Accelerate Parent Corp. Management Equity Incentive Plan for certain employees (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.8 | Accelerate Parent Corp. Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.9 | Form of Restricted Stock Grant Agreement under the 2010 Accelerate Parent Corp. Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.10 | Transaction and Monitoring Fee Letter Agreement, dated as of May 28, 2010, between American Tire Distributors, Inc. and TPG Capital, L.P. (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.11 | Indemnification Agreement, dated as of May 28, 2010, among American Tire Distributors Holdings, Inc., American Tire Distributors, Inc., Am-Pac Tire Dist. Inc., Tire Pros Francorp and TPG Capital, L.P. (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.12 | Accelerate Parent Corp. Management Stockholders’ Agreement, dated as of June 15, 2010, among Accelerate Parent Corp., TPG Partners V, L.P. and TPG Partners VI, L.P. (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
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| 10.13 | Executive Employment Agreement, dated as of March 31, 2005, between American Tire Distributors, Inc. and Richard P. Johnson (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.14 | Executive Employment Agreement, dated as of March 31, 2005, between American Tire Distributors, Inc. and J. Michael Gaither (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.15 | Executive Employment Agreement, dated as of March 31, 2005, between American Tire Distributors, Inc. and Phillip E. Marrett (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.16 | Executive Employment Agreement, dated as of March 31, 2005, between American Tire Distributors, Inc. and Daniel K. Brown (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.17 | Executive Employment Agreement, dated as of December 6, 2005, between American Tire Distributors, Inc. and David L. Dyckman (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report Form 10-K filed March 31, 2006). | |
| 10.18 | First Amendment to Executive Employment Agreement, dated as of March 3, 2008, between American Tire Distributors, Inc. and Richard P. Johnson (incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K filed March 26, 2008). | |
| 10.19 | Second Amendment to Executive Employment Agreement, dated as of April 6, 2009, between American Tire Distributors, Inc. and Richard P. Johnson (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 18, 2009). | |
| 10.20 | Separation Agreement and General Release, dated as of May 21, 2010, between American Tire Distributors Holdings, Inc. and Richard P. Johnson (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010). | |
| 10.21 | Amended and Restated Employment Agreement, dated as of April 6, 2009, between American Tire Distributors, Inc. and William E. Berry (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed June 3, 2009). | |
| 12.1 | Statement setting forth the Computation of Ratio of Earnings to Fixed Charges.* | |
| 21.1 | Chart of the subsidiaries of American Tire Distributors Holdings, Inc.* | |
| 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss), (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.** | |
| * | Filed herewith. |
| ** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized, on March 12, 2012.
| AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC. | ||
| By: |
/S/ WILLIAM E. BERRY | |
| Name: |
William E. Berry | |
| Title: |
President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 12, 2012.
| Signature |
Title |
Date | ||
|
/S/ WILLIAM E. BERRY William E. Berry |
Director, President and Chief Executive Officer (Principle Executive Officer) | March 12, 2012 | ||
|
/S/ JASON T. YAUDES Jason T. Yaudes |
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
March 12, 2012 | ||
|
/S/ DAVID L. DYCKMAN David L. Dyckman |
Director, Executive Vice President and Chief Operating Officer | March 12, 2012 | ||
| /S/ J. MICHAEL GAITHER J. Michael Gaither |
Director, Executive Vice President, General Counsel and Secretary | March 12, 2012 | ||
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Exhibit 12.1
American Tire Distributors Holdings, Inc.
Statement Regarding: Computation of Ratio of Earnings to Fixed Charges
(Amounts in thousands, except ratio amounts)
| Predecessor | Successor | |||||||||||||||||||||||||||||
| Twelve months Ended December 29, 2007 (unaudited) |
Twelve months Ended January 3, 2009 (unaudited) |
Twelve months Ended January 2, 2010 (unaudited) |
Five months Ended May 28, 2010 (unaudited) |
Seven months Ended January 1, 2011 (unaudited) |
Twelve months Ended December 31, 2011 (unaudited) |
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| Consolidated pretax income (loss) from operations |
$ | 4,240 | $ | 21,044 | $ | 12,258 | $ | (51,303 | ) | $ | (59,607 | ) | $ | 4,474 | ||||||||||||||||
| Interest |
61,633 | 59,169 | 54,415 | 32,669 | 37,391 | 67,580 | ||||||||||||||||||||||||
| Interest portion of rent expense |
11,169 | 12,390 | 15,822 | 6,599 | 9,738 | 19,499 | ||||||||||||||||||||||||
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| Earnings |
$ | 77,042 | $ | 92,603 | $ | 82,495 | $ | (12,035 | ) | $ | (12,478 | ) | $ | 91,553 | ||||||||||||||||
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| Interest |
$ | 61,633 | $ | 59,169 | $ | 54,415 | $ | 32,669 | $ | 37,391 | $ | 67,580 | ||||||||||||||||||
| Interest portion of rent expense |
11,169 | 12,390 | 15,822 | 6,599 | 9,738 | 19,499 | ||||||||||||||||||||||||
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| Fixed Charges |
$ | 72,802 | $ | 71,559 | $ | 70,237 | $ | 39,268 | $ | 47,129 | $ | 87,079 | ||||||||||||||||||
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| Ratio of Earnings to Fixed Charges |
1.06 | 1.29 | 1.17 | — | (a) | — | (b) | 1.05 | ||||||||||||||||||||||
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| (a) | In the five months ended May 28, 2010, earnings were insufficient to cover fixed charges by $51.3 million |
| (b) | In the seven months ended January 1, 2011, earnings were insufficient to cover fixed charges by $59.6 million |
EXHIBIT 21.1
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
Chart of Subsidiaries
| Company | State of Incorporation | |
| American Tire Distributors Holdings, Inc. |
Delaware | |
| American Tire Distributors, Inc. |
Delaware | |
| Am-Pac Tire Dist. Inc. |
California | |
| Tire Pros Francorp |
California | |
| Tire Wholesalers, Inc. |
Washington |
EXHIBIT 31.1
CERTIFICATIONS
I, William E. Berry, certify that:
| 1. | I have reviewed this annual report on Form 10-K of American Tire Distributors Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 12, 2012
| /s/ WILLIAM E. BERRY |
| William E. Berry |
| President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
I, Jason T. Yaudes, certify that:
| 1. | I have reviewed this annual report on Form 10-K of American Tire Distributors Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 12, 2012
| /s/ JASON T. YAUDES |
| Jason T. Yaudes |
| Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of American Tire Distributors Holdings, Inc., a Delaware corporation (the “Company”), hereby certifies that, to his best knowledge:
| (a) | the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (b) | information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: March 12, 2012 | By: | /s/ WILLIAM E. BERRY | ||
| Name: William E. Berry Title: President and Chief Executive Officer | ||||
| By: |
/s/ JASON T. YAUDES | |||
| Name: Jason T. Yaudes Title: Executive Vice President and Chief Financial Officer | ||||
|
Summary of Significant Accounting Policies
|
12 Months Ended | |||||||||||||||||||||||||||||||||
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Dec. 31, 2011
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| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies: A summary of significant accounting policies used in the preparation of the accompanying financial statements follows: Basis of Preparation The accompanying 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 consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated results for the periods presented. On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010 (as amended and supplemented, the “Merger Agreement”), among Holdings, Accelerate Holdings Corp., a Delaware corporation (the “Buyer”), Accelerate Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”), and Investcorp International, Inc., solely in its capacity as a representative of the stockholders, optionholders and warrantholders of Holdings, Merger Sub merged with and into Holdings with Holdings being the surviving corporation (the “Merger” or the “Acquisition”). As a result of the Merger, Holdings became a wholly-owned subsidiary of the Buyer and an indirect wholly-owned subsidiary of Accelerate Parent Corp. (“Accelerate Parent”), substantially all of whose outstanding capital stock is owned by investment entities affiliated with TPG Capital, L.P. (“TPG” or the “Sponsor”). Under the guidance provided by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Under push-down accounting, certain transactions incurred by the Buyer, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of common stock of Holdings have been pushed down from the Buyer to Holdings. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiaries. Partially-owned investments are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are based on several factors including the facts and circumstances available at the time of the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probably future outcome. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of operations in the period that they are determined. Cash and Cash Equivalents The Company considers all deposits with an original maturity of three months or less to be cash equivalents in its consolidated financial statements. Outstanding checks are presented as a financing cash outflow in the statement of cash flows because they are funded by drawing on the revolving credit facility as they are presented for payment. Allowance for Doubtful Accounts The allowance for doubtful accounts represents the best estimate of probable loss inherent within the Company’s accounts receivable balance. Estimates are based upon both the creditworthiness of specific customers and the overall probability of losses based upon an analysis of the overall aging of receivables as well as past collection trends and general economic conditions. Inventories Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value and consist primarily of automotive tires, custom wheels, and related tire supply and tool products. 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.
Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, assets placed in service are recorded at cost and depreciated using the straight-line method at annual rates sufficient to amortize the cost of the assets less estimated salvage values over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of their economic useful life or the related lease term. The range of useful lives used to depreciate property and equipment is as follows:
Major expenditures for replacements and significant improvements that increase asset values and extend useful lives are capitalized. Repairs and maintenance expenditures that do not extend the useful life of the asset are charged to expense as incurred. The carrying amounts of assets that are sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is reflected in the statement of operations. The Company capitalizes costs, including interest, incurred to develop or acquire internal-use software. These costs are capitalized subsequent to the preliminary project stage once specific criteria are met. Costs incurred in the preliminary project planning stage are expensed. Other costs, such as maintenance and training, are also expensed as incurred. Capitalized costs are amortized over their estimated useful lives using the straight-line method. The Company assesses the recoverability of the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets. Goodwill and Intangible Assets Goodwill and intangible assets with indefinite useful lives are no longer amortized, but 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. Recoverability of goodwill is measured at the reporting unit level and determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized. Recoverability of other indefinite-lived intangible assets is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.
Intangible assets such as customer-related intangible assets and noncompete agreements with finite useful lives are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:
The Company assesses the recoverability of the carrying value of its intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets. Deferred Financing Costs Deferred financing costs are expenditures associated with obtaining financings that are capitalized in the consolidated balance sheets and amortized over the term of the loans to which such costs relate. Amounts capitalized are recorded within other assets in the consolidated balance sheets and amortized to interest expense in the consolidated statements of operations. At December 31, 2011, the unamortized balance of deferred financing costs was $23.4 million, which includes $5.9 million incurred to increase the borrowing capacity and extend the maturity date of the Company’s revolving credit facility. At January 1, 2011, the unamortized balance was $22.3 million. Amortization for the Successor was $4.8 million and $2.7 million for fiscal year 2011 and the seven months ended January 1, 2011, respectively. Amortization for the Predecessor five months ended May 28, 2010 was $10.0 million, of which $8.0 million related to the write-off of deferred financing costs associated with the old debt structure eliminated as a result of the Merger. In addition, the Predecessor amortized $4.8 million during the fiscal year 2009. Equity Method Investment The Company has a 52% equity investment in American Car Care Centers (“ACCC”), an association of independent tire and automotive service dealers with over 1,100 locations nationwide. ACCC engages in a program to assist its stockholders and their customers in the promotion, marketing, distribution and sale of tires, tire supplies, accessories and equipment. Although we hold a majority ownership interest, our interest does not provide us with the ability to exercise significant influence. Accordingly, the investment is accounted for under the equity method and is included in other assets in the accompanying consolidated balance sheet at December 31, 2011. Derivative Instruments and Hedging Activities For derivative instruments, the Company applies FASB authoritative guidance which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. Self Insurance The Company is self-insured with respect to employee health liability claims and maintains a large deductible program on both workers’ compensation and auto insurance. The Company has stop-loss insurance coverage for individual claims in excess of $0.3 million for employee health insurance and deductibles of $0.3 million on the workers’ compensation and auto on a per claim basis. Aggregate stop-loss limits for workers’ compensation and auto are $7.8 million. There is no aggregate stop-loss limit on employee health insurance. A reserve for liabilities associated with losses is established for claims filed and claims incurred but not yet reported using actuarial methods followed in the insurance industry as well as the Company’s historical claims experience. Revenue Recognition Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. The Company recognizes revenue when the title and the risks and rewards of ownership have substantially transferred to the customer, which is upon delivery under free on board (“FOB”) destination terms. The Company permits customers from time to time to return certain products, but there is no contractual right of return. The Company continuously monitors and tracks such returns and records an estimate of such future returns, which is based on historical experience and recent trends. In the normal course of business, the Company extends credit, on open accounts, to its customers after performing a credit analysis based on a number of financial and other criteria. The Company performs ongoing credit evaluations of its customers’ financial condition and does not normally require collateral; however, letters of credit and other security are occasionally required for certain new and existing customers. Customer Rebates The Company offers rebates to its customers under a number of different programs. These rebates are recorded in accordance with the accounting standards for consideration given by a vendor to a customer. The majority of these programs provide for the customer to receive rebates, generally in the form of a reduction in the related accounts receivable balance, when certain measures are achieved, generally related to the volume of product purchased from the Company. These rebates are recorded as a reduction of the related price of the product, which reduces the amount of revenue recorded. Throughout the year, the amount of rebates is estimated based on the expected level of purchases to be made by customers that participate in the rebate programs. These estimates are periodically revised to reflect rebates earned by customers based on actual purchases made. Manufacturer Rebates The Company receives rebates from its vendors under a number of different programs. These rebates are recorded in accordance with the accounting standards for cash consideration received from a vendor. Many of the vendor programs provide for the Company to receive rebates when any of a number of measures are achieved, generally related to the volume of purchases. These rebates are accounted for as a reduction to the price of the product, which reduces the carrying value of inventory until the product is sold. Throughout the year, the amount recognized for annual rebates is based on purchases management considers probable for the full year. These estimates are continually revised to reflect rebates earned based on actual purchase levels. Cooperative Advertising and Marketing Programs The Company participates in cooperative advertising and marketing programs (“co-op”) with its vendors. Co-op funds are provided to the Company generally based on the volume of purchases made with vendors that offer such programs. A portion of the funds received must be used for specific advertising and marketing expenditures incurred by the Company or its customers. The co-op funds received by the Company from its vendors are accounted for in accordance with the accounting standards related to accounting for cash consideration received from a vendor, which requires that the Company record the funds received as a reduction of cost of sales or as an offset to specific costs incurred in selling the vendor’s products. The co-op funds that are provided to the Company’s customers are accounted for in accordance with authoritative guidance related to accounting for cash consideration given by a vendor to a customer, which requires that the Company record the funds paid as a reduction of revenue since no separate identifiable benefit is received by the Company. Shipping and Handling Fees and Costs In accordance with current accounting standards, the Company determined that shipping fees shall be reported on a gross basis. As a result, all amounts billed to a customer in a sale transaction related to shipping fees represent revenues earned for the goods provided and therefore recorded within net sales in the consolidated statement of operations. Handling costs include expenses incurred to store, move, and prepare products for shipment. The Company classifies these costs as selling, general and administrative expenses within the consolidated statement of operations, and includes a portion of internal costs such as salaries and overhead related to these activities. For fiscal 2011 and the seven months ended January 1, 2011, the Successor incurred $140.8 million and $64.5 million, respectively, related to these expenses. For the Predecessor, such expenses totaled $43.1 million and $99.6 million for the five months ended May 28, 2010 and fiscal 2009, respectively. Income Taxes The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision is computed using the asset and liability method of accounting, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, the Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. Deferred tax assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which those tax items are expected to be realized or settled. The Company regularly reviews the recoverability of its deferred tax assets considering historic profitability, projected future taxable income, and timing of the reversals of existing temporary differences as well as the feasibility of our tax planning strategies. Where appropriate, a valuation allowance is recorded if available evidence suggests that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Changes to valuation allowances are recognized in earnings in the period such determination is made. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is more-likely-than-not that the position will be sustained upon examination. The tax impacts recognized in the financial statements from such positions are then measured based on the largest impact that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions as a component of the provision for income taxes. Recently Issued Accounting Pronouncements In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, “Testing for Goodwill Impairment” which amended the guidance on the annual testing of goodwill for impairment. The amended guidance will allow a company to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company has determined that this new guidance will not have a material impact on its consolidated financial statements. In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 requires the Company to present components of other comprehensive income and of net income in one continuous statement of comprehensive income, or in two separate, but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. The option to report other comprehensive income within the statement of equity has been removed. This new presentation will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” ASU No. 2011-04 represents converged guidance between U.S. GAAP and IFRS resulting in common requirements for measuring fair value and for disclosing information about fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The Company is currently assessing the impact, if any, on its consolidated financial statements. |