UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-124878
American Tire Distributors Holdings, Inc.
(Exact name of registrant as specified in its charter)
A Delaware Corporation | 59-3796143 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
12200 Herbert Wayne Court
Suite 150
Huntersville, North Carolina 28078
(Address of principal executive office)
(704) 992-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x *
* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities and Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of common shares outstanding at November 1, 2012: 1,000
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
FORM 10-Q
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Item 1 |
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Condensed Consolidated Balance SheetsAs of September 29, 2012 and December 31, 2011 |
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Item 2 |
| Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3 |
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Item 4 |
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Item 1 |
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Item 1A |
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Item 6 |
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40 |
2
American Tire Distributors Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
In thousands, except share amounts |
September 29, 2012 |
December 31, 2011 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 14,802 | $ | 14,979 | ||||
Restricted cash |
1,250 | 1,072 | ||||||
Accounts receivable, net |
299,235 | 268,943 | ||||||
Inventories |
701,967 | 641,710 | ||||||
Income tax receivable |
369 | 1,601 | ||||||
Deferred income taxes |
14,628 | 15,042 | ||||||
Assets held for sale |
7,234 | 6,301 | ||||||
Other current assets |
17,681 | 13,203 | ||||||
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Total current assets |
1,057,166 | 962,851 | ||||||
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Property and equipment, net |
124,732 | 99,930 | ||||||
Goodwill |
455,982 | 445,715 | ||||||
Other intangible assets, net |
706,088 | 737,684 | ||||||
Other assets |
54,130 | 56,383 | ||||||
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Total assets |
$ | 2,398,098 | $ | 2,302,563 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 491,334 | $ | 469,867 | ||||
Accrued expenses |
52,906 | 45,693 | ||||||
Current maturities of long-term debt |
432 | 158 | ||||||
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Total current liabilities |
544,672 | 515,718 | ||||||
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Long-term debt |
924,116 | 835,650 | ||||||
Deferred income taxes |
270,520 | 282,756 | ||||||
Other liabilities |
12,647 | 12,620 | ||||||
Commitments and contingencies |
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Stockholders equity: |
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Common stock, par value $.01 per share; 1,000 shares authorized, issued and outstanding |
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Additional paid-in capital |
694,712 | 691,951 | ||||||
Accumulated (deficit) earnings |
(48,745 | ) | (36,195 | ) | ||||
Accumulated other comprehensive income (loss) |
176 | 63 | ||||||
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Total stockholders equity |
646,143 | 655,819 | ||||||
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Total liabilities and stockholders equity |
$ | 2,398,098 | $ | 2,302,563 | ||||
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See accompanying notes to condensed consolidated financial statements.
3
American Tire Distributors Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
In thousands |
Quarter Ended September 29, 2012 |
Quarter Ended October 1, 2011 |
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
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Net sales |
$ | 915,340 | $ | 830,966 | $ | 2,583,837 | $ | 2,234,275 | ||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
765,768 | 697,854 | 2,166,865 | 1,860,275 | ||||||||||||
Selling, general and administrative expenses |
129,159 | 111,694 | 377,939 | 320,073 | ||||||||||||
Transaction expenses |
799 | 1,183 | 2,060 | 2,830 | ||||||||||||
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Operating income (loss) |
19,614 | 20,235 | 36,973 | 51,097 | ||||||||||||
Other income (expense): |
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Interest expense |
(18,744 | ) | (17,231 | ) | (52,475 | ) | (50,756 | ) | ||||||||
Other, net |
(1,418 | ) | (434 | ) | (2,802 | ) | (1,303 | ) | ||||||||
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Income (loss) from operations before income taxes |
(548 | ) | 2,570 | (18,304 | ) | (962 | ) | |||||||||
Income tax provision (benefit) |
10,054 | 1,090 | (5,754 | ) | (376 | ) | ||||||||||
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Net income (loss) |
$ | (10,602 | ) | $ | 1,480 | $ | (12,550 | ) | $ | (586 | ) | |||||
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Other comprehensive income (loss): |
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Unrealized gain (loss) on rabbi trust assets, net of tax |
58 | (162 | ) | 113 | (230 | ) | ||||||||||
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Other comprehensive income (loss) |
58 | (162 | ) | 113 | (230 | ) | ||||||||||
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Comprehensive income (loss) |
$ | (10,544 | ) | $ | 1,318 | $ | (12,437 | ) | $ | (816 | ) | |||||
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See accompanying notes to condensed consolidated financial statements.
4
American Tire Distributors Holdings, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Total Stockholders Equity |
Common Stock | Additional Paid-In Capital |
Accumulated Earnings (Deficit) |
Accumulated Other Comprehensive (Loss) Income |
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In thousands, except share amounts |
Shares | Amount | ||||||||||||||||||||||
Balance, December 31, 2011 |
$ | 655,819 | 1,000 | $ | | $ | 691,951 | $ | (36,195 | ) | $ | 63 | ||||||||||||
Net income (loss) |
(12,550 | ) | | | | (12,550 | ) | | ||||||||||||||||
Unrealized gain (loss) on rabbi trust assets, net of tax |
113 | | | | | 113 | ||||||||||||||||||
Stock-based compensation expense |
2,761 | | | 2,761 | | | ||||||||||||||||||
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Balance, September 29, 2012 |
$ | 646,143 | 1,000 | $ | | $ | 694,712 | $ | (48,745 | ) | $ | 176 | ||||||||||||
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See accompanying notes to condensed consolidated financial statements.
5
American Tire Distributors Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In thousands |
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | (12,550 | ) | $ | (586 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
65,656 | 57,799 | ||||||
Amortization of other assets |
3,648 | 3,543 | ||||||
Benefit for deferred income taxes |
(11,897 | ) | (15,530 | ) | ||||
Provision for doubtful accounts |
1,546 | 1,653 | ||||||
Stock-based compensation |
2,761 | 2,648 | ||||||
Other, net |
2,679 | 946 | ||||||
Change in operating assets and liabilities: |
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Accounts receivable |
(28,809 | ) | (75,067 | ) | ||||
Inventories |
(53,836 | ) | (208,343 | ) | ||||
Income tax receivable |
1,232 | (1,347 | ) | |||||
Other current assets |
(4,410 | ) | (1,062 | ) | ||||
Accounts payable and accrued expenses |
9,632 | 73,651 | ||||||
Other, net |
(1,179 | ) | (1,629 | ) | ||||
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Net cash provided by (used in) operating activities |
(25,527 | ) | (163,324 | ) | ||||
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Cash flows from investing activities: |
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Acquisitions, net of cash acquired |
(19,224 | ) | (59,059 | ) | ||||
Purchase of property and equipment |
(42,177 | ) | (18,862 | ) | ||||
Purchase of assets held for sale |
(3,281 | ) | (2,281 | ) | ||||
Proceeds from sale of property and equipment |
84 | 70 | ||||||
Proceeds from sale of assets held for sale |
3,078 | 1,174 | ||||||
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Net cash provided by (used in) investing activities |
(61,520 | ) | (78,958 | ) | ||||
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Cash flows from financing activities: |
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Borrowings from revolving credit facility |
2,513,600 | 2,088,278 | ||||||
Repayments of revolving credit facility |
(2,423,995 | ) | (1,852,239 | ) | ||||
Outstanding checks |
(928 | ) | 15,488 | |||||
Payments of deferred financing costs |
| (5,880 | ) | |||||
Payments of other long-term debt |
(1,807 | ) | (771 | ) | ||||
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Net cash provided by (used in) financing activities |
86,870 | 244,876 | ||||||
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Net increase (decrease) in cash and cash equivalents |
(177 | ) | 2,594 | |||||
Cash and cash equivalentsbeginning of period |
14,979 | 11,971 | ||||||
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Cash and cash equivalentsend of period |
$ | 14,802 | $ | 14,565 | ||||
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Supplemental disclosures of cash flow information: |
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Cash payments for interest |
$ | 34,913 | $ | 34,020 | ||||
Cash payments (receipts) for taxes, net |
$ | 6,197 | $ | 1,358 | ||||
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Supplemental disclosures of noncash activities: |
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Capital expenditures financed by debt |
$ | 515 | $ | | ||||
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See accompanying notes to condensed consolidated financial statements.
6
American Tire Distributors Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. | Nature of Business: |
American Tire Distributors Holdings, Inc. (Holdings) is a Delaware corporation that owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (ATDI), a Delaware corporation. Holdings has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its subsidiaries constitute the operations of Holdings presented under accounting principles generally accepted in the United States. ATDI is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools. Its customer base is comprised primarily of independent tire dealers with the remainder of other customers representing various national and corporate accounts. ATDI serves a majority of the contiguous United States through one operating and reportable segment. Unless the context otherwise requires, Company herein refers to Holdings and its consolidated subsidiaries.
2. | Basis of Presentation: |
The accompanying condensed consolidated financial statements reflect the consolidated operations of the Company and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) as defined by the Financial Accounting Standards Board (FASB) within the FASB Accounting Standards Codification (FASB ASC). In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated unaudited results for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the American Tire Distributors Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 2011.
The Companys fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended September 29, 2012 and October 1, 2011 each contain operating results for 13 weeks. The nine months ended September 29, 2012 and October 1, 2011 each contain operating results for 39 weeks.
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by TPG Capital, L.P. and certain co-investors for an aggregate purchase price valued at $1,287.5 million (the Merger). The Merger was financed by $635 million in aggregate principal amount of debt financing as well as common equity capital. In connection with the Merger, the Company conducted cash tender offers for its existing outstanding debt securities, all of which were subsequently purchased and retired. Although the Company continues to operate as the same legal entity subsequent to the Merger and related change in control, a new entity was created for accounting purposes as of May 28, 2010. As a result, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market values at the date of acquisition. As well, under the guidance of the Securities and Exchange Commission (SEC), push-down accounting is required when such transactions result in an entity being substantially wholly-owned. Therefore, the basis in shares of the Companys common stock have been pushed down from the accounts of the parent and recorded on the financial statements of the subsidiary.
3. | Recently Adopted Accounting Pronouncements |
In May 2011, the FASB issued Accounting Standards Update (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 a consistent definition of fair value as well as provides common requirements for measuring fair value and disclosing information about fair value measurements. This new guidance is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The Company adopted this guidance on January 1, 2012 and its adoption did not significantly impact the Companys 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 the 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 is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The revised presentation requirements are reflected in the Companys consolidated financial statements.
7
In September 2011, the FASB issued 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 the option 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 adopted this guidance on January 1, 2012; however, the Company performs its annual impairment test in the fourth quarter and does not expect the adoption of this ASU to significantly impact its consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 revises ASU No. 2011-05 to defer the presentation in the financial statements of reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The deferral is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The Company adopted this guidance on January 1, 2012. The revised presentation requirements are reflected in the Companys consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company performs its annual impairment test in the fourth quarter and does not expect the impact of adopting this standard to have a material effect on the consolidated financial statements.
4. | Acquisitions: |
On May 24, 2012, the Company entered into a Stock Purchase Agreement with Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (CTO) to acquire 100% of the outstanding capital stock of CTO. CTO owned and operated three distribution centers in Baton Rouge, Slidell and Lafayette, Louisiana serving over 500 customers. The acquisition was completed on May 24, 2012 and was funded through the Companys ABL Facility. The Company does not believe the acquisition of CTO is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805Business Combinations. As a result, the information is not presented.
The acquisition of CTO was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $15.9 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $9.4 million. The premium in the purchase price paid for the acquisition of CTO reflects the anticipated realization of operational and cost synergies. As of the balance sheet date, the purchase price allocation is final except for the resolution of the post-closing purchase price adjustment and tax matters, both of which the Company anticipates finalizing by fiscal year end.
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 Companys 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 805Business 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 $27.0 million. The premium in the purchase price paid for the acquisition of NCT reflects the anticipated realization of operational and cost synergies.
8
5. | Inventories: |
Inventories consist primarily of tires, custom wheels and accessories and tire supplies and tools. Reported amounts are valued at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. A majority of the Companys tire vendors allow for the return of tire products, subject to certain limitations, specified in supply arrangements with the vendors. In addition, the Companys inventory is collateral under the ABL Facility. See Note 9 for further information.
6. | Assets Held for Sale: |
In accordance with current accounting standards, the Company classifies assets as held for sale in the period in which all held for sale criteria is met. Assets held for sale are reported at the lower of their carrying amount or fair value less cost to sell and are no longer depreciated. At September 29, 2012, assets held for sale totaled $7.2 million, of which $1.1 million were residential properties that were acquired as part of employee relocation packages. The Company is actively marketing these properties and anticipates that they will be sold within a twelve-month period from the date in which they are classified as held for sale.
As part of the Am-Pac Tire Dist., Inc (Am-Pac) acquisition in 2008, the Company acquired a distribution center in California which contained office space that served as Am-Pacs headquarters. The facility was used as a warehouse within the Companys distribution operations until its activities were absorbed into nearby existing locations during 2011. As a result, the facility was classified as held for sale when the building had a carrying value of $5.0 million. During the second quarter of 2012, the Company determined that the carrying value of the facility exceeded its fair value due to current market conditions. As a result, the Company recorded a $0.6 million adjustment related to the fair value of this facility. The Company continues to actively market the property for immediate sale at a reasonable price in relation to its fair value.
On February 1, 2012, the Company reacquired one of three facilities originally included in a sale-leaseback transaction completed in 2002 that had an initial lease term of 20 years, followed by two 10 year renewal options. The facility was used as a distribution center within the Companys operations until its activities were relocated to an expanded location during the second quarter of 2012. As a result, the Company classified the facility as held for sale during the third quarter of 2012 when the appropriate criteria was met. At September 29, 2012, the carrying value of the facility was $1.7 million.
7. | Goodwill: |
The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, adjustments may be recorded. Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.
The changes in the carrying amount of goodwill are as follows:
In thousands |
Holdings | |||
Balance, December 31, 2011 |
$ | 445,715 | ||
Acquisitions |
9,446 | |||
Purchase accounting adjustments |
821 | |||
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Balance, September 29, 2012 |
$ | 455,982 | ||
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At September 29, 2012, the Company has recorded goodwill of $456.0 million, of which approximately $31 million of net goodwill is deductible for income tax purposes in future periods. The balance primarily relates to the Merger on May 28, 2010, in which $430.3 million was recorded as goodwill. The Company does not have any accumulated goodwill impairment losses.
On May 24, 2012, the Company entered into a Stock Purchase Agreement to acquire 100% of the outstanding capital stock of CTO. The acquisition was completed on May 24, 2012 and was funded through the Companys ABL Facility. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $9.4 million as goodwill. See Note 4 for additional information.
In the fourth quarter of 2011, the Company reduced its goodwill by $11.7 million related to the Merger. The adjustment related to net deferred tax liabilities established during purchase accounting and represent accounting errors. The Company does not believe that the adjustment is material to any of its previously issued financial statements and therefore, has not adjusted any prior period amounts.
9
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 Companys 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 $27.0 million as goodwill. See Note 4 for additional information.
8. | Intangible Assets: |
Indefinite-lived intangible assets are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. All other intangible assets with finite lives are being amortized on a straight-line or accelerated basis over periods ranging from one to nineteen years.
The following table sets forth the gross amount and accumulated amortization of the Companys intangible assets at September 29, 2012 and December 31, 2011:
In thousands |
September 29, 2012 |
December 31, 2011 |
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Customer list |
$ | 588,134 | $ | 572,209 | ||||
Noncompete agreement |
7,713 | 6,320 | ||||||
Tradenames |
4,104 | 4,104 | ||||||
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Total gross finite-lived intangible assets |
599,951 | 582,633 | ||||||
Accumulated amortization |
(143,756 | ) | (94,842 | ) | ||||
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Total net finite-lived intangible assets |
456,195 | 487,791 | ||||||
Tradenames (indefinite-lived) |
249,893 | 249,893 | ||||||
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Total |
$ | 706,088 | $ | 737,684 | ||||
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As part of the purchase price allocation of CTO, the Company allocated $15.9 million to a finite-lived customer list intangible asset with a useful life of sixteen years. In connection with the acquisition of NCT during 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 non-compete agreement. These intangible assets had a useful life of nineteen years and five years, respectively. See Note 4 for additional information.
Intangible asset amortization expense was $16.7 million and $15.8 million for the quarters ended September 29, 2012 and October 1, 2011 respectively. For the nine months ended September 29, 2012 and October 1, 2011, intangible asset amortization expense was $48.9 million and $45.9 million, respectively. Estimated amortization expense on existing intangible assets is expected to approximate $17 million for the remaining three months of 2012 and approximately $64 million in 2013, $59 million in 2014, $50 million in 2015 and $42 million in 2016.
9. | Long-term Debt: |
The following table presents the Companys long-term debt at September 29, 2012 and at December 31, 2011:
In thousands |
September 29, 2012 |
December 31, 2011 |
||||||
ABL Facility |
$ | 462,860 | $ | 373,255 | ||||
Senior Secured Notes |
247,705 | 247,425 | ||||||
Senior Subordinated Notes |
200,000 | 200,000 | ||||||
Capital lease obligations |
12,529 | 14,118 | ||||||
Other |
1,454 | 1,010 | ||||||
|
|
|
|
|||||
Total debt |
924,548 | 835,808 | ||||||
LessCurrent maturities |
(432 | ) | (158 | ) | ||||
|
|
|
|
|||||
Long-term debt |
$ | 924,116 | $ | 835,650 | ||||
|
|
|
|
10
The fair value of the Companys long-term senior notes was $474.8 million at September 29, 2012 and $463.5 million at December 31, 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.
ABL Facility
In connection with the acquisition of Holdings on May 28, 2010, ATDI entered into the Fifth Amended and Restated Credit Agreement, as subsequently amended (ABL Facility). The agreement provided for a senior secured asset-backed revolving credit facility of up to $450.0 million (of which up to $50.0 million could have been utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default was then existing or would arise therefrom, the Company had the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to mature on November 28, 2014.
On June 6, 2011, the Company entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. The Company maintains the option to request that the ABL Facility be increased by an amount not to exceed $200 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. At September 29, 2012, the Company had $462.9 million outstanding under the facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $7.5 million, leaving $179.7 million available for additional borrowings.
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Companys option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.25% as of September 29, 2012 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 1.25% as of September 29, 2012. 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 ATDIs existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The ABL Facility contains customary covenants, including covenants that restricts the Companys 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 Companys 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 it to meet a fixed charge coverage ratio of 1.0 to 1.0. As of September 29, 2012, the Companys 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 redeemable, except as described below, at the option of
11
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 ATDIs 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 ATDIs 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 ATDIs or repurchase or redeem ATDIs capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDIs 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 ATDIs assets; enter into certain transactions with ATDIs affiliates; and designate ATDIs subsidiaries as unrestricted subsidiaries.
Senior Subordinated Notes
On May 28, 2010, ATDI issued Senior Subordinated Notes due June 1, 2018 (Senior Subordinated Notes) in an aggregate principal amount of $200.0 million. The Senior Subordinated Notes bear interest at a fixed rate of 11.50% per annum. Interest on the Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Subordinated Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Subordinated Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 104.0% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016.
Prior to June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes issued at a redemption price equal to 111.5% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that:
(1) | at least 50% of the aggregate principal amount of the Senior Subordinated Notes remains outstanding immediately after the occurrence of such redemption; and |
(2) | each such redemption occurs within 120 days of the date of the closing of the related equity offering. |
In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Subordinated Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a make-whole price based on the price of a U.S. treasury security plus 50 basis points) as of, and accrued and unpaid interest, to, but not including, the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.
12
The Senior Subordinated Notes are unconditionally guaranteed by Holdings and substantially all of ATDIs 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 ATDIs 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 ATDIs or repurchase or redeem ATDIs capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDIs 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 ATDIs assets; enter into certain transactions with ATDIs affiliates; and designate ATDIs subsidiaries as unrestricted subsidiaries.
Capital Lease Obligations
At December 31, 2011, the Company had a capital lease obligation of $14.1 million which related to the 2002 sale and subsequent leaseback of three of its owned facilities. Due to continuing involvement with the properties, the Company accounted for the transaction as a direct financing lease and recorded the cash received as a financing obligation. The transaction had an initial lease term of 20 years, followed by two 10 year renewal options. No gain or loss was recognized as a result of the initial sales transaction.
On February 1, 2012, the Company reacquired one of the three facilities included in the 2002 sale-leaseback transaction for $1.5 million. Accordingly, the original lease was amended to extend the lease term on the two remaining facilities by 5 years as well as to adjust the future lease payments over the remaining 15 years. Per current accounting guidance, the change in the debt terms was not considered substantial. As a result, the Company treated the amendment as a debt modification for accounting purposes and therefore, reduced the financing obligation by the purchase price. Cash payments to the lessor are allocated between interest expense and amortization of the financing obligation. At the end of the lease term, the Company will recognize the sale of the remaining facilities; however, no gain or loss will be recognized as the financing obligation will equal the expected carrying value of the facilities. At September 29, 2012, the outstanding balance of the financing obligation was $12.5 million.
10. | Derivative Instruments: |
In the normal course of business, the Company is exposed to the risk associated with exposure to fluctuations in interest rates on our variable rate debt. These fluctuations can increase the cost of financing, investing and operating the business. The Company has used derivative financial instruments to help manage this risk and reduce the impacts of these exposures and not for trading or other speculative purposes. All derivatives are recognized on the condensed consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of contracts that qualify for hedge accounting treatment are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in the statement of comprehensive income (loss) at the time earnings are affected by the hedged transaction. For other derivatives, changes in the fair value of the contract are recognized immediately in the statement of comprehensive income (loss).
On August 1, 2012, the Company entered into two interest rate swap agreements (3Q 2012 Swaps) used to hedge a portion of the Companys exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, with each $50.0 million contract having a fixed rate of 0.655% and expiring in June 2016. The counterparty to each swap is a major financial institution. The 3Q 2012 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in the condensed consolidated statement of comprehensive income (loss).
On September 23, 2011, the Company entered into two interest rate swap agreements (3Q 2011 Swaps) used to hedge a portion of the Companys exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, of which $50.0 million is at a fixed rate of 0.74% and will expire in September 2014 and $50.0 million is at a fixed rate of 1.0% and will expire in September 2015. The counterparty to each swap is a major financial institution. The 3Q 2011 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in the condensed consolidated statement of comprehensive income (loss).
On February 24, 2011, the Company entered into two interest rate swap agreements used to hedge a portion of the Companys exposure to changes in its variable interest rate debt. The swaps in place covered an aggregate notional amount of $75.0 million, of which $25.0 million was at a fixed interest rate of 0.585% and expired in February 2012. The remaining swap covers an aggregate notional amount of $50.0 million at a fixed interest rate of 1.105% and will expire in February 2013. The counterparty to each swap is a major financial institution. Neither swap met the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract are recognized in the condensed consolidated statement of comprehensive income (loss).
13
The following table presents the fair values of the Companys derivative instruments included within the condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011:
Liability Derivatives | ||||||||||
In thousands |
Balance Sheet Location |
September 29, 2012 |
December 31, 2011 |
|||||||
Derivatives not designated as hedges: |
||||||||||
1Q 2011 swap$50 million notional |
Accrued expenses | $ | 225 | $ | 303 | |||||
1Q 2011 swap$25 million notional |
Accrued expenses | | 12 | |||||||
3Q 2011 swaps$100 million notional |
Accrued expenses | 1,464 | 551 | |||||||
3Q 2012 swaps$100 million notional |
Accrued expenses | 810 | | |||||||
|
|
|
|
|||||||
Total |
$ | 2,499 | $ | 866 | ||||||
|
|
|
|
The pre-tax effect of the Companys derivative instruments on the condensed consolidated statement of comprehensive income (loss) was as follows:
(Gain) Loss Recognized | ||||||||||||||||||
In thousands |
Location of (Gain) Loss Recognized |
Quarter Ended September 29, 2012 |
Quarter Ended October 1, 2011 |
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
|||||||||||||
Derivatives not designated as hedges: |
||||||||||||||||||
1Q 2011 swap$50 million notional |
Interest Expense | $ | (34 | ) | $ | (32 | ) | $ | (78 | ) | $ | 474 | ||||||
1Q 2011 swap$25 million notional |
Interest Expense | | (14 | ) | (12 | ) | 35 | |||||||||||
3Q 2011 swaps$100 million notional |
Interest Expense | 266 | 426 | 912 | 426 | |||||||||||||
3Q 2012 swaps$100 million notional |
Interest Expense | 810 | | 810 | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,042 | $ | 380 | $ | 1,632 | $ | 935 | ||||||||||
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|
|
|
|
|
|
11. | Fair Value of Financial Instruments: |
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
| Level 1 InputsInputs based on quoted prices in active markets for identical assets or liabilities. |
| Level 2 InputsInputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
| Level 3 InputsUnobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities, therefore requiring an entity to develop its own assumptions. |
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instruments 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 Companys assets and liabilities, which are measured at fair value on a recurring basis as of September 29, 2012:
14
Fair Value Measurements | ||||||||||||||||
In thousands |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Benefit trust assets |
$ | 2,562 | $ | 2,562 | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,562 | $ | 2,562 | $ | | $ | | ||||||||
Liabilities: |
||||||||||||||||
Derivative instruments |
$ | 2,499 | $ | | $ | 2,499 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,499 | $ | | $ | 2,499 | $ | | ||||||||
|
|
|
|
|
|
|
|
ASC 820Fair 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 assetsThese 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 instrumentsThese instruments consist of interest rate swaps. The fair value is based upon quoted prices for similar instruments from a financial institution that is counterparty to the transaction. |
The fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments. The methodologies used by the Company to determine the fair value of its financial assets and liabilities at September 29, 2012 are the same as those used at December 31, 2011. As a result, there have been no transfers between Level 1 and Level 2 categories.
12. | Stock-Based Compensation: |
The Company accounts for stock-based compensation awards in accordance with ASC 718Compensation, 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 Companys stock-based compensation plans include programs for stock options and restricted stock units.
Stock Options
In August 2010, the Companys indirect parent company adopted a Management Equity Incentive Plan (the 2010 Plan), pursuant to which the indirect parent company will grant options to selected employees and directors of the Company. The 2010 Plan, which includes both time-based and performance-based awards, provides that a maximum of 48.6 million shares of common stock of the indirect parent company are available for grant. As of September 29, 2012, the Company has 1.7 million shares available for future incentive awards.
Changes in options outstanding under the 2010 Plan are as follows:
Number of Shares |
Weighted Average Exercise Price |
|||||||
OutstandingDecember 31, 2011 |
44,598,400 | $ | 1.00 | |||||
Granted |
2,277,600 | 1.14 | ||||||
Cancelled |
| | ||||||
|
|
|
|
|||||
OutstandingSeptember 29, 2012 |
46,876,000 | $ | 1.01 | |||||
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|
|
|
|||||
ExercisableSeptember 29, 2012 |
17,589,335 | $ | 1.00 | |||||
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|
|
|
15
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 Companys time-based stock option awards is expensed on a straight-line basis over the requisite service period, which is generally the three or five-year vesting period of the options. However, for options granted with performance target requirements, compensation expense is recognized when it is probable that both the performance target will be achieved and the requisite service period is satisfied. At September 29, 2012, unrecognized compensation expense related to non-vested options granted under the 2010 Plan totaled $9.9 million.
The weighted average fair value of stock options granted during the nine months ended September 29, 2012 and October 1, 2011 was $0.50 and $0.44, respectively, using the Black-Scholes option pricing model. The following weighted average assumptions were used:
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
|||||||
Risk-free interest rate |
1.48 | % | 2.41 | % | ||||
Dividend yield |
| | ||||||
Expected life |
6.5 years | 6.4 years | ||||||
Volatility |
42.81 | % | 40.75 | % | ||||
|
|
|
|
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 Companys peer group in the industry in which it does business. The risk-free interest rate is based on the yield-curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Because the Company does not have relevant data available regarding the expected life of the award, the expected life is derived from the Simplified Method as allowed under SAB Topic 14.
Restricted Stock Units (RSUs)
In October 2010, the Companys indirect parent company adopted the Non-Employee Director Restricted Stock Plan (the 2010 RSU Plan), pursuant to which the indirect parent company will grant restricted stock units to non-employee directors of the Company. Upon vesting, these awards entitle the holder to receive one share of common stock for each restricted stock unit granted. The 2010 RSU Plan provides that a maximum of 0.8 million shares of common stock of the indirect parent may be granted to non-employee directors of the Company, of which 0.3 million remain available at September 29, 2012 for future incentive awards.
The following table summarizes RSU activity under the 2010 RSU Plan for the nine months ended September 29, 2012:
Number of Shares |
Weighted Average Exercise Price |
|||||||
Outstanding and unvested at December 31, 2011 |
175,000 | $ | 1.00 | |||||
Granted |
219,298 | 1.14 | ||||||
Vested |
(50,000 | ) | 1.00 | |||||
Cancelled |
| | ||||||
|
|
|
|
|||||
Outstanding and unvested at September 29, 2012 |
344,298 | $ | 1.09 |
The fair value of each of the RSU awards is measured as the grant-date price of the common stock and is expensed on a straight-line basis over the requisite service period, which is generally the two-year vesting period. At September 29, 2012, unrecognized compensation expense related to non-vested RSUs granted under the 2010 RSU Plan totaled $0.2 million.
16
Compensation Expense
Stock-based compensation expense is included in selling, general and administrative expenses within the condensed consolidated statement of comprehensive income (loss). The amount of compensation expense recognized during a period is based on the portion of the granted awards that are expected to vest. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards as of the grant date that actually vest. The following table summarizes the compensation expense recognized:
In thousands |
Quarter Ended September 29, 2012 |
Quarter Ended October 1, 2011 |
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
||||||||||||
Stock Options |
$ | 1,534 | $ | 1,431 | $ | 2,584 | $ | 2,565 | ||||||||
Restricted Stock Units |
73 | 31 | 177 | 83 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,607 | $ | 1,462 | $ | 2,761 | $ | 2,648 | ||||||||
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|
|
13. | Income Taxes: |
The Company accounts for its provision for income taxes in accordance with ASC 740 Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the respective interim period. However, the authoritative guidance allows the use of the discrete method when, in certain situations, the actual interim period effective tax rate provides a better estimate of the income tax provision. For the nine months ended September 29, 2012, the Company utilized the discrete method to calculate the interim income tax provision as management determined that small changes in forecasted income would result in significant changes in the estimate of the annual effective tax rate.
Based on the reported loss before income taxes for the nine months ended September 29, 2012, the Company had an income tax benefit of $5.8 million and an effective tax benefit rate of 31.4%. The effective rate of the year-to-date tax benefit is lower than the statutory income tax rates primarily due to a lower estimate of projected full year income levels and the impact of several non-deductable tax items as well as our state effective tax rate, a result based on our legal entity tax structure and individual state filing requirements. As a result of the change in interim methodology from the effective tax rate method to the discrete method for the nine months ended September 29, 2012, the Company reported an income tax provision of $10.1 million for the quarter ended September 29, 2012.
At September 29, 2012, the Company has a net deferred tax liability of $255.9 million, of which, $14.6 million was recorded as a current deferred tax asset and $270.5 million was recorded as a non-current deferred tax liability. The net deferred tax liability primarily relates to the expected future tax liability associated with the non-deductible, identified, intangible assets that were recorded during the Merger, assuming an effective tax rate of 39.6%.
At September 29, 2012, the Company 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 within the accompanying condensed consolidated balance sheet. The total amount of unrecognized tax benefits that, if recognized, would affect the Companys effective tax rate is $1.6 million as of September 29, 2012. In addition, $0.2 million related to temporary timing differences. During the next 12 months, management does not believe that it is reasonably possible that any of the unrecognized tax benefits will be recognized.
While the Company believes that it has adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than the Companys 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 2011 remain open to examination by the taxing jurisdictions to which the Company is subject.
14. | Commitments and Contingencies: |
The Company is involved from time to time in various lawsuits, including class action lawsuits as well as various audits and reviews regarding its federal, state and local tax filings, arising out of the ordinary conduct of its business. Management does not expect that any of these matters will have a material adverse effect on the Companys 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.
17
Guaranteed Lease Obligations
The Company remains liable as a guarantor on certain leases related to the Winston Tire Company, which was sold in 2001. As of September 29, 2012, the Companys total obligations are $3.0 million extending over seven years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractual assigned or subleased rentals of $2.8 million. A provision has been made for the net present value of the estimated shortfall.
15. | Subsidiary Guarantor Financial Information: |
The following condensed consolidating financial statements are presented pursuant to Rule 3?10 of Regulation SX and reflect the financial position, results of operations, and cash flows of the Company.
On May 28, 2010, ATDI issued $250.0 million in aggregate principal amount of its Senior Secured Notes and $200.0 million in aggregate principal amount of its Senior Subordinated Notes. The Senior Secured Notes and the Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, by Holdings, Am-Pac, Tire Wholesalers, Inc. (Tire Wholesalers) and CTO. ATDI, Am-Pac, Tire Wholesalers and CTO 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 subsidiarys guarantee can be released in certain customary circumstances.
The financial information is presented under the following column headings:
| Parent Company (Holdings), |
| Subsidiary Issuer (ATDI), |
| Subsidiary Guarantor (Am-Pac, Tire Wholesalers and CTO) and |
| Non-Guarantor Subsidiary (Tire Pros FranCorp). |
ATDI is a direct wholly-owned subsidiary of Holdings. Am-Pac, Tire Wholesalers, CTO and Tire Pros FranCorp are indirect wholly-owned subsidiaries of Holdings. 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:
18
As of September 29, 2012 | ||||||||||||||||||||||||
In thousands |
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantor |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 13,663 | $ | 321 | $ | 818 | $ | | $ | 14,802 | ||||||||||||
Restricted cash |
| 250 | 1,000 | | | 1,250 | ||||||||||||||||||
Accounts receivable, net |
| 297,757 | 1,474 | 4 | | 299,235 | ||||||||||||||||||
Inventories |
| 701,880 | 87 | | | 701,967 | ||||||||||||||||||
Assets held for sale |
| 7,234 | | | | 7,234 | ||||||||||||||||||
Income tax receivable |
| 369 | | | | 369 | ||||||||||||||||||
Intercompany receivables |
| 5,235 | 60,841 | | (66,076 | ) | | |||||||||||||||||
Other current assets |
| 24,916 | 4,924 | 2,469 | | 32,309 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
| 1,051,304 | 68,647 | 3,291 | (66,076 | ) | 1,057,166 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Property and equipment, net |
| 124,027 | 694 | 11 | | 124,732 | ||||||||||||||||||
Goodwill and other intangible assets, net |
418,592 | 716,445 | 26,171 | 862 | | 1,162,070 | ||||||||||||||||||
Investment in subsidiaries |
242,538 | 53,395 | | | (295,933 | ) | | |||||||||||||||||
Other assets |
8,691 | 45,122 | 317 | | | 54,130 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 669,821 | $ | 1,990,293 | $ | 95,829 | $ | 4,164 | $ | (362,009 | ) | $ | 2,398,098 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 488,629 | $ | 2,705 | $ | | $ | | $ | 491,334 | ||||||||||||
Accrued expenses |
| 52,161 | 745 | | | 52,906 | ||||||||||||||||||
Current maturities of long-term debt |
| 426 | 6 | | | 432 | ||||||||||||||||||
Intercompany payables |
23,678 | 1,987 | 28,461 | 11,950 | (66,076 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
23,678 | 543,203 | 31,917 | 11,950 | (66,076 | ) | 544,672 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Long-term debt |
| 924,105 | 11 | | | 924,116 | ||||||||||||||||||
Deferred income taxes |
| 267,852 | 587 | 2,081 | | 270,520 | ||||||||||||||||||
Other liabilities |
| 12,595 | 52 | | | 12,647 | ||||||||||||||||||
Stockholders' equity: |
||||||||||||||||||||||||
Intercompany investment |
| 280,622 | 64,935 | | (345,557 | ) | | |||||||||||||||||
Common stock |
| | | | | | ||||||||||||||||||
Additional paid-in capital |
694,712 | 10,485 | | | (10,485 | ) | 694,712 | |||||||||||||||||
Accumulated deficit |
(48,745 | ) | (48,745 | ) | (1,673 | ) | (9,867 | ) | 60,285 | (48,745 | ) | |||||||||||||
Accumulated other comprehensive income (loss) |
176 | 176 | | | (176 | ) | 176 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders' equity |
646,143 | 242,538 | 63,262 | (9,867 | ) | (295,933 | ) | 646,143 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders' equity |
$ | 669,821 | $ | 1,990,293 | $ | 95,829 | $ | 4,164 | $ | (362,009 | ) | $ | 2,398,098 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
As of December 31, 2011 | ||||||||||||||||||||||||
In thousands |
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantor |
Non-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 |
| | 59,966 | | (59,966 | ) | | |||||||||||||||||
Other current assets |
| 23,030 | 4,941 | 274 | | 28,245 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
| 956,769 | 64,908 | 1,140 | (59,966 | ) | 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 | 47,683 | 3 | 6 | | 56,383 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 679,497 | $ | 1,926,414 | $ | 67,402 | $ | 2,228 | $ | (372,978 | ) | $ | 2,302,563 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Stockholders' Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 467,714 | $ | 2,153 | $ | | $ | | $ | 469,867 | ||||||||||||
Accrued expenses |
| 45,516 | 177 | | | 45,693 | ||||||||||||||||||
Current maturities of long-term debt |
| 141 | 17 | | | 158 | ||||||||||||||||||
Intercompany payables |
23,678 | 32,613 | | 3,675 | (59,966 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
23,678 | 545,984 | 2,347 | 3,675 | (59,966 | ) | 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 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 | $ | 1,926,414 | $ | 67,402 | $ | 2,228 | $ | (372,978 | ) | $ | 2,302,563 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
Condensed consolidating statements of comprehensive income (loss) for the quarters ended September 29, 2012 and October 1, 2011 are as follows:
For the Quarter Ended September 29, 2012 | ||||||||||||||||||||||||
In thousands |
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantors |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 913,285 | $ | 2,378 | $ | (323 | ) | $ | | $ | 915,340 | |||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 763,578 | 2,150 | 40 | | 765,768 | ||||||||||||||||||
Selling, general and administrative expenses |
| 126,484 | 615 | 2,060 | | 129,159 | ||||||||||||||||||
Transaction expenses |
| 705 | 94 | | | 799 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 22,518 | (481 | ) | (2,423 | ) | | 19,614 | ||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (18,744 | ) | | | | (18,744 | ) | ||||||||||||||||
Other, net |
| (1,421 | ) | 5 | (2 | ) | | (1,418 | ) | |||||||||||||||
Equity earnings of subsidiaries |
(10,602 | ) | (6,525 | ) | | | 17,127 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations before income taxes |
(10,602 | ) | (4,172 | ) | (476 | ) | (2,425 | ) | 17,127 | (548 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income tax provision (benefit) |
| 6,430 | 469 | 3,155 | | 10,054 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (10,602 | ) | $ | (10,602 | ) | $ | (945 | ) | $ | (5,580 | ) | $ | 17,127 | $ | (10,602 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | (10,544 | ) | $ | (10,544 | ) | $ | | $ | | $ | 10,544 | $ | (10,544 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended October 1, 2011 | ||||||||||||||||||||||||
In thousands |
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantors |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 831,715 | $ | (20 | ) | $ | (729 | ) | $ | | $ | 830,966 | ||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 697,843 | | 11 | | 697,854 | ||||||||||||||||||
Selling, general and administrative expenses |
| 110,496 | 336 | 862 | | 111,694 | ||||||||||||||||||
Transaction expenses |
| 1,183 | | | | 1,183 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 22,193 | (356 | ) | (1,602 | ) | | 20,235 | ||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (17,231 | ) | | | | (17,231 | ) | ||||||||||||||||
Other, net |
| (433 | ) | | (1 | ) | | (434 | ) | |||||||||||||||
Equity earnings of subsidiaries |
1,480 | (1,310 | ) | | | (170 | ) | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations before income taxes |
1,480 | 3,219 | (356 | ) | (1,603 | ) | (170 | ) | 2,570 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income tax provision (benefit) |
| 1,739 | (141 | ) | (508 | ) | | 1,090 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 1,480 | $ | 1,480 | $ | (215 | ) | $ | (1,095 | ) | $ | (170 | ) | $ | 1,480 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | 1,318 | $ | 1,318 | $ | | $ | | $ | (1,318 | ) | $ | 1,318 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
21
Condensed consolidating statements of comprehensive income (loss) for the nine months ended September 29, 2012 and October 1, 2011 are as follows:
For the Nine Months Ended September 29, 2012 | ||||||||||||||||||||||||
In thousands |
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantors |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 2,578,275 | $ | 6,822 | $ | (1,260 | ) | $ | | $ | 2,583,837 | |||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 2,160,717 | 6,053 | 95 | | 2,166,865 | ||||||||||||||||||
Selling, general and administrative expenses |
| 367,993 | 1,961 | 7,985 | | 377,939 | ||||||||||||||||||
Transaction expenses |
| 1,677 | 383 | | | 2,060 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 47,888 | (1,575 | ) | (9,340 | ) | | 36,973 | ||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (52,475 | ) | | | | (52,475 | ) | ||||||||||||||||
Other, net |
| (2,807 | ) | 7 | (2 | ) | | (2,802 | ) | |||||||||||||||
Equity earnings of subsidiaries |
(12,550 | ) | (7,403 | ) | | | 19,953 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations before income taxes |
(12,550 | ) | (14,797 | ) | (1,568 | ) | (9,342 | ) | 19,953 | (18,304 | ) | |||||||||||||
Income tax provision (benefit) |
| (2,247 | ) | (504 | ) | (3,003 | ) | | (5,754 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (12,550 | ) | $ | (12,550 | ) | $ | (1,064 | ) | $ | (6,339 | ) | $ | 19,953 | $ | (12,550 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | (12,437 | ) | $ | (12,437 | ) | $ | | $ | | $ | 12,437 | $ | (12,437 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended October 1, 2011 | ||||||||||||||||||||||||
In thousands |
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantors |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 2,235,717 | $ | 488 | $ | (1,930 | ) | $ | | $ | 2,234,275 | |||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 1,859,965 | 282 | 28 | | 1,860,275 | ||||||||||||||||||
Selling, general and administrative expenses |
| 314,868 | 476 | 4,729 | | 320,073 | ||||||||||||||||||
Transaction expenses |
| 2,830 | | | | 2,830 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 58,054 | (270 | ) | (6,687 | ) | | 51,097 | ||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (50,756 | ) | | | | (50,756 | ) | ||||||||||||||||
Other, net |
| (1,303 | ) | (1 | ) | 1 | | (1,303 | ) | |||||||||||||||
Equity earnings of subsidiaries |
(586 | ) | (4,233 | ) | | | 4,819 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations before income taxes |
(586 | ) | 1,762 | (271 | ) | (6,686 | ) | 4,819 | (962 | ) | ||||||||||||||
Income tax provision (benefit) |
| 2,348 | (106 | ) | (2,618 | ) | | (376 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (586 | ) | $ | (586 | ) | $ | (165 | ) | $ | (4,068 | ) | $ | 4,819 | $ | (586 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | (816 | ) | $ | (816 | ) | $ | | $ | | $ | 816 | $ | (816 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
22
Condensed consolidating statements of cash flows for the nine months ended September 29, 2012 and October 1, 2011 are as follows:
In thousands | For the Nine Months Ended September 29, 2012 | |||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantors |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by (used in) operations |
$ | | $ | (25,302 | ) | $ | (182 | ) | $ | (43 | ) | $ | | $ | (25,527 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| (19,870 | ) | 646 | | | (19,224 | ) | ||||||||||||||||
Purchase of property and equipment |
| (42,177 | ) | | | | (42,177 | ) | ||||||||||||||||
Purchase of assets held for sale |
| (3,281 | ) | | | | (3,281 | ) | ||||||||||||||||
Proceeds from sale of property and equipment |
| 65 | 19 | | | 84 | ||||||||||||||||||
Proceeds from disposal of assets held for sale |
| 3,078 | | | | 3,078 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) investing activities |
| (62,185 | ) | 665 | | | (61,520 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings from revolving credit facility |
| 2,513,600 | | | | 2,513,600 | ||||||||||||||||||
Repayments of revolving credit facility |
| (2,423,995 | ) | | | | (2,423,995 | ) | ||||||||||||||||
Outstanding checks |
| (928 | ) | | | | (928 | ) | ||||||||||||||||
Payments of other long-term debt |
| (1,645 | ) | (162 | ) | | | (1,807 | ) | |||||||||||||||
|
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|
|
|
|
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|
|
|
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|
|||||||||||||
Net cash provided by (used in) financing activities |
| 87,032 | (162 | ) | | | 86,870 | |||||||||||||||||
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|
|
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|
|
|
|
|
|
|
|||||||||||||
Net increase (decrease) in cash and cash equivalents |
| (455 | ) | 321 | (43 | ) | | (177 | ) | |||||||||||||||
Cash and cash equivalentsbeginning of period |
| 14,118 | | 861 | | 14,979 | ||||||||||||||||||
|
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Cash and cash equivalentsend of period |
$ | | $ | 13,663 | $ | 321 | $ | 818 | $ | | $ | 14,802 | ||||||||||||
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|
In thousands | For the Nine Months Ended October 1, 2011 | |||||||||||||||||||||||
Parent Company |
Subsidiary Issuer |
Subsidiary Guarantors |
Non-Guarantor Subsidiary |
Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by (used in) operations |
$ | | $ | (163,468 | ) | $ | (101 | ) | $ | 245 | $ | | $ | (163,324 | ) | |||||||||
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Cash flows from investing activities: |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| (59,059 | ) | | | | (59,059 | ) | ||||||||||||||||
Purchase of property and equipment |
| (18,862 | ) | | | | (18,862 | ) | ||||||||||||||||
Purchase of assets held for sale |
| (2,263 | ) | (18 | ) | | | (2,281 | ) | |||||||||||||||
Proceeds from sale of property and equipment |
| 65 | 5 | | | 70 | ||||||||||||||||||
Proceeds from disposal of assets held for sale |
| 1,174 | | | | 1,174 | ||||||||||||||||||
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|
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Net cash provided by (used in) investing activities |
| (78,945 | ) | (13 | ) | | | (78,958 | ) | |||||||||||||||
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|
|
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Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings from revolving credit facility |
| 2,088,278 | | | | 2,088,278 | ||||||||||||||||||
Repayments of revolving credit facility |
| (1,852,239 | ) | | | | (1,852,239 | ) | ||||||||||||||||
Outstanding checks |
| 15,488 | | | | 15,488 | ||||||||||||||||||
Payments of deferred financing costs |
| (5,880 | ) | | | | (5,880 | ) | ||||||||||||||||
Payments of other long-term debt |
| (753 | ) | (18 | ) | | | (771 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) financing activities |
| 244,894 | (18 | ) | | | 244,876 | |||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net increase (decrease) in cash and cash equivalents |
| 2,481 | (132 | ) | 245 | | 2,594 | |||||||||||||||||
Cash and cash equivalentsbeginning of period |
| 11,304 | 132 | 535 | | 11,971 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalentsend of period |
$ | | $ | 13,785 | $ | | $ | 780 | $ | | $ | 14,565 | ||||||||||||
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23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, the terms American Tire Distributors, ATD, the Company, we, us, our and similar terms in this report refer to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries, the term Holdings refers only to American Tire Distributors Holdings, Inc., a Delaware Corporation, and the term ATDI refers only to American Tire Distributors, Inc., a Delaware corporation. The terms TPG and Sponsor relate to TPG Capital, L.P. and/or certain funds affiliated with TPG Capital, L.P.
The following discussion and analysis of our consolidated results of operations, financial condition and liquidity should be read in conjunction with our consolidated financial statements and the related notes included in Item 1 of this report. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecast and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See Cautionary Statements on Forward-Looking Information.
Company Overview
We are the leading replacement tire distributor in the United States, providing a critical range of services to enable tire retailers to effectively service and grow sales to consumers. Through our network of 102 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 in fiscal 2011.
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 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. Our revenues are primarily generated from sales of passenger car and light truck tires, which represent 80.3% of our total net sales for the quarter ended September 29, 2012. The remainder of net sales is derived from other tire sales (16.8%), custom wheels (1.7%) and tire supplies, tools and other products (1.2%). We believe our large, diverse product offering allows us to better penetrate the replacement tire market across a broad range of price points.
Industry Overview
The U.S. replacement tire market has historically experienced stable growth and favorable pricing dynamics. However, the market is subject to changes in consumer confidence and the economic conditions that impact its customers. As a result, our customers may opt to defer replacement tire purchases or purchase less costly brand tires during challenging economic periods where macro-economic factors such as unemployment, persistently high fuel costs and weakness in the housing market impact their financial health.
From 1955 through 2011, U.S. replacement tire unit shipments increased by an average of approximately 2.7% per year. However, the impact of the recession led to negative growth during 2008 and 2009. The economic environment showed signs of stabilization during 2010 and 2011 ending the negative growth trend, although slow economic growth, persistently high fuel cost and a decrease in miles driven continued to impact the market. The economy continues to recover at a slow pace. Our outlook for 2012 reflects little or no market improvement, however, we expect to continue to follow our historical trend and outperform our expectations of the 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; |
| increase in the number of replacement tire SKUs; |
| growth of the high performance tire segment; and |
24
| shortening tire replacement cycles due to changes in product mix that increasingly favor high performance tires, which have shorter average lives. |
Despite the current market environment, we have a solid infrastructure, an extensive and efficient distribution network, and a broad product offering. Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand in existing markets as well as in new geographic areas. In addition, we are investing in technology and new sales channels which will help fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above market results in both contracting and expanding market demand cycles.
Recent Developments
As part of our ongoing business strategy, we intend to expand in existing markets as well as enter into previously underserved markets and new geographic areas. Since the second half of 2010, we opened new distribution centers in 10 locations throughout the contiguous United States increasing the size of our distribution network to 98 as of December 31, 2011. During the first nine months of 2012, we continued to execute on our plans to expand by opening new distribution centers in Long Island, NY, Milwaukee, WI, Colorado Springs, CO and Austin, TX. We will continue to evaluate additional geographic markets during 2012 and beyond.
On August 1, 2012, ATDI entered into two interest rate swap agreements (3Q 2012 Swaps) used to hedge a portion of our exposure to changes in our variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, with each $50.0 million contract having a fixed rate of 0.655% and expiring in June 2016. The 3Q 2012 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in the condensed consolidated statement of comprehensive income (loss).
On May 24, 2012, we completed the purchase of 100% of the capital stock of Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (CTO). CTO owned and operated three distribution centers in Baton Rouge, Slidell and Lafayette, Louisiana serving over 500 customers. The acquisition was funded through our ABL Facility. The purchase of CTO expanded our market position in Louisiana.
On February 1, 2012, we reacquired one of three facilities that were included in a 2002 sale-leaseback transaction. The purchase price of the facility was $1.5 million. Accordingly, the original lease was amended to extend the lease term on the two remaining facilities by 5 years as well as to adjust the future lease payments over the remaining 15 years. Per current accounting guidance, the change in the debt terms was not considered substantial. As a result, the amendment was treated as a debt modification for accounting purposes and therefore, we reduced the original financing obligation of $14.1 million by the purchase price. No gain or loss was recognized as a result of the initial sales transaction or the 2012 amendment.
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.
25
Results of Operations
Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended September 29, 2012 and October 1, 2011 each contain operating results for 13 weeks. The nine months ended September 29, 2012 and October 1, 2011 each contain operating results for 39 weeks.
Quarter Ended September 29, 2012 Compared to the Quarter Ended October 1, 2011
The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:
Quarter Ended |
Quarter Ended |
Period Over Period Change |
Period Over Period % Change |
Percentage of Net Sales For the Respective Period Ended |
||||||||||||||||||||
In thousands |
September 29, 2012 |
October 1, 2011 |
Favorable (unfavorable) |
Favorable (unfavorable) |
September 29, 2012 |
October 1, 2011 |
||||||||||||||||||
Net sales |
$ | 915,340 | $ | 830,966 | $ | 84,374 | 10.2 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold |
765,768 | 697,854 | (67,914 | ) | -9.7 | % | 83.7 | % | 84.0 | % | ||||||||||||||
Selling, general and administrative expenses |
129,159 | 111,694 | (17,465 | ) | -15.6 | % | 14.1 | % | 13.4 | % | ||||||||||||||
Transaction expenses |
799 | 1,183 | 384 | 32.5 | % | 0.1 | % | 0.1 | % | |||||||||||||||
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|
|||||||||||||
Operating income (loss) |
19,614 | 20,235 | (621 | ) | -3.1 | % | 2.1 | % | 2.4 | % | ||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(18,744 | ) | (17,231 | ) | (1,513 | ) | -8.8 | % | -2.0 | % | -2.1 | % | ||||||||||||
Other, net |
(1,418 | ) | (434 | ) | (984 | ) | -226.7 | % | -0.2 | % | -0.1 | % | ||||||||||||
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Income (loss) from operations before income taxes |
(548 | ) | 2,570 | (3,118 | ) | -121.3 | % | -0.1 | % | 0.3 | % | |||||||||||||
Provision (benefit) for income taxes |
10,054 | 1,090 | (8,964 | ) | -822.4 | % | 1.1 | % | 0.1 | % | ||||||||||||||
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|||||||||||||
Net income (loss) |
$ | (10,602 | ) | $ | 1,480 | $ | (12,082 | ) | -816.4 | % | -1.2 | % | 0.2 | % | ||||||||||
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Net Sales
Net sales for the quarter ended September 29, 2012 increased 10.2%, or $84.4 million, compared with the quarter ended October 1, 2011. The increase in net sales was primarily driven by the combined results of new distribution centers opened since the beginning of 2011 as well as the acquisition of CTO and NCT. These growth initiatives added $41.9 million of incremental sales in the third quarter of 2012. In addition, higher net tire pricing of $37.2 million contributed to the increase. The pricing increase, which included $28.0 million related to passenger and light truck tires and $6.2 million related to medium truck tires, resulted from our passing through tire manufacturer price increases predominately established during 2011. An increase in comparable tire unit sales across all tire categories contributed $2.8 million, primarily driven by passenger and light truck tires. However, the increase in comparable tire unit sales was impacted by the destocking of lower price point inventories throughout the marketplace in anticipation to the expiration of tariffs imposed on Chinese tire imports that ceased at the end of September. As a result, comparable net sales of the Chinese tire imports decreased by $9.3 million.
Cost of Goods Sold
Cost of goods sold for the quarter ended September 29, 2012 increased 9.7%, or $67.9 million, compared with the quarter ended October 1, 2011. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers opened since the beginning of 2011 as well as the acquisition of CTO and NCT. These growth initiatives added $36.4 million of incremental costs in the third quarter of 2012. In addition, higher net tire pricing of $29.8 million contributed to the increase. The pricing increase, which included $24.6 million related to passenger and light truck tires and $5.2 million related to medium truck tires, resulted from tire manufacturer price increases predominately established during 2011.
26
Cost of goods sold as a percentage of net sales was 83.7% for the quarter ended September 29, 2012; a decrease compared with 84.0% during the quarter ended October 1, 2011. The improvement in the cost of goods sold as a percentage of net sales was primarily driven by an improved product mix which resulted from a lower level of sales volume from our lower price point inventories impacted by the Chinese tariff. In addition, we received a higher level of benefit from manufacturer volume incentives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September 29, 2012 increased 15.6%, or $17.5 million, compared with the quarter ended October 1, 2011. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers opened since the beginning of 2011 as well as the acquisition of CTO and NCT. Combined, these factors added $5.8 million of incremental costs to the third quarter of 2012, including increased amortization expense of $1.0 million from newly established intangible assets. In addition, we experienced an increase to salaries and wage expense of $4.5 million, primarily due to higher sales volume and related headcount; a $2.6 million increase to vehicle expense due to a higher price per gallon of fuel, higher overall consumption of fuel and other vehicle related expenses; as well as a $1.6 million increase in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation expense added an additional $1.3 million of costs to the quarter ended September 29, 2012 as we increased our capital expenditure costs for information system technologies.
Selling, general and administrative expenses as a percentage of net sales was 14.1% for the quarter ended September 29, 2012; an increase compared with 13.4% during the quarter ended October 1, 2011. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened distribution centers as well as an increase in non-cash depreciation and amortization expense.
Transaction Expenses
Transaction expenses for the quarter ended September 29, 2012 were $0.8 million, which were primarily related to costs associated with our acquisition of CTO in May 2012 as well as with expenses related to potential future acquisitions and other corporate initiatives. During the quarter ended October 1, 2011, transaction expenses of $1.2 million primarily related to severance and integration costs in association with our acquisition of NCT in April 2011.
Interest Expense
Interest expense for the quarter ended September 29, 2012 increased 8.8%, or $1.5 million, compared with the quarter ended October 1, 2011. Higher debt levels associated with our ABL Facility was the primary driver of the increase. In addition, we recorded $1.0 million during the current period associated with the fair value changes of our interest rate swaps. The comparable amount recorded associated with these swaps during the quarter ended October 1, 2011 was $0.4 million.
Provision (Benefit) for Income Taxes
Based on the interim period effective tax rate, our income tax provision for the quarter ended September 29, 2012 was $10.1 million, a result based on the change in interim methodology from the effective tax rate method to the discrete method. The combination of our income tax provision and our recorded loss from operations before income taxes of $0.5 million resulted in a negative effective tax rate for the period. The effective tax rate for the quarter ended September 29, 2012 is different than our statutory tax rate primarily due to a lower estimate of projected full year income levels as well as state income taxes, a result based on our legal entity tax structure and individual state filing requirements. The change in projected income levels effect the percentage by which individual tax items impact the effective tax rate. For the quarter ended October 1, 2011, our income tax provision was $1.1 million. Based on the income from operations before income taxes of $2.6 million, our effective tax rate was 42.4%.
27
Nine Months Ended September 29, 2012 Compared to the Nine Months Ended October 1, 2011
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:
Nine Months Ended |
Nine Months Ended |
Period Over Period Change |
Period Over Period % Change |
Percentage of Net Sales For the Respective Period Ended |
||||||||||||||||||||
In thousands |
September 29, 2012 |
October 1, 2011 |
Favorable (unfavorable) |
Favorable (unfavorable) |
September 29, 2012 |
October 1, 2011 |
||||||||||||||||||
Net sales |
$ | 2,583,837 | $ | 2,234,275 | $ | 349,562 | 15.6 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold |
2,166,865 | 1,860,275 | (306,590 | ) | -16.5 | % | 83.9 | % | 83.3 | % | ||||||||||||||
Selling, general and administrative expenses |
377,939 | 320,073 | (57,866 | ) | -18.1 | % | 14.6 | % | 14.3 | % | ||||||||||||||
Transaction expenses |
2,060 | 2,830 | 770 | 27.2 | % | 0.1 | % | 0.1 | % | |||||||||||||||
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Operating income (loss) |
36,973 | 51,097 | (14,124 | ) | -27.6 | % | 1.4 | % | 2.3 | % | ||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(52,475 | ) | (50,756 | ) | (1,719 | ) | -3.4 | % | -2.0 | % | -2.3 | % | ||||||||||||
Other, net |
(2,802 | ) | (1,303 | ) | (1,499 | ) | -115.0 | % | -0.1 | % | -0.1 | % | ||||||||||||
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Income (loss) from operations before income taxes |
(18,304 | ) | (962 | ) | (17,342 | ) | -1802.7 | % | -0.7 | % | 0.0 | % | ||||||||||||
Provision (benefit) for income taxes |
(5,754 | ) | (376 | ) | 5,378 | 1430.3 | % | -0.2 | % | 0.0 | % | |||||||||||||
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|||||||||||||
Net income (loss) |
$ | (12,550 | ) | $ | (586 | ) | $ | (11,964 | ) | -2041.6 | % | -0.5 | % | 0.0 | % | |||||||||
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Net Sales
Net sales for the nine months ended September 29, 2012 increased 15.6%, or $349.6 million, compared with the nine months ended October 1, 2011. The increase in net sales was primarily driven by higher net tire pricing of $154.2 million. The pricing increase, which included $116.9 million related to passenger and light truck tires and $25.5 million related to medium truck tires, resulted from our passing through tire manufacturer price increases predominately established during 2011. The combined results of new distribution centers opened since the beginning of 2011 as well as the acquisition of CTO and NCT added $139.1 million of incremental sales during the nine months ended September 29, 2012. In addition, an increase in comparable tire unit sales across all tire categories contributed $40.0 million, primarily driven by passenger and light truck tires. However, the increase in comparable tire sales was slightly impacted by the destocking of lower price point inventories throughout the marketplace in anticipation to the expiration of tariffs imposed on Chinese tire imports that ceased at the end of September. As a result, comparable net sales of the Chinese tire imports decreased by $26.2 million.
Cost of Goods Sold
Cost of goods sold for the nine months ended September 29, 2012 increased 16.5%, or $306.6 million, compared with the nine months ended October 1, 2011. The increase in cost of goods sold was primarily driven by higher net tire pricing of $127.1 million. The pricing increase, which included $99.3 million related to passenger and light truck tires and $21.4 million related to medium truck tires, resulted from tire manufacturer price increases predominately established during 2011. The combined results of new distribution centers opened since the beginning of 2011 as well as the acquisition of CTO and NCT added $119.5 million of incremental costs during the nine months ended September 29, 2012. In addition, an increase in comparable tire unit sales across all tire categories contributed $28.3 million, primarily driven by passenger and light truck tires.
Cost of goods sold as a percentage of net sales was 83.9% for the nine months ended September 29, 2012; an increase compared with 83.3% during the nine months ended October 1, 2011. The increase in the cost of goods sold as a percentage of net sales was primarily driven by a lower level of manufacturer price increases implemented during 2012 as compared to 2011. These price increases generate favorable inventory cost layers that are passed through to our customers in the period instituted. In addition, competitive pricing pressures have increased as distributors vie for customers in a sluggish market.
28
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 29, 2012 increased 18.1%, or $57.9 million, compared with the nine months ended October 1, 2011. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers opened since the beginning of 2011 as well as the acquisition of CTO and NCT. Combined, these factors added $19.2 million of incremental costs to the nine months ended September 29, 2012, including increased amortization expense of $3.4 million from newly established intangible assets. In addition, we experienced an increase to salaries and wage expense of $15.2 million, primarily due to higher sales volume and related headcount; a $7.4 million increase to vehicle expense due to a higher price per gallon of fuel, higher overall consumption of fuel and other vehicle related expenses; as well as a $4.2 million increase in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation expense added an additional $4.3 million of costs to the nine months ended September 29, 2012 as we increased our capital expenditures for information system technologies.
Selling, general and administrative expenses as a percentage of net sales was 14.6% for the nine months ended September 29, 2012; an increase compared with 14.3% during the nine months ended October 1, 2011. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened distribution centers as well as an increase in non-cash depreciation and amortization expense.
Transaction Expenses
Transaction expenses for the nine months ended September 29, 2012 were $2.1 million, which were primarily related to acquisition costs associated with our acquisition of CTO in May of 2012 as well as with expenses related to potential future acquisitions and other corporate initiatives. In addition, we incurred $0.1 million for exit costs associated with our 2011 decision to relocate two existing distribution centers into two expanded distribution centers. During the nine months ended October 1, 2011, transaction expenses of $2.8 million 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.
Interest Expense
Interest expense for the nine months ended September 29, 2012 increased 3.4% or $1.7 million compared with the nine months ended October 1, 2011. The increase is primarily due to higher debt levels associated with our ABL Facility partially offset by lower average interest rates on the outstanding debt. In addition, we recorded $1.6 million during the current period associated with the fair value changes of our interest rate swaps. The comparable amount recorded associated with these swaps during the nine months ended October 1, 2011 was $0.9 million.
Provision (Benefit) for Income Taxes
Based on the interim period effective tax rate, our income tax benefit for the nine months ended September 29, 2012 was $5.8 million, a result based on the change in interim methodology from the effective tax rate method to the discrete method. The combination of our income tax benefit and our recorded loss from operation before income taxes of $18.3 million resulted in an effective tax rate of 31.4%. The effective tax rate for the nine months ended September 29, 2012 is different than our statutory tax rate primarily due to a lower estimate of projected full year income levels and the impact of several non-deductable tax items as well as our state effective tax rate, a result based on our legal entity tax structure and individual state filing requirements. For the nine months ended October 1, 2011, our income tax benefit was $0.4 million. Based on the loss from operations before income taxes of $1.0 million, our effective tax rate was 39.1%.
29
Liquidity and Capital Resources
Overview
The following table contains several key measures to gauge our financial condition and liquidity:
In thousands |
September 29, 2012 |
December 31, 2011 |
||||||
Cash and cash equivalents |
$ | 14,802 | $ | 14,979 | ||||
Working capital |
512,494 | 447,133 | ||||||
Total debt |
924,548 | 835,808 | ||||||
Total stockholders' equity |
646,143 | 655,819 | ||||||
Debt-to-capital ratio |
58.9 | % | 56.0 | % | ||||
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|
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Debt-to-capital ratio = total debt / (total debt plus total stockholders' equity) |
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments and income tax rates. Our cash requirements consist primarily of the following:
| Debt service requirements |
| Funding of working capital |
| Funding of capital expenditures |
Our primary sources of liquidity include cash flows from operations and our availability under our ABL Facility. We expect our cash flow from operations, combined with availability under our ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending during the next twelve month period. In addition, we expect our cash flow from operations and our availability under our ABL Facility, 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.
On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by TPG Capital, L.P. and certain co-investors for an aggregate purchase price valued at $1,287.5 million (the Merger). As a result of the Merger, we are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of September 29, 2012, our total indebtedness is $924.5 million with a debt-to-capital ratio of 58.9%. Cash interest payments for the nine months ended September 29, 2012 and October 1, 2011 amounted to $34.9 million and $34.0 million, respectively. As of September 29, 2012, we have an additional $179.7 million of availability under our ABL Facility. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them.
Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under Item 1ARisk Factors in our most recently filed Annual Report on Form 10-K. If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our ABL Facility, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.
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Cash Flows
The following table sets forth the major categories of cash flows:
In thousands |
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
||||||
Cash provided by (used in) operating activities |
$ | (25,527 | ) | $ | (163,324 | ) | ||
Cash provided by (used in) investing activities |
(61,520 | ) | (78,958 | ) | ||||
Cash provided by (used in) financing activities |
86,870 | 244,876 | ||||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
(177 | ) | 2,594 | |||||
Cash and cash equivalentsbeginning of period |
14,979 | 11,971 | ||||||
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|
|
|
|||||
Cash and cash equivalentsend of period |
$ | 14,802 | $ | 14,565 | ||||
|
|
|
|
|||||
Cash payments for interest |
$ | 34,913 | $ | 34,020 | ||||
Cash payments (receipts) for taxes, net |
$ | 6,197 | $ | 1,358 | ||||
Capital expenditures financed by debt |
$ | 515 | $ | | ||||
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|
|
Operating Activities
Net cash used in operating activities for the nine months ended September 29, 2012 was $25.5 million, of which $77.4 million related to working capital requirements. Inventory increased $53.8 million as a result of the normal seasonal build in our inventory as well as stocking four new distribution centers opened during the year. In addition, higher sales volume led to a $28.8 million increase to accounts receivable. However, these amounts were partially offset by a $9.6 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor purchases and accrued interest on our senior notes.
Net cash used in operating activities for the nine months ended October 1, 2011 was $163.3 million. During the nine months, working capital requirements resulted in a cash outflow of $213.8 million, primarily driven by an increase in inventory of $208.3 million. The increase reflected our decision to increase manufacturer safety stock amounts as a result of tight supply levels with most of our manufacturers, the impact of manufacturer price increases on the replenishment of our inventory as well as the seasonal nature of our business. In addition, the combined impact of stocking new distribution centers and our acquisitions also contributed to the inventory increase. As well, higher sales volumes led to a $75.1 million increase to accounts receivable. However, these amounts were partially offset by a $73.7 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor purchases and accrued interest on our senior notes.
Investing Activities
Net cash used in investing activities for the nine months ended September 29, 2012 was $61.5 million, compared with $79.0 million during the nine months ended October 1, 2011. The change was primarily associated with cash paid for acquisitions, which resulted in a $39.9 million reduction in the current period. We invested $42.2 million in property and equipment purchases during the nine months ended September 29, 2012, which included information technology upgrades, IT application development and warehouse racking. During the nine months ended October 1, 2011 capital expenditures for property and equipment were $18.9 million. The expenditures included information technology upgrades, IT application development and warehouse racking.
Financing Activities
Net cash provided by financing activities for the nine months ended September 29, 2012 was $86.9 million, compared with financing activities of $244.9 million during the nine months ended October 1, 2011. The change was primarily related to lower net borrowings from our ABL Facility due to the reduction in working capital requirements.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest during the nine months ended September 29, 2012 were $34.9 million, compared with $34.0 million paid during the nine months ended October 1, 2011. Despite higher average debt levels during the current period, we experienced lower average interest rates on the outstanding debt during the nine months ended September 29, 2012. As well, we paid an additional $0.6 million during the nine months ended September 29, 2012 related to our interest rate swaps.
Cash payments for taxes during the nine months ended September 29, 2012 were $6.2 million, which was partially offset by a receipt of $1.2 million related to a federal income tax refund. The remaining balance included payments for 2012 estimated tax payments and 2011 tax return payments. Cash payments for the nine months ended October 1, 2011 were $1.4 million as a result of utilizing a majority of our available net operating losses.
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Indebtedness
The following table summarizes the Companys outstanding debt at September 29, 2012:
In thousands |
Matures | Interest Rate (1) |
Outstanding Balance |
|||||||||
ABL Facility |
2016 | 3.5 | % | $ | 462,860 | |||||||
Senior Secured Notes |
2017 | 9.75 | 247,705 | |||||||||
Senior Subordinated Notes |
2018 | 11.50 | 200,000 | |||||||||
Capital lease obligations |
2012 - 2027 | 7.1 - 12.3 | 12,529 | |||||||||
Other |
2014 - 2021 | 8.0 - 10.6 | 1,454 | |||||||||
|
|
|||||||||||
Total debt |
924,548 | |||||||||||
LessCurrent maturities |
(432 | ) | ||||||||||
|
|
|||||||||||
Long-term debt |
$ | 924,116 | ||||||||||
|
|
(1) | Interest rate for the ABL Facility is the weighted average interest rate at September 29, 2012. |
ABL Facility
In connection with the acquisition of Holdings on May 28, 2010, ATDI entered into the Fifth Amended and Restated Credit Agreement, as subsequently amended (ABL Facility). The agreement provided for a senior secured asset-backed revolving credit facility of up to $450.0 million (of which up to $50.0 million could have been utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default was then existing or would arise therefrom, we had the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to mature on November 28, 2014.
On June 6, 2011, we entered into the Second Amendment to Fifth Amended and Restated Credit Agreement. The second amendment increased the revolving commitments from $450.0 million to $650.0 million, extended the maturity date to June 6, 2016 as well as made certain pricing and other changes to the agreement. We maintain the option to request that the ABL Facility be increased by an amount not to exceed $200 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. At September 29, 2012, we had $462.9 million outstanding under the facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $7.5 million, leaving $179.7 million available for additional borrowings.
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 2.25% as of September 29, 2012 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 1.25% as of September 29, 2012. 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 ATDIs existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.
The ABL Facility contains customary covenants, including covenants that restricts our ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt,
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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 September 29, 2012, our additional borrowing availability under the ABL Facility was above the required amount and we were therefore not subject to the additional covenants.
Senior Secured Notes
On May 28, 2010, ATDI issued Senior Secured Notes (Senior Secured Notes) due June 1, 2017 in an aggregate principal amount at maturity of $250.0 million. The Senior Secured Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $240.7 million after debt issuance costs (which represents a non-cash financing activity of $9.3 million). The Senior Secured Notes will accrete based on an effective interest rate of 10% to an aggregate accreted value of $250.0 million, the full principal amount at maturity. The Senior Secured Notes bear interest at a fixed rate of 9.75%. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Secured Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Secured Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 107.313% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount if the redemption date occurs between June 1, 2016 and May 31, 2017.
Until June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Secured Notes issued at a redemption price equal to 109.75% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds from one or more equity offerings to the extent that such net cash proceeds are received by or contributed to ATDI; provided that:
(1) | at least 50% of the sum of the aggregate principal amount of the Senior Secured Notes remains outstanding immediately after the occurrence of such redemption; and |
(2) | each such redemption occurs within 120 days of the date of the closing of the related equity offering. |
In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Secured Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a make-whole price based on the price of a U.S. treasury security plus 50 basis points) as of, plus accrued and unpaid interest, to, but not including, the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.
The Senior Secured Notes are unconditionally guaranteed by Holdings and substantially all of ATDIs 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 ATDIs 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 ATDIs or repurchase or redeem ATDIs capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDIs 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 ATDIs assets; enter into certain transactions with ATDIs affiliates; and designate ATDIs subsidiaries as unrestricted subsidiaries.
Senior Subordinated Notes
On May 28, 2010, ATDI issued Senior Subordinated Notes due June 1, 2018 (Senior Subordinated Notes) in an aggregate principal amount of $200.0 million. The Senior Subordinated Notes bear interest at a fixed rate of 11.50% per annum. Interest on the Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Subordinated Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Subordinated Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 104.0% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016.
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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 ATDIs 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 ATDIs 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 ATDIs or repurchase or redeem ATDIs capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDIs 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 ATDIs assets; enter into certain transactions with ATDIs affiliates; and designate ATDIs subsidiaries as unrestricted subsidiaries.
Adjusted EBITDA
We report our financial results in accordance with Generally Accepted Accounting Principles in the United States (GAAP). In addition, we present Adjusted EBITDA as a supplemental financial measure in order to provide a more complete understanding of the factors and trends affecting our business. Adjusted EBITDA is a non-GAAP financial measure that should be considered supplemental to, not a substitute for or superior to, the financial measure calculated in accordance with GAAP. It has limitations in that it does not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. In addition, this measure may not be comparable to non-GAAP financial measures reported by other companies. We believe that Adjusted EBITDA provides important supplemental information to both management and investors regarding financial and business trends used in assessing our financial condition. As a result, one should not consider Adjusted EBITDA in isolation or as a substitute for our results reported under GAAP. We compensate for these limitations by analyzing results on a GAAP basis as well as on a non-GAAP basis, predominantly disclosing GAAP results and providing reconciliations from GAAP results to non-GAAP results.
The following table shows a reconciliation of Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss) in order to show the differences in these measures of operating performance:
In thousands |
Quarter Ended September 29, 2012 |
Quarter Ended October 1, 2011 |
Nine Months Ended September 29, 2012 |
Nine Months Ended October 1, 2011 |
||||||||||||
Net income (loss) |
$ | (10,602 | ) | $ | 1,480 | $ | (12,550 | ) | $ | (586 | ) | |||||
Depreciation and amortization |
22,416 | 19,875 | 65,656 | 57,799 | ||||||||||||
Interest expense |
18,744 | 17,231 | 52,475 | 50,756 | ||||||||||||
Income tax provision (benefit) |
10,054 | 1,090 | (5,754 | ) | (376 | ) | ||||||||||
Management fee |
1,299 | 1,324 | 3,599 | 3,263 | ||||||||||||
Stock-based compensation |
1,607 | 1,462 | 2,761 | 2,648 | ||||||||||||
Transaction fees |
799 | 1,183 | 2,060 | 2,830 | ||||||||||||
Other |
685 | 20 | 1,677 | 920 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | 45,002 | $ | 43,665 | $ | 109,924 | $ | 117,254 | ||||||||
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|
|
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Off-Balance Sheet Arrangements
We have no significant off balance sheet arrangements, other than liabilities related to leases of Winston Tire Company (Winston Tire) that we guaranteed when we sold Winston Tire in 2001. As of September 29, 2012, our total obligations as guarantor on these leases are approximately $3.0 million extending over seven years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $2.8 million as of September 29, 2012. A provision has been made for the net present value of the estimated shortfall. The accrual for lease liabilities could be materially affected by factors such as the credit worthiness of lessors, assignees and sublessees and our success at negotiating early termination agreements with lessors. These factors are significantly dependent on general economic conditions. While we believe that our current estimates of these liabilities are adequate, it is possible that future events could require significant adjustments to those estimates.
Critical Accounting Polices and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.
Management believes there have been no significant changes during the nine months ended September 29, 2012, to the items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 a consistent definition of fair value as well as provides common requirements for measuring fair value and disclosing information about fair value measurements. This new guidance is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. We adopted this guidance on January 1, 2012 and its adoption did not significantly impact 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 the 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 is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The revised presentation requirements are reflected in our consolidated financial statements.
In September 2011, the FASB issued 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 the option 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 adopted this guidance on January 1, 2012; however, we perform our annual impairment test in the fourth quarter and do not expect the adoption of this ASU to significantly impact our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 revises ASU No. 2011-05 to defer the presentation in the financial statements of reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The deferral is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. We adopted this guidance on January 1, 2012. The revised presentation requirements are reflected in our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-
35
than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. We perform our annual impairment test in the fourth quarter and do not expect the impact of adopting this standard to have a material effect on the consolidated financial statements.
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Cautionary Statements on Forward-Looking Information
This Form 10-Q, including the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements relating to our business and financial outlook that are based on our current expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as may, should, expects, plans, anticipates, believes, estimates, predicts, potential, continue or other comparable terminology.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions. Actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances, after we distribute this Form 10-Q, except as required by the federal securities laws. Many factors could cause actual results to differ materially from those indicated by the forward-looking statements or could contribute to such differences including:
| general business and economic conditions in the United States and other countries, including uncertainty as to changes and trends; |
| our ability to develop and implement the operational and financial systems needed to manage our operations; |
| our ability to execute key strategies, including pursuing acquisitions and successfully integrating and operating acquired companies; |
| the ability of our customers and suppliers to obtain financing related to funding their operations in the current economic market; |
| the financial condition of our customers, many of which are small businesses with limited financial resources; |
| changing relationships with customers, suppliers and strategic partners; |
| changes in state or federal laws or regulations affecting the tire industry; |
| impacts of competitive products and changes to the competitive environment; |
| acceptance of new products in the market; and |
| unanticipated expenditures. |
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in the Risk Factors section of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. These risks are not the only risks and uncertainties facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
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Item 3. Quantitative and Qualitative Disclosures 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 September 29, 2012, we had $462.9 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 September 29, 2012, $212.9 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 $2.1 million.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
(a) | We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
(b) | As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. |
Changes in Internal Control Over Financial Reporting
During the quarter ended September 29, 2012, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are, however, currently implementing a conversion of our legacy computer system to Oracle. We believe we are maintaining and monitoring appropriate internal controls during the implementation period.
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We are involved from time to time in various lawsuits, including alleged class action lawsuits arising out of the ordinary conduct of our business. Although no assurances can be given, we do not expect that any of these matters will have a material adverse effect on our business or financial condition. We are also involved in various litigation proceedings incidental to the ordinary course of our business. We believe, based on consultation with legal counsel, that none of these will have a material adverse effect on our financial condition or results of operations.
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
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 Companys Quarterly Report on Form 10-Q for the quarter ended September 29, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statement of Stockholders Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 9, 2012 | AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC. | |||||
By: | /s/ JASON T. YAUDES | |||||
Jason T. Yaudes | ||||||
Executive Vice President and Chief Financial Officer (On behalf of the registrant and as Principal Financial Officer) |
40
EXHIBIT 31.1
CERTIFICATIONS
I, William E. Berry, certify that:
1. | I have reviewed this quarterly report on Form 10-Q 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: November 9, 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 quarterly report on Form 10-Q 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 registrants 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 registrants 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 registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: November 9, 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 Quarterly Report on Form 10-Q for the quarter ended September 29, 2012 (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: November 9, 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 |
Derivative Instruments - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
1 Months Ended | 1 Months Ended | 1 Months Ended | 1 Months Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 29, 2012
Interest Rate Swap
3Q 2011 Swaps
|
Dec. 31, 2011
Interest Rate Swap
3Q 2011 Swaps
|
Sep. 23, 2011
Interest Rate Swap
3Q 2011 Swaps
Derivative
|
Feb. 24, 2011
Interest Rate Swap
1Q 2011 Swaps
Derivative
|
Sep. 29, 2012
Interest Rate Swap
3Q 2012 Swaps
|
Aug. 01, 2012
Interest Rate Swap
3Q 2012 Swaps
Derivative
|
Sep. 23, 2011
Interest rate swap, fixed rate 0.74% and expire in September 2014
3Q 2011 Swaps
|
Sep. 23, 2011
Interest rate swap, fixed rate 1.0% and expire in September 2015
3Q 2011 Swaps
|
Feb. 24, 2011
Interest rate swap, fixed rate 0.585% and expired in February 2012
1Q 2011 Swaps
|
Sep. 29, 2012
Interest rate swap, fixed rate 0.585% and expired in February 2012
1Q 2011 Swaps
|
Dec. 31, 2011
Interest rate swap, fixed rate 0.585% and expired in February 2012
1Q 2011 Swaps
|
Feb. 24, 2011
Interest rate swap, fixed rate 1.105% and expire in February 2013
1Q 2011 Swaps
|
Sep. 29, 2012
Interest rate swap, fixed rate 1.105% and expire in February 2013
1Q 2011 Swaps
|
Dec. 31, 2011
Interest rate swap, fixed rate 1.105% and expire in February 2013
1Q 2011 Swaps
|
Aug. 01, 2012
Interest rate swap, fixed rate 0.655% and expire in June 2016 (one)
3Q 2012 Swaps
|
Sep. 29, 2012
Interest rate swap, fixed rate 0.655% and expire in June 2016 (one)
3Q 2012 Swaps
|
Dec. 31, 2011
Interest rate swap, fixed rate 0.655% and expire in June 2016 (one)
3Q 2012 Swaps
|
Aug. 01, 2012
Interest rate swap, fixed rate 0.655% and expire in June 2016 (two)
3Q 2012 Swaps
|
|
Derivative [Line Items] | ||||||||||||||||||
Notional amount of interest rate swap | $ 100.0 | $ 100.0 | $ 100.0 | $ 75.0 | $ 100.0 | $ 100.0 | $ 50.0 | $ 50.0 | $ 25.0 | $ 25.0 | $ 25.0 | $ 50.0 | $ 50.0 | $ 50.0 | $ 50.0 | $ 100.0 | $ 100.0 | $ 50.0 |
Number of interest rate swap agreements | 2 | 2 | 2 | |||||||||||||||
Interest rate swap, applicable fixed interest rate | 0.74% | 1.00% | 0.585% | 1.105% | 0.655% | 0.655% | ||||||||||||
Interest rate swap, expiration date | 2014-09 | 2015-09 | 2012-02 | 2013-02 | 2016-06 | 2016-06 |
Activity Under Two Thousand Ten Restricted Stock Units Plan (Detail) (Restricted Stock Units (RSUs), USD $)
|
9 Months Ended |
---|---|
Sep. 29, 2012
|
|
Restricted Stock Units (RSUs)
|
|
Number of Shares | |
Outstanding and unvested, beginning balance | 175,000 |
Granted | 219,298 |
Vested | (50,000) |
Cancelled | |
Outstanding and unvested, ending balance | 344,298 |
Weighted Average Exercise price | |
Outstanding and unvested, beginning balance | $ 1.00 |
Granted | $ 1.14 |
Vested | $ 1.00 |
Cancelled | |
Outstanding and unvested, ending balance | $ 1.09 |
Changes in Options Outstanding Under Two Thousand Ten Plan (Detail) (USD $)
|
9 Months Ended |
---|---|
Sep. 29, 2012
|
|
Number of Shares | |
Outstanding, beginning balance | 44,598,400 |
Granted | 2,277,600 |
Cancelled | |
Outstanding, ending balance | 46,876,000 |
Options exercisable at period end | 17,589,335 |
Weighted- Average Exercise Price | |
Outstanding, beginning balance | $ 1.00 |
Granted | $ 1.14 |
Cancelled | |
Outstanding, ending balance | $ 1.01 |
Options exercisable at period end | $ 1.00 |
Change in Carrying Amount of Goodwill (Detail) (USD $)
In Thousands, unless otherwise specified |
9 Months Ended |
---|---|
Sep. 29, 2012
|
|
Goodwill [Line Items] | |
Beginning balance | $ 445,715 |
Acquisitions | 9,446 |
Purchase accounting adjustments | 821 |
Ending balance | $ 455,982 |
Derivative Instruments (Tables)
|
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 29, 2012
|
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Fair Values of Derivative Instruments Included Within Condensed Consolidated Balance Sheets | The following table presents the fair values of the Company’s derivative instruments included within the condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011:
|
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Pre-Tax Effect of Derivative Instruments on Condensed Consolidated Statement of Comprehensive Income (Loss) | The pre-tax effect of the Company’s derivative instruments on the condensed consolidated statement of comprehensive income (loss) was as follows:
|
Pre-Tax Effect of Derivative Instruments on Condensed Consolidated Statement of Comprehensive Income (Loss) (Detail) (Interest Expense, USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 29, 2012
|
Oct. 01, 2011
|
Sep. 29, 2012
|
Oct. 01, 2011
|
|
Derivative Instruments, Gain (Loss) [Line Items] | ||||
(Gain) loss recognized in interest expense | $ 1,042 | $ 380 | $ 1,632 | $ 935 |
Interest rate swap, fixed rate 1.105% and expire in February 2013 | 1Q 2011 Swaps
|
||||
Derivative Instruments, Gain (Loss) [Line Items] | ||||
(Gain) loss recognized in interest expense | (34) | (32) | (78) | 474 |
Interest rate swap, fixed rate 0.585% and expired in February 2012 | 1Q 2011 Swaps
|
||||
Derivative Instruments, Gain (Loss) [Line Items] | ||||
(Gain) loss recognized in interest expense | (14) | (12) | 35 | |
Interest Rate Swap | 3Q 2011 Swaps
|
||||
Derivative Instruments, Gain (Loss) [Line Items] | ||||
(Gain) loss recognized in interest expense | 266 | 426 | 912 | 426 |
Interest Rate Swap | 3Q 2012 Swaps
|
||||
Derivative Instruments, Gain (Loss) [Line Items] | ||||
(Gain) loss recognized in interest expense | $ 810 | $ 810 |
Long-Term Debt (Detail) (USD $)
In Thousands, unless otherwise specified |
Sep. 29, 2012
|
Dec. 31, 2011
|
---|---|---|
Debt Instrument [Line Items] | ||
ABL Facility | $ 462,860 | $ 373,255 |
Senior Secured Notes | 247,705 | 247,425 |
Senior Subordinated Notes | 200,000 | 200,000 |
Capital lease obligations | 12,529 | 14,118 |
Other | 1,454 | 1,010 |
Total debt | 924,548 | 835,808 |
Less-Current maturities | (432) | (158) |
Long-term debt | $ 924,116 | $ 835,650 |
Subsidiary Guarantor Financial Information - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
May 28, 2010
|
---|---|
Senior Secured Notes
|
|
Condensed Financial Statements, Captions [Line Items] | |
Aggregate principal amount of senior notes issued | $ 250.0 |
Senior Subordinated Notes
|
|
Condensed Financial Statements, Captions [Line Items] | |
Aggregate principal amount of senior notes issued | $ 200.0 |
Weighted Average Assumptions Used to Determine Weighted Average Fair Value of Stock Options Granted (Detail)
|
9 Months Ended | |
---|---|---|
Sep. 29, 2012
|
Oct. 01, 2011
|
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
Risk-free interest rate | 1.48% | 2.41% |
Dividend yield | ||
Expected life | 6 years 6 months | 6 years 4 months 24 days |
Volatility | 42.81% | 40.75% |
Recently Adopted Accounting Pronouncements
|
9 Months Ended | ||
---|---|---|---|
Sep. 29, 2012
|
|||
Recently Adopted Accounting Pronouncements |
In May 2011, the FASB issued Accounting Standards Update (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 a consistent definition of fair value as well as provides common requirements for measuring fair value and disclosing information about fair value measurements. This new guidance is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The Company adopted this guidance on January 1, 2012 and its adoption did not significantly impact the Company’s 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 the 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 is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The revised presentation requirements are reflected in the Company’s consolidated financial statements.
In September 2011, the FASB issued 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 the option 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 adopted this guidance on January 1, 2012; however, the Company performs its annual impairment test in the fourth quarter and does not expect the adoption of this ASU to significantly impact its consolidated financial statements. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU No. 2011-12 revises ASU No. 2011-05 to defer the presentation in the financial statements of reclassifications out of accumulated other comprehensive income for annual and interim financial statements. The deferral is effective for fiscal years beginning after December 15, 2011 and subsequent interim periods. The Company adopted this guidance on January 1, 2012. The revised presentation requirements are reflected in the Company’s consolidated financial statements. In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company performs its annual impairment test in the fourth quarter and does not expect the impact of adopting this standard to have a material effect on the consolidated financial statements. |