UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 4, 2014
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 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 10, 2014: 1,000
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 is expressly qualified in its entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, particularly under the caption Risk Factors. We undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances, after we distribute this Form 10-Q, except as required by the federal securities laws. Many factors could cause actual results to differ materially from those indicated by the forward-looking statements or could contribute to such differences including:
| general business and economic conditions in the United States, Canada and other countries, including uncertainty as to changes and trends; |
| our ability to execute key strategies, including pursuing acquisitions and successfully integrating and operating acquired companies; |
| our ability to develop and implement the operational and financial systems needed to manage our operations; |
| 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 laws or regulations affecting the tire industry; |
| changes in capital and credit market conditions, including availability of funding sources and fluctuations in currency exchange rates; |
| 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 28, 2013. These risks are not the only risks and uncertainties facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Where You Can Find More Information
We file reports and other information with the Securities and Exchange Commission (SEC). You can inspect, read and copy these reports and other information at the SECs Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SECs Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.
We make available free of charge at www.atd-us.com (in the Investor Relations section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.atd-us.com, we do not incorporate such website or its contents into this Quarterly Report on Form 10-Q.
2
AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.
FORM 10-Q
Page | ||||||||||
Item 1 | - | Financial Statements (unaudited): | ||||||||
Condensed Consolidated Balance Sheets - As of October 4, 2014 and December 28, 2013 | 4 | |||||||||
5 | ||||||||||
Condensed Consolidated Statement of Stockholders Equity - For the nine months ended October 4, 2014 |
6 | |||||||||
7 | ||||||||||
Notes to Condensed Consolidated Financial Statements | 8 | |||||||||
Item 2 | - | Managements Discussion and Analysis of Financial Condition and Results of Operations | 35 | |||||||
Item 3 | - | Quantitative and Qualitative Disclosures about Market Risk | 52 | |||||||
Item 4 | - | Controls and Procedures | 52 | |||||||
PART II OTHER INFORMATION | ||||||||||
Item 1 | - | Legal Proceedings | 53 | |||||||
Item 1A | - | Risk Factors | 53 | |||||||
Item 2 | - | Unregistered Sales of Equity Securities and Use of Proceeds | 53 | |||||||
Item 3 | - | Defaults Upon Senior Securities | 53 | |||||||
Item 4 | - | Mine Safety Disclosures | 53 | |||||||
Item 5 | - | Other Information | 53 | |||||||
Item 6 | - | Exhibits | 53 | |||||||
SIGNATURES | 54 |
3
PART I - FINANCIAL INFORMATION
American Tire Distributors Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
October 4, | December 28, | |||||||
In thousands, except share amounts |
2014 | 2013 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 23,759 | $ | 35,760 | ||||
Accounts receivable, net |
485,068 | 305,247 | ||||||
Inventories |
1,122,416 | 772,733 | ||||||
Income tax receivable |
30,828 | 369 | ||||||
Deferred income taxes |
21,197 | 15,719 | ||||||
Assets held for sale |
| 910 | ||||||
Other current assets |
23,174 | 19,684 | ||||||
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Total current assets |
1,706,442 | 1,150,422 | ||||||
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Property and equipment, net |
210,416 | 147,856 | ||||||
Goodwill |
735,013 | 504,333 | ||||||
Other intangible assets, net |
1,068,615 | 713,294 | ||||||
Other assets |
54,626 | 43,421 | ||||||
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Total assets |
$ | 3,775,112 | $ | 2,559,326 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 770,598 | $ | 563,691 | ||||
Accrued expenses |
99,736 | 47,723 | ||||||
Current maturities of long-term debt |
9,839 | 564 | ||||||
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Total current liabilities |
880,173 | 611,978 | ||||||
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Long-term debt |
1,926,664 | 966,436 | ||||||
Deferred income taxes |
311,523 | 270,576 | ||||||
Other liabilities |
25,401 | 17,362 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
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Common stock, par value $.01 per share; 1,000 shares authorized, issued and outstanding |
| | ||||||
Additional paid-in capital |
811,750 | 758,972 | ||||||
Accumulated earnings (deficit) |
(155,141 | ) | (56,898 | ) | ||||
Accumulated other comprehensive income (loss) |
(25,258 | ) | (9,100 | ) | ||||
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Total stockholders equity |
631,351 | 692,974 | ||||||
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Total liabilities and stockholders equity |
$ | 3,775,112 | $ | 2,559,326 | ||||
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See accompanying notes to condensed consolidated financial statements.
4
American Tire Distributors Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
In thousands |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Net sales |
$ | 1,324,429 | $ | 987,894 | $ | 3,667,480 | $ | 2,782,947 | ||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
1,100,913 | 817,544 | 3,081,603 | 2,328,192 | ||||||||||||
Selling, general and administrative expenses |
187,665 | 144,766 | 568,978 | 417,591 | ||||||||||||
Management fees |
1,810 | 1,587 | 17,385 | 3,833 | ||||||||||||
Transaction expenses |
20,134 | 1,015 | 40,310 | 4,304 | ||||||||||||
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Operating income (loss) |
13,907 | 22,982 | (40,796 | ) | 29,027 | |||||||||||
Other income (expense): |
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Interest expense |
(32,148 | ) | (20,625 | ) | (88,770 | ) | (55,252 | ) | ||||||||
Loss on extinguishment of debt |
(82 | ) | | (17,195 | ) | | ||||||||||
Other, net |
(3,726 | ) | (648 | ) | (1,776 | ) | (3,556 | ) | ||||||||
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Income (loss) from continuing operations before income taxes |
(22,049 | ) | 1,709 | (148,537 | ) | (29,781 | ) | |||||||||
Income tax provision (benefit) |
(7,649 | ) | 485 | (50,625 | ) | (8,877 | ) | |||||||||
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Income (loss) from continuing operations |
(14,400 | ) | 1,224 | (97,912 | ) | (20,904 | ) | |||||||||
Income (loss) from discontinued operations, net of tax |
(283 | ) | | (331 | ) | | ||||||||||
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Net income (loss) |
$ | (14,683 | ) | $ | 1,224 | $ | (98,243 | ) | $ | (20,904 | ) | |||||
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Other comprehensive income (loss): |
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Unrealized gain (loss) on rabbi trust assets, net of income tax provision (benefit) of $(43), $44, $(6), $122, respectively |
$ | (66 | ) | $ | 68 | $ | (9 | ) | $ | 187 | ||||||
Foreign currency translation |
(16,670 | ) | 3,000 | (16,149 | ) | (4,242 | ) | |||||||||
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Other comprehensive income (loss) |
(16,736 | ) | 3,068 | (16,158 | ) | (4,055 | ) | |||||||||
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Comprehensive income (loss) |
$ | (31,419 | ) | $ | 4,292 | $ | (114,401 | ) | $ | (24,959 | ) | |||||
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See accompanying notes to condensed consolidated financial statements.
5
American Tire Distributors Holdings, Inc.
Condensed Consolidated Statement of Stockholders Equity
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Total | Additional | Accumulated | Other | |||||||||||||||||||||
Stockholders | Common Stock | Paid-In | Earnings | Comprehensive | ||||||||||||||||||||
In thousands, except share amounts |
Equity | Shares | Amount | Capital | (Deficit) | Income (Loss) | ||||||||||||||||||
Balance, December 28, 2013 |
$ | 692,974 | 1,000 | $ | | $ | 758,972 | $ | (56,898 | ) | $ | (9,100 | ) | |||||||||||
Net income (loss) |
(98,243 | ) | | | | (98,243 | ) | | ||||||||||||||||
Unrealized gain (loss) on rabbi trust assets, net of tax |
(9 | ) | | | | | (9 | ) | ||||||||||||||||
Foreign currency translation |
(16,149 | ) | | | | | (16,149 | ) | ||||||||||||||||
Equity contribution |
50,000 | 50,000 | ||||||||||||||||||||||
Stock-based compensation expense |
2,778 | | | 2,778 | | | ||||||||||||||||||
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Balance, October 4, 2014 |
$ | 631,351 | 1,000 | $ | | $ | 811,750 | $ | (155,141 | ) | $ | (25,258 | ) | |||||||||||
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See accompanying notes to condensed consolidated financial statements.
6
American Tire Distributors Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
October 4, | September 28, | |||||||
In thousands |
2014 | 2013 | ||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (98,243 | ) | $ | (20,904 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing operating activities: |
||||||||
Income (loss) from discontinued operations, net of tax |
107 | | ||||||
Loss on disposal of discontinued operations, net of tax |
224 | | ||||||
Loss on extinguishment of debt |
17,195 | | ||||||
Call premium and interest paid on redemption of Senior Secured Notes |
(16,303 | ) | | |||||
Depreciation and amortization |
107,738 | 78,456 | ||||||
Amortization of other assets |
4,743 | 3,294 | ||||||
Provision (benefit) for deferred income taxes |
(23,620 | ) | (17,864 | ) | ||||
Non-cash inventory step-up amortization |
34,513 | 5,007 | ||||||
Provision for doubtful accounts |
1,437 | 1,673 | ||||||
Stock-based compensation |
2,778 | 2,047 | ||||||
Non-cash changes in the fair value of contingent consideration liabilities |
(2,550 | ) | | |||||
Other, net |
1,014 | 2,317 | ||||||
Change in operating assets and liabilities (excluding impact from acquisitions): |
||||||||
Accounts receivable |
(65,197 | ) | (13,549 | ) | ||||
Inventories |
(112,041 | ) | (18,031 | ) | ||||
Income tax receivable |
(30,546 | ) | 644 | |||||
Other current assets |
3,921 | 4,005 | ||||||
Accounts payable and accrued expenses |
58,131 | 12,965 | ||||||
Other, net |
2,900 | (913 | ) | |||||
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Net cash provided by (used in) continuing operating activities |
(113,799 | ) | 39,147 | |||||
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Net cash provided by (used in) discontinued operations |
1,562 | | ||||||
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Net cash provided by (used in) operating activities |
(112,237 | ) | 39,147 | |||||
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Cash flows from investing activities: |
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Acquisitions, net of cash acquired |
(843,293 | ) | (70,566 | ) | ||||
Purchase of property and equipment |
(51,910 | ) | (34,924 | ) | ||||
Purchase of assets held for sale |
(28 | ) | (1,924 | ) | ||||
Proceeds from disposal of discontinued operations |
3,854 | | ||||||
Proceeds from sale of property and equipment |
383 | 88 | ||||||
Proceeds from sale of assets held for sale |
784 | 5,389 | ||||||
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Net cash provided by (used in) continuing investing activities |
(890,210 | ) | (101,937 | ) | ||||
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Net cash provided by (used in) discontinued investing activities |
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Net cash provided by (used in) investing activities |
(890,210 | ) | (101,937 | ) | ||||
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Cash flows from financing activities: |
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Borrowings from revolving credit facility |
3,412,965 | 2,239,558 | ||||||
Repayments of revolving credit facility |
(3,137,675 | ) | (2,168,837 | ) | ||||
Outstanding checks |
(3,710 | ) | (3,582 | ) | ||||
Payments of deferred financing costs |
(15,951 | ) | (1,106 | ) | ||||
Payments of other long-term debt |
(5,820 | ) | (292 | ) | ||||
Payment for Senior Secured Notes redemption |
(246,900 | ) | | |||||
Proceeds from issuance of long-term debt |
940,313 | | ||||||
Equity contribution |
50,000 | | ||||||
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Net cash provided by (used in) continuing financing activities |
993,222 | 65,741 | ||||||
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Net cash provided by (used in) discontinued financing activities |
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Net cash provided by (used in) financing activities |
993,222 | 65,741 | ||||||
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Effect of exchange rate changes on cash |
(2,776 | ) | (1,581 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(12,001 | ) | 1,370 | |||||
Cash and cash equivalents - beginning of period |
35,760 | 25,951 | ||||||
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Cash and cash equivalents - end of period |
$ | 23,759 | $ | 27,321 | ||||
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Supplemental disclosures of cash flow information: |
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Cash payments for interest |
$ | 77,185 | $ | 38,535 | ||||
Cash payments (receipts) for taxes, net |
$ | 12,185 | $ | 12,876 | ||||
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See accompanying notes to condensed consolidated financial statements.
7
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 U.S. Generally Accepted Accounting Principles (GAAP). ATDI is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools. Its customer base is comprised primarily of independent tire dealers with the remainder of other customers representing various national and corporate accounts. ATDI serves a majority of the contiguous United States, as well as Canada, through one operating and reportable segment. Unless the context otherwise requires, Company herein refers to Holdings and its consolidated subsidiaries.
2. | Basis of Presentation: |
The accompanying condensed consolidated financial statements reflect the consolidated operations of the Company and have been prepared in accordance with 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 Holdings Annual Report on Form 10-K for the fiscal year ended December 28, 2013.
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 October 4, 2014 and September 28, 2013 each contain operating results for 13 weeks. The nine months ended October 4, 2014 contains operating results for 40 weeks while the nine months ended September 28, 2013 contains operating results for 39 weeks. It should be noted that the Company and its recently acquired Hercules subsidiary, as defined below, have different quarter-end reporting dates. Hercules has a September 30 quarter-end reporting date. There were no significant changes to the business subsequent to Hercules fiscal period end that would have a material impact on the condensed consolidated balance sheet or condensed consolidated statement of comprehensive income (loss) as of and for the quarter and nine months ended October 4, 2014. Terrys Tire, Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary each converted to the companys quarter-end reporting date during the quarter ended October 4, 2014.
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 (the TPG Merger). Under the guidance provided by the SEC Staff Accounting Bulletin Topic 5J, New Basis of Accounting Required in Certain Circumstances, push-down accounting is required when such transactions result in an entity being substantially wholly-owned. Under push-down accounting, certain transactions incurred by the buyer, which would otherwise be accounted for in the accounts of the parent, are pushed down and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of the Companys common stock has been pushed down from the buyer to the Company.
3. | Recent Accounting Pronouncements: |
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company adopted this guidance on December 29, 2013 (the first day of its 2014 fiscal year) and its adoption did not have a material impact on the Companys consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, (ASU 2014-08). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the companys operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statement previously issued. The Company is currently assessing the impact, if any, on its consolidated financial statements.
8
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under todays guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning in fiscal year 2017 and, at that time the Company may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Companys consolidated financial statements and disclosures.
4. | Acquisitions: |
2014 Acquisitions
On June 27, 2014, TriCan Tire Distributors Inc. (TriCan), an indirect wholly-owned subsidiary of Holdings, entered into and closed an Asset Purchase Agreement (the Trail Tire Purchase Agreement) with Trail Tire Distributors Ltd., a corporation formed under the laws of the Province of Alberta (Trail Tire), and the shareholders and principals of Trail Tire, pursuant to which TriCan acquired the wholesale distribution business of Trail Tire. Trail Tire is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada. The Company believes that the acquisition of Trail Tire will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The Trail Tire acquisition closed for aggregate cash consideration of approximately $20.8 million (the Trail Tire Purchase Price). The aggregate cash consideration was funded through borrowings under the Companys existing ABL credit facility. The Trail Tire Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, the Company finalized the post-closing working capital adjustments in accordance with the Trail Tire Purchase Agreement. This adjustment increased the Trail Tire Purchase Price by $1.5 million to $22.3 million with a corresponding increase to goodwill of $1.5 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the Extreme Purchase Agreement) with Extreme Wheel Distributors Ltd., a corporation formed under the laws of the Province of Alberta (Extreme), and the shareholder and principal of Extreme, pursuant to which TriCan agreed to acquire the wholesale distribution business of Extreme. Extreme is a wholesale distributor of wheels and related accessories in Canada. The Company believes that the acquisition of Extreme will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The Extreme acquisition closed for aggregate cash consideration of approximately $6.5 million (the Extreme Purchase Price). The aggregate cash consideration was funded through borrowings under the Companys existing ABL credit facility. The Extreme Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, the Company finalized the post-closing working capital adjustments in accordance with the Extreme Purchase Agreement. This adjustment increased the Extreme Purchase Price by $0.7 million to $7.2 million with a corresponding increase to goodwill of $0.7 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the Kirks Tire Purchase Agreement) with Kirks Tire Ltd., a corporation formed under the laws of the Province of Alberta (Kirks Tire), and the shareholders and principals of Kirks Tire, pursuant to which TriCan agreed to acquire the wholesale distribution business of Kirks Tire. Kirks Tire is engaged in (i) the wholesale distribution of tires, tire parts, tire accessories and related equipment and (ii) the retail sale and installation of tires, tire parts, and tire accessories and the manufacturing and sale of retread tires. Kirks Tires retail operations were not acquired by TriCan and will continue to operate under its current ownership. The Company believes that the acquisition of the wholesale distribution business of Kirks Tire will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The Kirks Tire acquisition closed for aggregate cash consideration of approximately $73.0 million (the Kirks Tire Purchase Price). The Kirks Tire Purchase Price was funded through borrowings under the Companys existing ABL credit facility. The Kirks Tire Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, the Company finalized the post-closing working capital adjustments in accordance with the Kirks Tire Purchase Agreement. This adjustment increased the Kirks Tire Purchase Price by $4.7 million to $77.7 million with a corresponding increase to goodwill of $4.7 million.
9
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the RTD Edmonton Purchase Agreement) with Regional Tire Distributors (Edmonton) Inc. (RTD Edmonton), a corporation formed under the laws of the Province of Alberta, and the shareholders and principals of RTD Edmonton, pursuant to which TriCan agreed to acquire the wholesale distribution business of RTD Edmonton. RTD Edmonton is a wholesale distributor of tires, tire parts, tire accessories and related equipment. The Company believes that the acquisition of RTD Edmonton will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The RTD Edmonton acquisition closed for aggregate cash consideration of approximately $31.9 million (the RTD Edmonton Purchase Price). The RTD Edmonton Purchase Price was funded through borrowings under the Companys existing ABL credit facility. The RTD Edmonton Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, the Company finalized the post-closing working capital adjustments in accordance with the RTD Edmonton Purchase Agreement. This adjustment increased the RTD Edmonton Purchase Price by $0.5 million to $32.4 million with a corresponding increase to goodwill of $0.5 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the RTD Calgary Purchase Agreement) with Regional Tire Distributors (Calgary) Inc. (RTD Calgary), a corporation formed under the laws of the Province of Alberta, and the shareholders and principals of RTD Calgary, pursuant to which TriCan agreed to acquire the wholesale distribution business of RTD Calgary. RTD Calgary is a wholesale distributor of tires, tire parts, tire accessories and related equipment. The Company believes that the acquisition of RTD Calgary will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The RTD Calgary acquisition closed for aggregate cash consideration of approximately $20.7 million (the RTD Calgary Purchase Price). The RTD Calgary Purchase Price was funded by borrowings under the Companys existing ABL credit facility. The RTD Calgary Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, the Company finalized the post-closing working capital adjustments in accordance with the RTD Calgary Purchase Agreement. This adjustment increased the RTD Calgary Purchase Price by $3.6 million to $24.3 million with a corresponding increase to goodwill of $3.6 million.
On March 28, 2014, ATDI completed its acquisition of Terrys Tire Town Holdings, Inc., an Ohio corporation (Terrys Tire and such acquisition, the Terrys Tire Acquisition). The Terrys Tire Acquisition was completed pursuant to a Stock Purchase Agreement (the Stock Purchase Agreement) entered into on February 17, 2014 between ATDI and TTT Holdings, Inc., a Delaware corporation. Terrys Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the internet. Terrys Tire operated 10 distribution centers spanning from Virginia to Maine and in Ohio. The Company believes that the acquisition of Terrys Tire will enhance its market position in these areas and aligns with their distribution centers, especially the new distribution centers opened by the Company over the past two years in the Northeast and Ohio.
The Terrys Tire acquisition closed for an aggregate purchase price of approximately $372.7 million (the Terrys Tire Purchase Price), consisting of cash consideration of approximately $358.0 million, contingent consideration of $12.5 million and non-cash consideration for debt assumed of $2.2 million. The cash consideration paid for the Terrys Tire Acquisition included estimated working capital adjustments and a portion of consideration contingent on certain events achieved prior to closing. During second quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment decreased the Terrys Tire Purchase Price by $5.4 million to $372.7 million with a corresponding decrease to goodwill of $5.4 million. The Terrys Tire Purchase Price was funded by a combination of borrowings under a new senior secured term loan facility, as more fully described in Note 9, and borrowings of approximately $72.5 million under Holdings existing U.S. ABL Facility.
On January 31, 2014, pursuant to an Agreement and Plan of Merger, dated January 24, 2014 (the Merger Agreement), among ATD Merger Sub II LLC (Merger Sub), an indirect wholly-owned subsidiary of Holdings, ATDI, Hercules Tire Holdings LLC, a Delaware limited liability company (Hercules Holdings), the equityholders of Hercules Holdings (each a Seller and, collectively the Sellers) and the Sellers Representative, Merger Sub merged with and into Hercules Holdings, with Hercules Holdings being the surviving entity (the Merger). As a result of the Merger, Hercules Holdings became an indirect 100% owned subsidiary of Holdings. Hercules Holdings owns all of the capital stock of The Hercules Tire & Rubber Company, a Connecticut corporation (Hercules). Hercules Holdings has no material assets or operations other than its ownership of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling after-market replacement tires for passenger cars, trucks, and certain off road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, 6 distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules® brand, which is one of the most sought-after proprietary tire brands in the industry. The acquisition of Hercules is expected to strengthen the Companys presence in major markets such as
10
California, Texas and Florida in addition to increasing its presence in Canada. Additionally, the Company believes that Hercules strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow the Company to capitalize on the growing import market, as well as, providing the ability to expand the international sales of the Hercules® brand. Finally, this acquisition will allow the Company to be a brand marketer of the Hercules® brand which in 2013 had a 2% market share of the passenger and light truck market in North America and a 3% share of highway truck tires in North America.
The Merger closed for an aggregate purchase price of approximately $318.9 million (the Hercules Closing Purchase Price), consisting of net cash consideration of $310.0 million, contingent consideration of $3.5 million and non-cash consideration for debt assumed of $5.4 million. The Hercules Closing Purchase Price includes an estimate for initial working capital adjustments. During second quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the Merger Agreement. This adjustment decreased the Hercules Closing Purchase Price by $0.4 million from $319.3 million to $318.9 million with a corresponding decrease to goodwill of $0.4 million. The Merger Agreement provides for the payment of up to $6.5 million in additional consideration contingent upon the occurrence of certain post-closing events (to the extent payable, the Hercules Additional Purchase Price and, collectively with the Hercules Closing Purchase Price, the Hercules Purchase Price). The cash consideration paid for the Merger was funded by a combination of the issuance of additional Senior Subordinated Notes, as more fully described in Note 9, an equity contribution of $50.0 million from Holdings indirect parent, as more fully described in Note 14 and borrowings under Holdings credit agreement, as more fully described in Note 9.
On January 17, 2014, TriCan entered into an Asset Purchase Agreement with Kipling Tire Co. LTD., a corporation governed by the laws of the Province of Ontario (Kipling), pursuant to which TriCan agreed to acquire the wholesale distribution business of Kipling. Kipling has operated as a retail-wholesale business since 1982. Kiplings wholesale business distributes tires from its Etobicoke facilities to approximately 400 retail customers in Southern Ontario. Kiplings retail operations were not acquired by TriCan and will continue to operate under its current ownership. This acquisition will further strengthen TriCans presence in the Southern Ontario region of Canada. The acquisition was completed on January 17, 2014 and was funded through the Companys Canadian ABL Facility. The Company does not believe the acquisition of Kipling is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805 Business Combinations. As a result, the information is not presented.
11
The acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Terrys Tire and Hercules (collectively the 2014 Acquisitions) were recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As of the date of these financial statements, the Company is continuing to evaluate the initial purchase price allocation for the Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary acquisitions. Accordingly, management has used its best estimates in the allocation of the purchase price to assets acquired and liabilities assumed based on the estimated preliminary fair market value of such assets and liabilities at the date of each acquisition. As additional information is obtained about these assets and liabilities within the measurement period, the Company expects to refine its estimates of fair value to allocate the purchase price for the Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary acquisitions more accurately. As of the date of these financial statements, the purchase price allocation for Hercules is final and the purchase price allocation for Terrys Tire is final except for the evaluation and conversion of certain Terrys Tire inventory, which the Company anticipates finalizing by fiscal year end. The allocation of the purchase price for each of the 2014 Acquisitions is as follows:
In thousands |
Terrys Tire |
Hercules | Trail Tire |
Extreme | Kirks Tire |
RTD Edmonton |
RTD Calgary |
Total | ||||||||||||||||||||||||
Cash |
$ | 7,431 | $ | 12,187 | $ | | $ | | $ | | $ | | $ | | $ | 19,618 | ||||||||||||||||
Accounts receivable |
39,772 | 61,193 | 4,899 | 884 | 5,175 | 1,056 | 2,618 | 115,597 | ||||||||||||||||||||||||
Inventory |
92,445 | 153,644 | 6,308 | 1,380 | 5,927 | 2,525 | 6,047 | 268,276 | ||||||||||||||||||||||||
Assets held for sale |
5,819 | | | | | | | 5,819 | ||||||||||||||||||||||||
Other current assets |
2,222 | 5,064 | | | | | | 7,286 | ||||||||||||||||||||||||
Deferred income taxes |
4,947 | | 124 | | | | | 5,071 | ||||||||||||||||||||||||
Property and equipment |
7,072 | 29,970 | 298 | 29 | | 6 | 508 | 37,883 | ||||||||||||||||||||||||
Intangible assets |
186,161 | 155,704 | 10,922 | 3,985 | 43,971 | 21,549 | 9,707 | 431,999 | ||||||||||||||||||||||||
Other assets |
289 | | | | | | | 289 | ||||||||||||||||||||||||
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Total assets acquired |
346,158 | 417,762 | 22,551 | 6,278 | 55,073 | 25,136 | 18,880 | 891,838 | ||||||||||||||||||||||||
Accounts payable |
80,771 | 95,616 | 6,017 | 449 | | 1,432 | 1,907 | 186,192 | ||||||||||||||||||||||||
Accrued and other liabilities |
3,904 | 6,154 | 368 | 131 | 2,997 | 183 | 1,464 | 15,201 | ||||||||||||||||||||||||
Liabilities held for sale |
319 | | | | | | | 319 | ||||||||||||||||||||||||
Deferred income taxes |
| 68,516 | | | | | | 68,516 | ||||||||||||||||||||||||
Other liabilities |
| 2,325 | 468 | | 47 | | | 2,840 | ||||||||||||||||||||||||
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Total liabilities assumed |
84,994 | 172,611 | 6,853 | 580 | 3,044 | 1,615 | 3,371 | 273,068 | ||||||||||||||||||||||||
Net assets acquired |
261,164 | 245,151 | 15,698 | 5,698 | 52,029 | 23,521 | 15,509 | 618,770 | ||||||||||||||||||||||||
Goodwill |
111,492 | 73,708 | 6,624 | 1,469 | 25,627 | 8,832 | 8,769 | 236,521 | ||||||||||||||||||||||||
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Purchase price |
$ | 372,656 | $ | 318,859 | $ | 22,322 | $ | 7,167 | $ | 77,656 | $ | 32,353 | $ | 24,278 | $ | 855,291 | ||||||||||||||||
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The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill. The premium in the purchase price paid for the 2014 Acquisitions primarily reflects growth opportunities from expanding the Companys distribution footprint into Western Canada and through the anticipated realization of operational and cost synergies. In addition, growth opportunities associated with the Hercules® brand also contributed to the premium in the purchase price paid for the Hercules acquisition.
Cash and cash equivalents, accounts receivable and accounts payable were stated at their historical carrying values, which approximate their fair value, given the short-term nature of these assets and liabilities. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.
The Company recorded intangible assets based on their estimated fair value which consisted of the following:
In thousands |
Terrys Tire |
Hercules | Trail Tire |
Extreme | Kirks Tire |
RTD Edmonton |
RTD Calgary |
Total | ||||||||||||||||||||||||
Customer list (1) |
$ | 185,776 | $ | 147,216 | $ | 10,922 | $ | 3,985 | $ | 43,971 | $ | 21,549 | $ | 9,707 | $ | 423,126 | ||||||||||||||||
Tradenames (2) |
| 8,488 | | | | | | 8,488 | ||||||||||||||||||||||||
Favorable leases (3) |
385 | | | | | | | 385 | ||||||||||||||||||||||||
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Total |
$ | 186,161 | $ | 155,704 | $ | 10,922 | $ | 3,985 | $ | 43,971 | $ | 21,549 | $ | 9,707 | $ | 431,999 | ||||||||||||||||
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(1) | Estimated useful life is eighteen years. |
(2) | Estimated useful life is fifteen years. |
(3) | Estimated useful life is five years. |
The Company utilized the excess earnings method, a derivation of the income approach, as well as the assistance of a third-party valuation report, to determine the fair value of the customer list intangible assets. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of eighteen years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Companys historical experience in renewing and extending similar customer relationships and future expectations for renewing and extending similar existing customer relationships, and represents the number of years over which the Company expects the customer relationships to economically contribute to the business. This estimate is based on the year in which 95.0% of the annual discounted cash flows were captured in the value of the customer list intangible asset.
12
As part of the acquisition of Terrys Tire, the Company acquired Terrys Tires commercial and retread businesses. As the Companys core business does not include commercial and retread operations, the Company decided that it would divest of these businesses. As it is managements intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria has been met, the related assets, including the allocation of purchase price, and the related liabilities of the commercial and retread businesses were classified as held for sale at the acquisition date. As part of the preliminary purchase price allocation, the estimated fair value of the assets held for sale was $5.8 million, including $4.5 million in current assets, net property and equipment of $0.8 million and goodwill of $0.5 million. The estimated fair value of the liabilities held for sale was $0.3 million of which the entire amount related to current liabilities. On July 31, 2014, the Company completed a transaction to sell the commercial and retread businesses acquired as part of the Terrys Tire acquisition. See Note16 for additional information.
The 2014 Acquisitions contributed net sales of approximately $562.5 million to the Company for the nine months ended October 4, 2014. Net loss contributed by the 2014 Acquisitions during the nine months ended October 4, 2014 was approximately $21.7 million which included non-cash amortization of the inventory step-up of $34.3 million and non-cash amortization expense on acquired intangible assets of $21.7 million.
2013 Acquisitions
On December 13, 2013, TriCan entered into a Share Purchase Agreement with Wholesale Tire Distributors Inc., a corporation formed under the laws of the Province of Ontario (WTD), Allan Bishop, an individual resident in the Province of Ontario (Allan) and The Bishop Company Inc., a corporation formed under the laws of the Province of Ontario (BishopCo) (Allan and BishopCo each, a Seller and collectively, the Sellers), pursuant to which TriCan agreed to acquire from the Sellers all of the issued and outstanding shares of WTD. WTD operated two distribution centers serving over 2,300 customers. The Company believes that the acquisition of WTD strengthened the Companys market presence in the Southern Ontario region of Canada. The acquisition was completed on December 13, 2013 and was funded through cash on hand. The Company does not believe the acquisition of WTD is a material transaction, individually or when aggregated with the other non-material acquisitions discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805 Business Combinations. As a result, the information is not presented.
The acquisition of WTD 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 $4.4 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $1.2 million. The premium in the purchase price paid for the acquisition of WTD reflects the anticipated realization of operational and cost synergies.
On August 30, 2013, the Company entered into a Stock Purchase Agreement with Tire Distributors, Inc. (TDI) to acquire 100% of the outstanding capital stock of TDI. TDI operated one distribution center serving over 1,700 customers across Maryland and northeastern Virginia. The acquisition was completed on August 30, 2013 and was funded through the Companys ABL Facility. The Company does not believe the acquisition of TDI is a material transaction, individually or when aggregated with the other non-material acquisitions discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805 Business Combinations. As a result, the information is not presented.
The acquisition of TDI 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 $3.4 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $2.4 million. The premium in the purchase price paid for the acquisition of TDI reflects the anticipated realization of operational and cost synergies.
On March 22, 2013, TriCan and ATDI entered into a Share Purchase Agreement with Regional Tire Holdings Inc., a corporation formed under the laws of the Province of Ontario (Holdco), Regional Tire Distributors Inc. (RTD), a corporation formed under the laws of the Province of Ontario and a 100% owned subsidiary of Holdco, and the shareholders of Holdco, pursuant to which TriCan agreed to acquire from the shareholders of Holdco all of the issued and outstanding shares of Holdco for a purchase price of $62.5 million. Holdco has no significant assets or operations other than its ownership of RTD. The operations of RTD constitute the operations of Holdco. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada. The Company believes that the acquisition of RTD significantly expanded the Companys presence in the Ontario and Atlantic Provinces of Canada and complemented the Companys current operations in Canada.
The acquisition of RTD was completed on April 30, 2013 for aggregate cash consideration of approximately $64.9 million (the Adjusted Purchase Price) which includes initial working capital adjustments. The acquisition of RTD was funded by borrowings
13
under the Companys ABL Facility and FILO Facility, as more fully described in Note 9. The Adjusted Purchase Price was subject to certain post-closing adjustments, including, but not limited to, the finalization of working capital adjustments. Of the $64.9 million Adjusted Purchase Price, $6.3 million is held in escrow pending the resolution of the post-closing adjustments and other escrow release conditions in accordance with the terms of the purchase agreement and escrow agreement. During third quarter 2013, the Company and the shareholders of Holdco agreed on the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment increased the Adjusted Purchase Price by $1.0 million to $65.9 million with a corresponding increase to goodwill of $1.0 million.
The acquisition of RTD was recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As a result, the Adjusted 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. The allocation of the Adjusted Purchase Price is as follows:
In thousands |
||||
Cash |
$ | 904 | ||
Accounts receivable |
10,093 | |||
Inventory |
21,685 | |||
Other current assets |
998 | |||
Property and equipment |
1,050 | |||
Intangible assets |
42,990 | |||
Other assets |
52 | |||
|
|
|||
Total assets acquired |
77,772 | |||
Debt |
| |||
Accounts payable |
7,817 | |||
Accrued and other liabilities |
12,740 | |||
Deferred income taxes |
11,692 | |||
|
|
|||
Total liabilities assumed |
32,249 | |||
Net assets acquired |
45,523 | |||
Goodwill |
20,375 | |||
|
|
|||
Purchase price |
$ | 65,898 | ||
|
|
The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $20.4 million. The premium in the purchase price paid for the acquisition of RTD primarily relates to growth opportunities from expanding the Companys distribution footprint into Eastern Canada and through operating synergies available via the consolidation of certain distribution centers in Eastern Canada.
Cash and cash equivalents, accounts receivable and accounts payable were stated at their historical carrying values, which approximate their fair value, given the short-term nature of these assets and liabilities. Inventory was recorded at fair value, based on computation which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.
The Company recorded intangible assets based on their estimated fair value which consisted of the following:
In thousands |
Estimated Useful Life |
Estimated Fair Value |
||||
Customer list |
16 years | $ | 40,720 | |||
Tradenames |
5 years | 1,900 | ||||
Favorable leases |
4 years | 370 | ||||
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|
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Total |
$ | 42,990 | ||||
|
|
The following unaudited pro forma supplementary data gives effect to the 2014 Acquisitions as if these transactions had occurred on December 30, 2012 (the first day of the Companys 2013 fiscal year) and gives effect to the acquisition of RTD as if
14
this transaction had occurred on January 1, 2012 (the first day of the Companys 2012 fiscal year). The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Companys results of operations had the 2014 Acquisitions and the RTD acquisition been consummated on the date assumed or of the Companys results of operations for any future date.
Pro Forma | ||||||||||||
Quarter | Nine Months | Nine Months | ||||||||||
Ended | Ended | Ended | ||||||||||
September 28, | October 4, | September 28, | ||||||||||
In thousands |
2013 | 2014 | 2013 | |||||||||
Net sales |
$ | 1,325,139 | $ | 3,876,792 | $ | 3,756,785 | ||||||
Income (loss) from continuing operations |
(6,266 | ) | (77,447 | ) | (51,830 | ) |
The pro forma supplementary data for the quarter ended September 28, 2013 includes $9.5 million as an increase to historical amortization expense as a result of acquired intangible assets while the nine months ended October 4, 2014 and September 28, 2013 includes $12.0 million and $31.3 million, respectively. In addition, the pro forma supplementary data for the quarter ended September 28, 2013 includes $10.3 million as an increase to historical interest expense as a result of the issuance of the additional Senior Subordinated Notes and the new senior secured term loan facility, as more fully described in Note 9, while the nine months ended October 4, 2014 and September 28, 2013 includes $6.5 million and $31.9 million, respectively. For the nine months ended October 4, 2014 and September 28, 2013, the Company has included a reduction in non-recurring historical transaction expenses of $60.6 million and $5.3 million, respectively. These transaction expenses were incurred prior to the acquisition of Hercules, Terrys Tire and RTD and they are directly related to the acquisitions and are non-recurring. Additionally, for the nine months ended October 4, 2014, the Company has included a reduction in historical cost of goods sold of $34.3 million. The reduction in cost of goods sold relates to the elimination of the non-cash amortization of the inventory step-up recorded in connection with the 2014 Acquisitions as this amortization is directly related to the 2014 Acquisitions and is non-recurring.
5. | Inventories: |
Inventories consist primarily of automotive 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 and the FILO Facility. See Note 9 for further information.
As a result of the TriCan acquisition in November 2012, the RTD, TDI and WTD acquisitions in fiscal 2013 and the 2014 Acquisitions, the carrying value of the acquired inventory was increased by $6.3 million, $2.7 million, $0.2 million, $0.5 million, and $34.4 million, respectively, to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The step-up in inventory value for each acquisition was amortized into cost of goods sold over the period of the Companys normal inventory turns, which approximates two months. Amortization of the inventory step-up included in cost of goods sold in the accompanying condensed consolidated statements of comprehensive income (loss) for the quarter and nine months ended October 4, 2014 was $2.9 million and $34.5 million, respectively, while amortization for the quarter and nine months ended September 28, 2013 was $0.1 million and $5.0 million, respectively.
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. During third quarter 2013, the Company classified a facility located in Georgia as held for sale. The facility was previously used as a distribution center within the Companys operations until its activities were relocated to an expanded facility. During the nine months ended October 4, 2014, the Company received $0.4 million in cash for the sale of this facility.
As part of the Terrys Tire acquisition, the Company acquired Terrys Tires commercial and retread businesses. See Note 4 for additional information regarding this acquisition. As it is managements intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria have been met, the related assets and liabilities of the commercial and retread businesses were classified as held for sale at the acquisition date. On July 31, 2014, the Company received $3.9 million in cash for the sale of the commercial and retread businesses. See Note 16 for additional information.
15
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 |
||||
Balance, December 28, 2013 |
$ | 504,333 | ||
Purchase accounting adjustments |
128 | |||
Acquisitions |
236,611 | |||
Currency translation |
(6,059 | ) | ||
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|
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Balance, October 4, 2014 |
$ | 735,013 | ||
|
|
At October 4, 2014, the Company has recorded goodwill of $735.0 million, of which approximately $167.4 million of net goodwill is deductible for income tax purposes in future periods. The balance primarily relates to the TPG Merger on May 28, 2010, in which $418.6 million was recorded as goodwill. The Company does not have any accumulated goodwill impairment losses.
During the quarter ended October 4, 2014, the Company acquired the assets and liabilities of several small Canadian businesses. The purchase price for each business was preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair market value at the date of acquisition. As part of the preliminary purchase price allocation, the Company allocated $3.3 million to finite-lived intangible assets related to noncompete agreements with useful lives ranging between two and five years. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $0.1 million.
On June 27, 2014, TriCan completed its acquisition of the wholesale distribution businesses of Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary. The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $6.6 million, $1.5 million, $25.6 million, $8.8 million and $8.8 million, respectively, as goodwill. See Note 4 for additional information.
On March 28, 2014, ATDI completed its acquisition of Terrys Tire pursuant to a Stock Purchase Agreement entered into on February 17, 2014. The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. During the second quarter of 2014, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment decreased goodwill by $5.4 million to $111.5 million at October 4, 2014. See Note 4 for additional information.
On January 31, 2014, the Company completed its acquisition of Hercules pursuant to an Agreement and Plan of Merger dated January 24, 2014. 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. During second quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the Merger Agreement. This adjustment decreased goodwill by $0.4 million to $73.7 million at October 4, 2014. See Note 4 for additional information.
On December 13, 2013, TriCan entered into a share Purchase Agreement to acquire all of the issued and outstanding common shares of WTD. The acquisition was funded through cash on hand. 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. During first quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This increased goodwill by $0.1 million to a total of $1.2 million. 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.
16
The following table sets forth the gross amount and accumulated amortization of the Companys intangible assets at October 4, 2014 and December 28, 2013:
October 4, 2014 | December 28, 2013 | |||||||||||||||
Gross | Accumulated | Gross | Accumulated | |||||||||||||
In thousands |
Amount | Amortization | Amount | Amortization | ||||||||||||
Customer lists |
$ | 1,096,707 | $ | 300,237 | $ | 677,062 | $ | 226,614 | ||||||||
Noncompete agreements |
17,461 | 9,252 | 12,007 | 6,400 | ||||||||||||
Favorable leases |
1,042 | 256 | 688 | 119 | ||||||||||||
Tradenames |
18,725 | 5,468 | 10,531 | 3,754 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total finite-lived intangible assets |
1,133,935 | 315,213 | 700,288 | 236,887 | ||||||||||||
Tradenames (indefinite-lived) |
249,893 | | 249,893 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total intangible assets |
$ | 1,383,828 | $ | 315,213 | $ | 950,181 | $ | 236,887 | ||||||||
|
|
|
|
|
|
|
|
At October 4, 2014, the Company had $1,068.6 million of intangible assets. The balance primarily relates to the TPG Merger on May 28, 2010, in which $781.3 million was recorded as intangible assets. As part of the preliminary purchase price allocation of Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary, the Company allocated $10.9 million, $4.0 million, $44.0 million, $21.5 million and $9.7 million, respectively, to a finite-lived customer list intangible asset with a useful life of eighteen years. As part of the preliminary purchase price allocation of Terrys Tire, the Company allocated $185.8 million to a finite-lived customer list intangible asset with a useful life of eighteen years and $0.4 million to a favorable leases intangible asset with a useful life of five years. As part of the purchase price allocation of Hercules, the Company allocated $147.2 million to a finite-lived customer list intangible asset with a useful life of eighteen years and $8.5 million to a finite-lived tradename with a useful life of fifteen years. As part of the purchase price allocation of WTD, the Company allocated $4.4 million to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the purchase price allocation of TDI, the Company allocated $3.4 million to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the purchase price allocation of RTD, the Company allocated $40.7 million to a finite-lived customer list intangible asset with a useful life of sixteen years, $1.9 million to a finite-lived tradename with a useful life of five years and $0.4 million to a finite-lived favorable leases intangible asset with a useful life of four years.
Intangible asset amortization expense was $30.1 million and $19.7 million for the quarters ended October 4, 2014 and September 28, 2013, respectively. For the nine months ended October 4, 2014 and September 28, 2013, intangible asset amortization expense was $79.1 million and $56.3 million, respectively. Estimated amortization expense on existing intangible assets is expected to approximate $30.9 million for the remaining three months of 2014 and approximately $124.2 million in 2015, $105.5 million in 2016, $90.9 million in 2017 and $77.7 million in 2018.
9. | Long-term Debt: |
The following table presents the Companys long-term debt at October 4, 2014 and at December 28, 2013:
October 4, | December 28, | |||||||
In thousands |
2014 | 2013 | ||||||
U.S. ABL Facility |
$ | 631,401 | $ | 417,066 | ||||
Canadian ABL Facility |
53,861 | 36,424 | ||||||
U.S. FILO Facility |
80,000 | 51,863 | ||||||
Canadian FILO Facility |
14,551 | | ||||||
Term Loan |
715,934 | | ||||||
Senior Secured Notes |
| 248,219 | ||||||
Senior Subordinated Notes |
421,545 | 200,000 | ||||||
Capital lease obligations |
12,479 | 12,330 | ||||||
Other |
6,732 | 1,098 | ||||||
|
|
|
|
|||||
Total debt |
1,936,503 | 967,000 | ||||||
Less - Current maturities |
(9,839 | ) | (564 | ) | ||||
|
|
|
|
|||||
Long-term debt |
$ | 1,926,664 | $ | 966,436 | ||||
|
|
|
|
17
The fair value of the Senior Subordinated Notes was $443.7 million at October 4, 2014 and $212.0 million at December 28, 2013 and was estimated using a discounted cash flow analysis with significant inputs that are not observable (Level 3) as there are no quoted prices in active markets for these notes. The fair value of the Term Loan was $721.1 million at October 4, 2014 and was estimated using a discounted cash flow analysis with significant inputs that are not observable (Level 3). The discount rate used in the fair value analysis for the Term Loan was based on borrowing rates available to the Company for debt with the same remaining maturity.
ABL Facility
On January 31, 2014, in connection with the Hercules acquisition, the Company entered into the Second Amendment to Sixth Amended and Restated Credit Agreement (Credit Agreement), which provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the U.S. ABL Facility) and (ii) Canadian revolving credit commitments of $125.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the Canadian ABL Facility and, collectively with the U.S. ABL Facility, the ABL Facility). In addition, the Credit Agreement provides (i) the U.S. borrowers under the agreement with a first-in last-out facility (the U.S. FILO Facility) in the aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and (ii) the Canadian borrowers under the agreement with a first-in last-out facility (the Canadian FILO Facility and collectively with the U.S. FILO Facility, the FILO Facility) in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility is available to ATDI, Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that the Company designates in the future in accordance with the terms of the Credit Agreement. The Canadian ABL Facility is available to TriCan and any other Canadian subsidiaries that the Company designates in the future in accordance with the terms of the Credit Agreement. Provided that no default or event of default then exists or would arise therefrom, the Company has the option to request that the ABL Facility be increased by an amount not to exceed $175.0 million (up to $25.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks providing commitments for such increase. The maturity date for the ABL Facility is November 16, 2017. The maturity date for the FILO Facility is January 31, 2017. During the nine months ended October 4, 2014, the Company paid $0.7 million in debt issuance costs related to the ABL Facility and FILO Facility.
As of October 4, 2014, the Company had $631.4 million outstanding under the U.S. ABL Facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $9.9 million, leaving $206.3 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at October 4, 2014 was $53.9 million, leaving $71.1 million available for additional borrowings. As of October 4, 2014, the outstanding balance of the U.S. FILO Facility was $80.0 million and the outstanding balance of the Canadian FILO Facility was $14.6 million.
Borrowings under the U.S. ABL Facility bear interest at a rate per annum equal to, at the Companys option, either (a) 200 basis points over an adjusted LIBOR rate or (b) 100 basis points over an alternative base rate (the higher of the prime rate, the federal funds rate plus 50 basis points and one month-adjusted LIBOR rate plus 100 basis points). The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to, at the Companys option, either (a) 100 basis points over an alternative Canadian base rate (the higher of the base rate as published by Bank of America, N.A., acting through its Canada branch, the federal funds rate plus 50 basis points and one month-LIBOR plus 100 basis points), (b) 100 basis points over a Canadian prime rate determined in accordance with the Canadian ABL Facility, (c) 200 basis points over a rate determined by reference to the average rate applicable to Canadian Dollar bankers acceptances having an identical or comparable term as the proposed loan amount or (d) 200 basis points over an adjusted LIBOR rate. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
Borrowings under the U.S. FILO Facility bear interest at a rate per annum equal to, at the Companys option, either (a) 350 basis points over an adjusted LIBOR rate or (b) 250 basis points over an alternative base rate (the higher of the prime rate, the federal funds rate plus 50 basis points and one month-adjusted LIBOR plus 100 basis points). The applicable margins under the U.S. FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
Borrowings under the Canadian FILO Facility bear interest at a rate per annum equal to, at the Companys option, either (a) 250 basis points over an alternative Canadian base rate (the higher of the base rate as published by Bank of America, N.A., acting through its Canada branch, the federal funds rate plus 50 basis points and one month-LIBOR plus 100 basis points), (b) 250 basis points over a Canadian prime rate determined in accordance with the Canadian ABL Facility, (c) 350 basis points over a rate determined by reference to the average rate applicable to Canadian Dollar bankers acceptances having an identical or comparable term as the proposed loan amount or (d) 350 basis points over an adjusted LIBOR rate. The applicable margins under the Canadian FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
18
The U.S. and Canadian borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
| 85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus |
| The lesser of (a) 70% of the lesser of cost or market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus |
| The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable. |
The U.S. FILO and the Canadian FILO borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
| 5% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus |
| 10% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable. |
All obligations under the U.S. ABL Facility and the U.S. FILO 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. The Canadian ABL Facility and the Canadian FILO Facility are unconditionally guaranteed by the U.S. loan parties, TriCan and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the U.S. FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility and the Canadian FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets of the U.S. loan parties and the Canadian loan parties and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.
The ABL Facility and FILO Facility contain customary covenants, including covenants that restrict 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. The terms of the ABL Facility and FILO Facility generally restrict distributions or the payment of dividends in respect of the Companys stock subject to certain exceptions requiring compliance with certain availability levels and fixed charge coverage ratios under the ABL Facility and other customary negotiated exceptions. As of October 4, 2014, the Company was in compliance with these covenants. If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate borrowing base and (b) $25.0 million, then the Company would be subject to an additional covenant requiring them to meet a fixed charge coverage ratio of 1.0 to 1.0. As of October 4, 2014, 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 Term Loan
In connection with the acquisition of Terrys Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for a senior secured term loan facility in the aggregate principal amount of $300.0 million (the Initial Term Loan). The Initial Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Initial Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Initial Term Loan were used to finance a portion of the Terrys Tire Purchase Price.
On June 16, 2014, ATDI amended the Initial Term Loan (the Incremental Amendment) to borrow an additional $340.0 million (the Incremental Term Loan) on the same terms as the Initial Term Loan. Pursuant to the Incremental Amendment, until August 15, 2014 ATDI also had the right to borrow up to an additional $80.0 million (the Delayed Draw Term Loan and collectively with the Initial Term Loan and the Incremental Term Loan, the Term Loan) on the same terms as the Initial Term Loan. The proceeds from the Incremental Term Loan, net of related debt issuance costs paid at closing, amounted to approximately $335.7 million, and were used, in part, to redeem all $250.0 million aggregate principal amounts of notes outstanding under ATDIs Senior Secured Notes and related fees and expenses as more fully described below, and the remaining proceeds will be used for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions. The Company received the proceeds from the Delayed Draw Term Loan at the end of the second quarter of 2014. The maturity date for the Term Loan is June 1, 2018. During the nine months ended October 4, 2014, the Company paid $14.0 million in debt issuance cost related to the Term Loan.
19
Borrowings under the Term Loan bear interest at a rate per annum equal to, at the Companys option, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 475 basis points or (b) 375 basis points over an alternative base rate determined by reference of the higher of the federal funds rate plus 50 basis points, the prime rate and 100 basis points over the one month Eurodollar rate. The Eurodollar rate is subject to an interest rate floor of 100 basis points. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the agreement.
All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDIs existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.
The Term Loan contains customary covenants, including covenants that restrict the Companys ability to incur additional debt, create 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, change the nature of the Companys business or change the Companys fiscal year. The terms of the Term Loan generally restrict distributions or the payment of dividends in respect to the Companys stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning January 1, 2014 and other customary negotiated exceptions. As of October 4, 2014, the Company was in compliance with these covenants.
The Company was required to make a principal payment under the Term Loan equal to $1.6 million on the last business day of June 2014. Commencing with the last business day of September 2014, the Company is required to make principal payments equal to $1.8 million on the last business day of each March, June, September and December. In addition, subject to certain exceptions, the Company is required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of its annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayments provision related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the agreement.
Senior Secured Notes
On May 16, 2014, ATDI delivered a Notice of Full Redemption, providing for the redemption of all $250.0 million aggregate principal amount of the 9.75% Senior Secured Notes (Senior Secured Notes) on June 16, 2014 (the Redemption Date) at a price equal to 104.875% of the principal amount of the Senior Secured Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the Redemption Date (the Redemption Price). On June 16, 2014, using proceeds from the Incremental Term Loan, the Senior Secured Notes were redeemed for a Redemption Price of $263.2 million.
Senior Subordinated Notes
On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the Initial Subordinated Notes). Interest on the Initial Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010.
In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of an additional $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the Additional Subordinated Notes and, collectively with the Initial Subordinated Notes, the Senior Subordinated Notes). The Additional Subordinated Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $221.1 million. The Additional Subordinated Notes will accrete based on an effective interest rate of 12% to an aggregate accreted value of $225.0 million, the full principal amount at maturity. During the nine months ended October 4, 2014, the Company paid $1.2 million in debt issuance cost related to the Additional Subordinated Notes.
The Additional Subordinated Notes have identical terms to the Initial Subordinated Notes except the Additional Subordinated Notes accrues interest from January 31, 2014. The Additional Subordinated Notes and the Initial Subordinated Notes are treated as a single class of securities for all purposes under the indenture. The Senior Subordinated Notes will mature on June 1, 2018.
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 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.
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.
20
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. The terms of the Senior Subordinated Notes generally restrict distributions or the payment of dividends in respect of the Companys stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning April 4, 2010 and other customary negotiated exceptions. As of October 4, 2014, the Company was in compliance with these covenants.
10. | Derivative Instruments: |
In the normal course of business, the Company is exposed to the risk associated with fluctuations in interest rates on its variable rate debt. These fluctuations can increase the cost of financing, investing and operating the business. The Company has used derivative financial instruments to help manage this risk and reduce the impacts of these exposures and not for trading or other speculative purposes. All derivatives are recognized on the 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 net income (loss) in the statement of comprehensive income (loss).
On September 4, 2013, the Company entered into a spot interest rate swap and two forward-starting interest rate swaps (collectively the 3Q 2013 Swaps) each of which are used to hedge a portion of the Companys exposure to changes in its variable interest rate debt. The spot interest rate swap in place covers a notional amount of $100.0 million at a fixed interest rate of 1.145% and expires in September 2016. The forward-starting interest rate swaps in place cover an aggregate notional amount of $100.0 million, of which $50.0 million becomes effective in September 2014 at a fixed interest rate of 1.464% and will expire in September 2016 and $50.0 million becomes effective in September 2015 at a fixed interest rate of 1.942% and will expire in September 2016. The counterparty to each swap is a major financial institution. The 3Q 2013 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the condensed consolidated 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 net income (loss) 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 was at a fixed rate of 0.74% and expired 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 net income (loss) in the condensed consolidated statement of comprehensive income (loss).
On February 24, 2011, the Company entered into two interest rate swap agreements (1Q 2011 Swaps) used to hedge a portion of the 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 covered an aggregate notional amount of $50.0 million at a fixed interest rate of 1.105% and expired in February 2013. The counterparty to each swap was a major financial institution. Neither swap met the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract were recognized in net income (loss) in the condensed consolidated statement of comprehensive income (loss).
21
The following tables present the fair values of the Companys derivative instruments included within the condensed consolidated balance sheets as of October 4, 2014 and December 28, 2013:
Liability Derivatives | ||||||||||
Balance Sheet | October 4, | December 28, | ||||||||
In thousands |
Location | 2014 | 2013 | |||||||
Derivatives not designated as hedges: |
||||||||||
3Q 2011 swaps - $100 million notional |
Accrued expenses | $ | 384 | $ | 792 | |||||
3Q 2012 swaps - $100 million notional |
Accrued expenses | 213 | 280 | |||||||
3Q 2013 swaps - $200 million notional |
Accrued expenses | 1,687 | 1,880 | |||||||
|
|
|
|
|||||||
Total |
$ | 2,284 | $ | 2,952 | ||||||
|
|
|
|
The pre-tax effect of the Companys derivative instruments on the condensed consolidated statement of comprehensive income (loss) was as follows:
Gain (Loss) Recognized | ||||||||||||||||||||
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||||||
Location of | Ended | Ended | Ended | Ended | ||||||||||||||||
Gain (Loss) | October 4, | September 28, | October 4, | September 28, | ||||||||||||||||
In thousands |
Recognized | 2014 | 2013 | 2014 | 2013 | |||||||||||||||
Derivatives not designated as hedges: |
||||||||||||||||||||
1Q 2011 swap - $50 million notional |
Interest Expense | $ | | $ | | $ | | $ | 149 | |||||||||||
3Q 2011 swaps - $100 million notional |
Interest Expense | 164 | 10 | 408 | 412 | |||||||||||||||
3Q 2012 swaps - $100 million notional |
Interest Expense | 96 | (316 | ) | 67 | 484 | ||||||||||||||
3Q 2013 swaps - $200 million notional |
Interest Expense | 254 | (1,787 | ) | 193 | (1,787 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 514 | $ | (2,093 | ) | $ | 668 | $ | (742 | ) | ||||||||||
|
|
|
|
|
|
|
|
11. | Fair Value of Financial Instruments: |
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
| Level 1 Inputs - Inputs based on quoted prices in active markets for identical assets or liabilities. |
| Level 2 Inputs - Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
| Level 3 Inputs - Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities, therefore requiring an entity to develop its own assumptions. |
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
22
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 October 4, 2014:
Fair Value Measurements | ||||||||||||||||
In thousands |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Benefit trust assets |
$ | 3,531 | $ | 3,531 | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,531 | $ | 3,531 | $ | | $ | | ||||||||
Liabilities: |
||||||||||||||||
Contingent consideration |
$ | 13,450 | $ | | $ | | $ | 13,450 | ||||||||
Derivative instruments |
2,284 | | 2,284 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 15,734 | $ | | $ | 2,284 | $ | 13,450 | ||||||||
|
|
|
|
|
|
|
|
ASC 820 Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines fair value of its financial assets and liabilities using the following methodologies:
| Benefit trust assets These assets include money market and mutual funds that are the underlying for deferred compensation plan assets, held in a rabbi trust. The fair value of the assets is based on observable market prices quoted in readily accessible and observable markets. |
| Contingent consideration - As part of the purchase price allocation of Terrys Tire and Hercules, the Company recorded $12.5 million and $3.5 million, respectively, in contingent consideration liabilities. The fair value was estimated using a discounted cash flow technique with significant inputs that are not observable, including discount rates and probability-weighted cash flows and represents managements best estimate of the amounts to be paid. The contingent consideration liabilities includes $12.3 million related to the retention of certain key members of management as employees of the Company and $3.7 million related to securing the rights to continue to distribute certain tire brands previously distributed by Terrys Tire and Hercules. The Company believes the probable outcome could range from approximately $8.0 million to $13.5 million. Changes in the fair value of the contingent consideration liabilities subsequent to the acquisition dates, primarily resulting from managements revision of the assessed probabilities of achieving the defined milestones, are recorded to transaction expenses in the condensed consolidated statements of comprehensive income (loss). During the quarter ended October 4, 2014, the Company revised the assessed probabilities related to the contingent consideration liabilities for securing the rights to continue to distribute certain tire brands previously distributed by Terrys Tire and Hercules based on current available information which reduced the fair value of the contingent consideration liabilities by $2.6 million with a corresponding decrease to transaction expenses. The recorded contingent consideration liabilities are included in Accrued Expenses in the condensed consolidated balance sheet as of October 4, 2014. |
| Derivative instruments - These instruments consist of interest rate swaps. The fair value is based upon quoted prices for similar instruments from a financial institution that is counterparty to the transaction. |
The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments. The methodologies used by the Company to determine the fair value of its financial assets and liabilities at October 4, 2014 are the same as those used at December 28, 2013. As a result, there have been no transfers between Level 1 and Level 2 categories.
The following table summarizes the changes in the fair value of the Companys contingent consideration liabilities measured using significant unobservable inputs (Level 3) for the nine months ended October 4, 2014:
Contingent | ||||
In thousands |
Consideration | |||
Balance at December 28, 2013 |
$ | | ||
Contingent consideration liabilities recorded for the Terrys and Hercules acquisitions |
16,000 | |||
Changes in the fair value of contingent consideration liabilities |
(2,550 | ) | ||
|
|
|||
Balance at October 4, 2014 |
$ | 13,450 | ||
|
|
23
12. | Stock-Based Compensation: |
The Company accounts for stock-based compensation awards in accordance with ASC 718 - Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Companys stock-based compensation plans include programs for stock options and restricted stock awards.
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, was amended on April 28, 2014 by the board of directors of the Companys indirect parent, ATD Corporation, to increase the maximum number of shares of common stock for which stock options may be granted under the 2010 Plan from 52.1 million to 54.4 million. In addition to the increase in the maximum number of shares, on April 28, 2014, the board of directors of ATD Corporation approved the issuance of stock options to certain members of management. The approved options are for the purchase of up to 4.5 million shares of common stock, have an exercise price of $1.50 per share and vest over a two-year vesting period. As of October 4, 2014, the Company has 0.3 million shares available for future incentive awards.
Changes in options outstanding under the 2010 Plan are as follows:
Weighted | ||||||||
Number | Average | |||||||
of Shares | Exercise Price | |||||||
Outstanding - December 28, 2013 |
49,516,503 | $ | 1.02 | |||||
Granted |
4,528,833 | 1.50 | ||||||
Exercised |
| | ||||||
Cancelled |
| | ||||||
|
|
|
|
|||||
Outstanding - October 4, 2014 |
54,045,336 | $ | 1.06 | |||||
|
|
|
|
|||||
Exercisable - October 4, 2014 |
34,080,079 | $ | 1.03 | |||||
|
|
|
|
As of October 4, 2014, the aggregate intrinsic value of options outstanding and options exercisable was $23.7 million and $16.0 million, respectively. The aggregate intrinsic value is based on the estimated fair value of the Companys common stock of $1.50 as of October 4, 2014. The total fair value of shares vested during the nine months ended October 4, 2014 was $6.3 million. No options were exercised during the nine months ended October 4, 2014.
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 two, three or five years. The weighted-average remaining contractual term for options outstanding and exercisable at October 4, 2014 was 6.5 years and 6.2 years, respectively. 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 two, 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 October 4, 2014, unrecognized compensation expense related to non-vested options granted under the 2010 Plan totaled $8.0 million and the weighted-average period over which this expense will be recognized is 1.2 years.
24
The weighted average fair value of stock options granted during the nine months ended October 4, 2014 and September 28, 2013 was $0.68 and $0.54 using the Black-Scholes option pricing model. The following weighted average assumptions were used:
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
October 4, | September 28, | |||||||
2014 | 2013 | |||||||
Risk-free interest rate |
1.73 | % | 1.38 | % | ||||
Dividend yield |
| | ||||||
Expected life |
5.8 years | 6.0 years | ||||||
Volatility |
46.49 | % | 45.39 | % |
As the Company does not have sufficient historical volatility data for the Companys 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
In October 2010, the Companys indirect parent company adopted the Non-Employee Director Restricted Stock Plan (the 2010 Restricted Stock Plan), pursuant to which the indirect parent company will grant restricted stock to non-employee directors of the Company. These awards entitle the holder to receive one share of common stock for each restricted stock award granted. The 2010 Restricted Stock 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 0.2 million remain available at October 4, 2014 for future incentive awards. On April 28, 2014, the board of directors of ATD Corporation approved the issuance of restricted stock to the non-employee directors of the Company. The approved restricted stock awards were for the issuance of up to 0.1 million shares of common stock, have a grant date fair value of $1.50 per share and vest over a two-year vesting period.
The following table summarizes restricted stock activity under the 2010 Restricted Stock Plan for the nine months ended October 4, 2014:
Weighted | ||||||||
Number | Average | |||||||
of Shares | Exercise Price | |||||||
Outstanding and unvested at December 28, 2013 |
87,719 | $ | 1.14 | |||||
Granted |
133,333 | 1.50 | ||||||
Vested |
(87,719 | ) | 1.14 | |||||
Cancelled |
| | ||||||
|
|
|
|
|||||
Outstanding and unvested at October 4, 2014 |
133,333 | $ | 1.50 | |||||
|
|
|
|
The fair value of each of the restricted stock 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 October 4, 2014, unrecognized compensation expense related to non-vested restricted stock awards granted under the 2010 Restricted Stock Plan totaled $0.1 million and the weighted-average period over which this expense will be recognized is 1.2 years.
Compensation Expense
Stock-based compensation expense is included in selling, general and administrative expenses within the condensed consolidated statement of comprehensive income (loss). The amount of compensation expense recognized during a period is based on the portion of the granted awards that are expected to vest. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards as of the grant date that actually vest. The following table summarizes the compensation expense recognized:
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
In thousands |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Stock Options |
$ | 753 | $ | 584 | $ | 2,715 | $ | 1,962 | ||||||||
Restricted Stock |
38 | 12 | 63 | 85 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 791 | $ | 596 | $ | 2,778 | $ | 2,047 | ||||||||
|
|
|
|
|
|
|
|
25
13. | Other, Net: |
Other, net is comprised of non-operating income and expenses that primarily relate to bank fees, gains and losses on foreign currency and financing service fees charged to customers. Non-operating income for the quarters ended October 4, 2014 and September 28, 2013 totaled $1.2 million and $1.1 million, respectively while the nine months ended October 4, 2014 and September 28, 2013 totaled $6.1 million and $2.3 million, respectively. Non-operating expenses for the quarters ended October 4, 2014 and September 28, 2013 totaled $4.9 million and $1.8 million, respectively while the nine months ended October 4, 2014 and September 28, 2013 totaled $7.9 million and $5.9 million, respectively.
14. | Income Taxes: |
The tax provision for the nine months ended October 4, 2014, was calculated on a national jurisdiction basis. The Company accounts for its provision for income taxes in accordance with ASC 740 Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the respective interim period. However, the authoritative guidance allows the use of the discrete method when, in certain situations, the actual interim period effective tax rate provides a better estimate of the income tax provision. For the nine months ended October 4, 2014, the discrete method was used to calculate the Companys U.S. and Canadian interim tax expense as management determined that it provided a more reliable estimate of year-to-date income tax expense.
Based on the reported loss before income taxes for the nine months ended October 4, 2014, the Company had an income tax benefit of $50.6 million, consisting of a $46.7 million U.S. tax benefit and a $3.9 million foreign tax benefit, and an effective tax benefit rate under the discrete method of 34.1%. For the nine months ended September 28, 2013, the Company had an income tax benefit of $8.9 million, consisting of a $7.2 million U.S. tax benefit and a $1.7 million foreign tax benefit, and an effective tax benefit rate of 29.8%. The effective rate of the year-to-date tax benefit is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower than the statutory U.S. federal rate decreasing the rate by 0.8%.
At October 4, 2014, the Company has a net deferred tax liability of $290.3 million, of which, $21.2 million was recorded as a current deferred tax asset and $311.5 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 TPG Merger, assuming an effective tax rate of 39.6%. It is the Companys intention to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries.
At October 4, 2014, the Company had unrecognized tax benefits of $0.6 million, of which $0.6 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 $0.1 million as of October 4, 2014. In addition, $0.5 million is 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 2010 2013 remain open to examination by the Internal Revenue Service. The tax years 2009 2013 remain open to examination by other major taxing jurisdictions to which the Company is subject (primarily Canada and other state and local jurisdictions).
26
In September 2013, the Internal Revenue Service released final Tangible Property Regulations (the Final Regulations). The Final Regulations provide guidance on applying Section 263(a) of the Code to amounts paid to acquire, produce or improve tangible property, as well as rules for materials and supplies (Code Section 162). These regulations contain certain changes from the temporary and proposed tangible property regulations that were issued on December 27, 2011. The Final Regulations are generally effective for taxable years beginning on or after January 1, 2014. During 2012, the Company filed a change in tax methodology related to a section of the Final Regulations, specifically the methodology for repairs and maintenance deductions. The Company does not expect any additional adjustments related to the Final Regulations.
15. | Stockholders Equity: |
On January 31, 2014, TPG and certain co-investors contributed $50.0 million through the purchase of 33.3 million shares of common stock in Holdings indirect parent company, ATD Corporation. The proceeds from this equity contribution were used to fund a portion of the Hercules Closing Purchase Price. Accordingly, the Company recorded the basis in these shares in additional paid-in capital.
16. | 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. While the ultimate outcome cannot be determined, management does not believe 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.
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 October 4, 2014, the Companys total obligations are $1.4 million extending over five years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractual assigned or subleased rentals of $1.2 million. A provision has been made for the net present value of the estimated shortfall.
17. | Discontinued Operations: |
As part of the acquisition of Terrys Tire, the Company acquired Terrys Tires commercial and retread businesses. As the Companys core business does not include commercial and retread operations, the Company decided that it would divest of these businesses. As it was managements intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria had been met, the related assets and liabilities of the commercial and retread businesses were classified as held for sale within the accompanying condensed consolidated balance sheet. On July 31, 2014, the Company completed a transaction to sell the commercial and retread businesses for cash proceeds of $3.9 million. The carrying value of the commercial and retread businesses was $4.0 million. During the quarter ended October 4, 2014, the Company finalized the post-closing working capital adjustments which resulted in a payment due to the buyer of approximately $0.2 million. Accordingly, the Company has recognized a pre-tax loss on the sale of discontinued operations of $0.3 million within the accompanying condensed consolidated statements of comprehensive income (loss) for the quarter and nine months ended October 4, 2014.
27
The Company has reflected the results of Terrys Tires commercial and retread businesses as discontinued operations in the accompanying condensed consolidated statement of comprehensive income (loss) for the quarter and nine months ended October 4, 2014. The components of income (loss) from discontinued operations, net of tax for the quarter and nine months ended October 4, 2014 were as follows:
Quarter | Nine Months | |||||||
Ended | Ended | |||||||
October 4, | October 4, | |||||||
In thousands |
2014 | 2014 | ||||||
Net sales |
$ | 2,084 | $ | 7,502 | ||||
|
|
|
|
|||||
Income (loss) from operations before income taxes |
$ | (91 | ) | $ | (165 | ) | ||
Loss on sale before income taxes |
(346 | ) | (346 | ) | ||||
Income tax provision (benefit) |
(154 | ) | (180 | ) | ||||
|
|
|
|
|||||
Income (loss) from discontinued operations, net of tax |
$ | (283 | ) | $ | (331 | ) | ||
|
|
|
|
18. | Subsequent Events: |
On November 3, 2014, TriCan completed the acquisition of three small Canadian wholesale distributors located in the province of British Columbia. The acquisition was funded through the Companys existing ABL credit facility. The Company does not believe the acquisitions of these three small wholesale distributors are material transactions, individually or when aggregated with the other non-material acquisitions discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805 Business Combination. As a result, the information is not presented.
On October 17, 2014, the Company entered into two forward-starting interest rate swaps (collectively the 4Q14 Swaps) each of which are used to hedge a portion of the Companys exposure to changes in its variable interest rate debt. The 4Q14 Swaps in place cover an aggregate notional amount of $600.0 million, of which $300.0 million becomes effective in January 2016 at a fixed interest rate of 2.29% and will expire in January 2021 and $300.0 million becomes effective in January 2017 at a fixed interest rate of 2.44% and will expire in January 2020. The counterparty to each swap is a major financial institution. The 4Q14 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract will be recognized in net income (loss) in the condensed consolidated statement of comprehensive income (loss) beginning in fourth quarter 2014.
19. | Subsidiary Guarantor Financial Information: |
ATDI is the issuer of $425.0 million in aggregate principal amount of Senior Subordinated Notes. The Senior Subordinated Notes are fully and unconditionally guaranteed, jointly and severally, by Holdings, Am-Pac, Tire Wholesalers, Inc. (Tire Wholesalers), Terrys Tire and by the U.S. operations of Hercules. ATDI is a direct 100% owned subsidiary of Holdings and Am-Pac, Tire Wholesales, Terrys Tire and Hercules are indirect 100% owned subsidiaries of Holdings. None of the Companys other subsidiaries guarantees the Senior Subordinated Notes. The guarantees can be released in certain customary circumstances.
In accordance with Rule 3-10 of Regulation S-X, the following presents condensed consolidating financial information for:
| Holdings, under the column heading Parent Company; |
| ATDI, under the column heading Subsidiary Issuer; |
| Am-Pac, Tire Wholesalers, Terrys Tire and Hercules U.S. subsidiary, on a combined basis, under the column heading Guarantor Subsidiaries; and |
| The Companys other subsidiaries, on a combined basis, under the column heading Non-Guarantor Subsidiaries; |
| Consolidating entries and eliminations, under the column heading Eliminations; and |
| Holdings, ATDI and their subsidiaries on a consolidated basis, under the column heading Consolidated. |
At the beginning of fiscal 2014, the Company merged a subsidiary that previously was a non-guarantor of the Senior Subordinated Notes, Tire Distributors, Inc., into ATDI. As a result of this merger, the consolidating balance sheet as of December 28, 2013, the consolidating statement of comprehensive income (loss) for the quarter and nine months ended September 28, 2013 and the consolidating cash flow for the nine months ended September 28, 2013 have been retroactively adjusted to reflect the post-merger legal entity structure. Terrys Tire and Hercules U.S. subsidiary became guarantors of the Senior Subordinated Notes in the first quarter of 2014.
28
The condensed consolidating financial information for the Company is as follows:
As of October 4, 2014 | ||||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
In thousands |
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 16,957 | $ | 1,278 | $ | 5,524 | $ | | $ | 23,759 | ||||||||||||
Accounts receivable, net |
| 374,338 | 24,977 | 85,753 | | 485,068 | ||||||||||||||||||
Inventories |
| 819,010 | 109,489 | 193,917 | | 1,122,416 | ||||||||||||||||||
Assets held for sale |
| | | | | | ||||||||||||||||||
Income tax receivable |
| 26,681 | 441 | 3,706 | | 30,828 | ||||||||||||||||||
Intercompany receivables |
95,051 | | 175,104 | 19,880 | (290,035 | ) | | |||||||||||||||||
Other current assets |
| 31,478 | 9,916 | 2,977 | | 44,371 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
95,051 | 1,268,464 | 321,205 | 311,757 | (290,035 | ) | 1,706,442 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Property and equipment, net |
| 163,016 | 31,048 | 16,352 | | 210,416 | ||||||||||||||||||
Goodwill and other intangible assets, net |
418,592 | 624,575 | 478,691 | 281,770 | | 1,803,628 | ||||||||||||||||||
Investment in subsidiaries |
117,708 | 981,991 | 51,743 | | (1,151,442 | ) | | |||||||||||||||||
Other assets |
| 50,627 | 3,283 | 716 | | 54,626 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 631,351 | $ | 3,088,673 | $ | 885,970 | $ | 610,595 | $ | (1,441,477 | ) | $ | 3,775,112 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Stockholders Equity | ||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 571,977 | $ | 94,505 | $ | 104,116 | $ | | $ | 770,598 | ||||||||||||
Accrued expenses |
| 60,901 | 14,885 | 23,950 | | 99,736 | ||||||||||||||||||
Liabilities held for sale |
| | | | | | ||||||||||||||||||
Current maturities of long-term debt |
| 7,782 | 2,057 | | | 9,839 | ||||||||||||||||||
Intercompany payables |
| 230,651 | | 59,384 | (290,035 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
| 871,311 | 111,447 | 187,450 | (290,035 | ) | 880,173 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Long-term debt |
| 1,854,113 | 4,139 | 68,412 | | 1,926,664 | ||||||||||||||||||
Deferred income taxes |
| 230,199 | 58,304 | 23,020 | | 311,523 | ||||||||||||||||||
Other liabilities |
| 15,342 | 5,027 | 5,032 | | 25,401 | ||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||||||
Intercompany investment |
| 280,622 | 748,873 | 385,785 | (1,415,280 | ) | | |||||||||||||||||
Common stock |
| | | | | | ||||||||||||||||||
Additional paid-in capital |
811,750 | 17,485 | | | (17,485 | ) | 811,750 | |||||||||||||||||
Accumulated earnings (deficit) |
(155,141 | ) | (155,141 | ) | (39,259 | ) | (33,482 | ) | 227,882 | (155,141 | ) | |||||||||||||
Accumulated other comprehensive income (loss) |
(25,258 | ) | (25,258 | ) | (2,561 | ) | (25,622 | ) | 53,441 | (25,258 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity |
631,351 | 117,708 | 707,053 | 326,681 | (1,151,442 | ) | 631,351 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity |
$ | 631,351 | $ | 3,088,673 | $ | 885,970 | $ | 610,595 | $ | (1,441,477 | ) | $ | 3,775,112 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
29
As of December 28, 2013 | ||||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
In thousands |
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 22,352 | $ | | $ | 13,408 | $ | | $ | 35,760 | ||||||||||||
Accounts receivable, net |
| 265,551 | | 39,696 | | 305,247 | ||||||||||||||||||
Inventories |
| 714,235 | | 58,498 | | 772,733 | ||||||||||||||||||
Assets held for sale |
| 910 | | | | 910 | ||||||||||||||||||
Income tax receivable |
| 369 | | | | 369 | ||||||||||||||||||
Intercompany receivables |
45,052 | | 60,188 | 12,086 | (117,326 | ) | | |||||||||||||||||
Other current assets |
| 24,495 | 4,877 | 6,031 | | 35,403 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current assets |
45,052 | 1,027,912 | 65,065 | 129,719 | (117,326 | ) | 1,150,422 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Property and equipment, net |
| 140,712 | 343 | 6,801 | | 147,856 | ||||||||||||||||||
Goodwill and other intangible assets, net |
418,592 | 667,996 | 1,450 | 129,589 | | 1,217,627 | ||||||||||||||||||
Investment in subsidiaries |
229,330 | 196,624 | | | (425,954 | ) | | |||||||||||||||||
Other assets |
| 42,468 | 308 | 645 | | 43,421 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 692,974 | $ | 2,075,712 | $ | 67,166 | $ | 266,754 | $ | (543,280 | ) | $ | 2,559,326 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Liabilities and Stockholders Equity | ||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 527,080 | $ | 2,255 | $ | 34,356 | $ | | $ | 563,691 | ||||||||||||
Accrued expenses |
| 43,375 | 48 | 4,300 | | 47,723 | ||||||||||||||||||
Current maturities of long-term debt |
| 558 | 6 | | | 564 | ||||||||||||||||||
Intercompany payables |
| 85,172 | 1,110 | 31,044 | (117,326 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total current liabilities |
| 656,185 | 3,419 | 69,700 | (117,326 | ) | 611,978 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Long-term debt |
| 930,012 | 3 | 36,421 | | 966,436 | ||||||||||||||||||
Deferred income taxes |
| 246,897 | 587 | 23,092 | | 270,576 | ||||||||||||||||||
Other liabilities |
| 13,288 | 18 | 4,056 | | 17,362 | ||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||||||
Intercompany investment |
| 280,622 | 64,935 | 160,253 | (505,810 | ) | | |||||||||||||||||
Common stock |
| | | | | | ||||||||||||||||||
Additional paid-in capital |
758,972 | 14,706 | | | (14,706 | ) | 758,972 | |||||||||||||||||
Accumulated earnings (deficit) |
(56,898 | ) | (56,898 | ) | (1,796 | ) | (17,294 | ) | 75,988 | (56,898 | ) | |||||||||||||
Accumulated other comprehensive income (loss) |
(9,100 | ) | (9,100 | ) | | (9,474 | ) | 18,574 | (9,100 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity |
692,974 | 229,330 | 63,139 | 133,485 | (425,954 | ) | 692,974 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and stockholders equity |
$ | 692,974 | $ | 2,075,712 | $ | 67,166 | $ | 266,754 | $ | (543,280 | ) | $ | 2,559,326 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
30
Condensed consolidating statements of comprehensive income (loss) for the quarters ended October 4, 2014 and September 28, 2013 are as follows:
For the Quarter Ended October 4, 2014 | ||||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
In thousands |
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 1,093,114 | $ | 56,875 | $ | 174,440 | $ | | $ | 1,324,429 | ||||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 914,749 | 39,406 | 146,758 | | 1,100,913 | ||||||||||||||||||
Selling, general and administrative expenses |
| 138,826 | 20,590 | 28,249 | | 187,665 | ||||||||||||||||||
Management fees |
| 1,810 | | | | 1,810 | ||||||||||||||||||
Transaction expenses |
| 9,704 | 6,315 | 4,115 | | 20,134 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 28,025 | (9,436 | ) | (4,682 | ) | | 13,907 | ||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (30,754 | ) | (397 | ) | (997 | ) | | (32,148 | ) | ||||||||||||||
Loss on extinguishment of debt |
| (82 | ) | | | | (82 | ) | ||||||||||||||||
Other, net |
| 75 | (232 | ) | (3,569 | ) | (3,726 | ) | ||||||||||||||||
Equity earnings of subsidiaries |
(14,683 | ) | (13,411 | ) | (2,552 | ) | | 30,646 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations before income taxes |
(14,683 | ) | (16,147 | ) | (12,617 | ) | (9,248 | ) | 30,646 | (22,049 | ) | |||||||||||||
Income tax provision (benefit) |
| (1,464 | ) | (3,732 | ) | (2,453 | ) | | (7,649 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations |
(14,683 | ) | (14,683 | ) | (8,885 | ) | (6,795 | ) | 30,646 | (14,400 | ) | |||||||||||||
Income (loss) from discontinued operations |
| | (283 | ) | | | (283 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (14,683 | ) | $ | (14,683 | ) | $ | (9,168 | ) | $ | (6,795 | ) | $ | 30,646 | $ | (14,683 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | (31,419 | ) | $ | (31,419 | ) | $ | (11,800 | ) | $ | (23,486 | ) | $ | 66,705 | $ | (31,419 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended September 28, 2013 | ||||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
In thousands |
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 901,963 | $ | | $ | 85,931 | $ | | $ | 987,894 | ||||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 748,988 | | 68,556 | | 817,544 | ||||||||||||||||||
Selling, general and administrative expenses |
| 127,603 | 76 | 17,087 | | 144,766 | ||||||||||||||||||
Management fees |
| 1,587 | | | | 1,587 | ||||||||||||||||||
Transaction expenses |
| 980 | | 35 | | 1,015 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 22,805 | (76 | ) | 253 | | 22,982 | |||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (20,092 | ) | | (533 | ) | | (20,625 | ) | |||||||||||||||
Other, net |
| (848 | ) | | 200 | | (648 | ) | ||||||||||||||||
Equity earnings of subsidiaries |
1,224 | (88 | ) | | | (1,136 | ) | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations before income taxes |
1,224 | 1,777 | (76 | ) | (80 | ) | (1,136 | ) | 1,709 | |||||||||||||||
Income tax provision (benefit) |
| 553 | (21 | ) | (47 | ) | | 485 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 1,224 | $ | 1,224 | $ | (55 | ) | $ | (33 | ) | $ | (1,136 | ) | $ | 1,224 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | 4,292 | $ | 4,292 | $ | (55 | ) | $ | 2,967 | $ | (7,204 | ) | $ | 4,292 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
31
Condensed consolidating statements of comprehensive income (loss) for the nine months ended October 4, 2014 and September 28, 2013 are as follows:
For the Nine Months Ended October 4, 2014 | ||||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
In thousands |
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 3,001,613 | $ | 285,178 | $ | 380,689 | $ | | $ | 3,667,480 | ||||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 2,508,748 | 259,004 | 313,851 | | 3,081,603 | ||||||||||||||||||
Selling, general and administrative expenses |
| 423,643 | 68,072 | 77,263 | | 568,978 | ||||||||||||||||||
Management fees |
| 17,385 | | | | 17,385 | ||||||||||||||||||
Transaction expenses |
| 17,804 | 14,081 | 8,425 | | 40,310 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 34,033 | (55,979 | ) | (18,850 | ) | | (40,796 | ) | |||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (85,080 | ) | (1,264 | ) | (2,426 | ) | | (88,770 | ) | ||||||||||||||
Loss on extinguishment of debt |
(17,195 | ) | | | | (17,195 | ) | |||||||||||||||||
Other, net |
| (900 | ) | 182 | (1,058 | ) | | (1,776 | ) | |||||||||||||||
Equity earnings of subsidiaries |
(98,243 | ) | (53,456 | ) | (195 | ) | | 151,894 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations before income taxes |
(98,243 | ) | (122,598 | ) | (57,256 | ) | (22,334 | ) | 151,894 | (148,537 | ) | |||||||||||||
Income tax provision (benefit) |
| (24,355 | ) | (19,934 | ) | (6,336 | ) | | (50,625 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations |
(98,243 | ) | (98,243 | ) | (37,322 | ) | (15,998 | ) | 151,894 | (97,912 | ) | |||||||||||||
Income (loss) from discontinued operations |
| | (141 | ) | (190 | ) | | (331 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (98,243 | ) | $ | (98,243 | ) | $ | (37,463 | ) | $ | (16,188 | ) | $ | 151,894 | $ | (98,243 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | (114,401 | ) | $ | (120,163 | ) | $ | (40,024 | ) | $ | (29,796 | ) | $ | 189,983 | $ | (114,401 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 28, 2013 | ||||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
In thousands |
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Net sales |
$ | | $ | 2,598,714 | $ | 3 | $ | 184,230 | $ | | $ | 2,782,947 | ||||||||||||
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below |
| 2,173,921 | | 154,271 | | 2,328,192 | ||||||||||||||||||
Selling, general and administrative expenses |
| 377,755 | 678 | 39,158 | | 417,591 | ||||||||||||||||||
Management fees |
| 3,833 | | | | 3,833 | ||||||||||||||||||
Transaction expenses |
| 3,821 | | 483 | | 4,304 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating income (loss) |
| 39,384 | (675 | ) | (9,682 | ) | | 29,027 | ||||||||||||||||
Other (expense) income: |
||||||||||||||||||||||||
Interest expense |
| (54,077 | ) | (33 | ) | (1,142 | ) | | (55,252 | ) | ||||||||||||||
Other, net |
| (2,872 | ) | 2 | (686 | ) | | (3,556 | ) | |||||||||||||||
Equity earnings of subsidiaries |
(20,904 | ) | (8,786 | ) | | | 29,690 | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from operations before income taxes |
(20,904 | ) | (26,351 | ) | (706 | ) | (11,510 | ) | 29,690 | (29,781 | ) | |||||||||||||
Income tax provision (benefit) |
| (5,447 | ) | (215 | ) | (3,215 | ) | | (8,877 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | (20,904 | ) | $ | (20,904 | ) | $ | (491 | ) | $ | (8,295 | ) | $ | 29,690 | $ | (20,904 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) |
$ | (24,959 | ) | $ | (24,959 | ) | $ | (491 | ) | $ | (12,537 | ) | $ | 37,987 | $ | (24,959 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
32
Condensed consolidating statements of cash flows for the nine months ended October 4, 2014 and September 28, 2013 are as follows:
In thousands |
For the Nine Months Ended October 4, 2014 | |||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by (used in) continuing operations |
$ | (50,000 | ) | $ | (192,331 | ) | $ | (11,870 | ) | $ | 140,402 | $ | | $ | (113,799 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) discontinued operations |
| | 1,422 | 140 | | 1,562 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) operations |
(50,000 | ) | (192,331 | ) | (10,448 | ) | 140,542 | | (112,237 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| (683,938 | ) | 13,647 | (173,002 | ) | | (843,293 | ) | |||||||||||||||
Purchase of property and equipment |
| (42,682 | ) | (3,218 | ) | (6,010 | ) | | (51,910 | ) | ||||||||||||||
Purchase of assets held for sale |
| (28 | ) | | | | (28 | ) | ||||||||||||||||
Proceeds from disposal of discontinued operations |
| | 3,104 | 750 | 3,854 | |||||||||||||||||||
Proceeds from sale of property and equipment |
| 94 | 206 | 83 | | 383 | ||||||||||||||||||
Proceeds from disposal of assets held for sale |
| 784 | | | | 784 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) continuing investing activities |
| (725,770 | ) | 13,739 | (178,179 | ) | | (890,210 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) discontinued investing activities |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) investing activities |
| (725,770 | ) | 13,739 | (178,179 | ) | | (890,210 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings from revolving credit facility |
| 3,335,053 | | 77,912 | | 3,412,965 | ||||||||||||||||||
Repayments of revolving credit facility |
| (3,092,582 | ) | | (45,093 | ) | | (3,137,675 | ) | |||||||||||||||
Outstanding checks |
| (3,710 | ) | | | | (3,710 | ) | ||||||||||||||||
Payments of other long-term debt |
| (3,807 | ) | (2,013 | ) | | | (5,820 | ) | |||||||||||||||
Payments of deferred financing costs |
| (15,661 | ) | | (290 | ) | | (15,951 | ) | |||||||||||||||
Payment for Senior Secured Notes redemption |
| (246,900 | ) | | | | (246,900 | ) | ||||||||||||||||
Proceeds from issuance of long-term debt |
| 940,313 | | | | 940,313 | ||||||||||||||||||
Equity contribution |
50,000 | | | | | 50,000 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) continuing financing activities |
50,000 | 912,706 | (2,013 | ) | 32,529 | | 993,222 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) discontinued financing activities |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) financing activities |
50,000 | 912,706 | (2,013 | ) | 32,529 | | 993,222 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Effect of exchange rate changes on cash |
| | | (2,776 | ) | (2,776 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net increase (decrease) in cash and cash equivalents |
| (5,395 | ) | 1,278 | (7,884 | ) | | (12,001 | ) | |||||||||||||||
Cash and cash equivalents - beginning of period |
| 22,352 | | 13,408 | | 35,760 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash and cash equivalents - end of period |
$ | | $ | 16,957 | $ | 1,278 | $ | 5,524 | $ | | $ | 23,759 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
33
In thousands |
For the Nine Months Ended September 28, 2013 | |||||||||||||||||||||||
Parent | Subsidiary | Guarantor | Non-Guarantor | |||||||||||||||||||||
Company | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net cash provided by (used in) operations |
$ | | $ | 13,642 | $ | 5 | $ | 25,500 | $ | | $ | 39,147 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Acquisitions, net of cash acquired |
| (1,347 | ) | | (69,219 | ) | | (70,566 | ) | |||||||||||||||
Purchase of property and equipment |
| (31,577 | ) | | (3,347 | ) | | (34,924 | ) | |||||||||||||||
Purchase of assets held for sale |
| (1,924 | ) | | | | (1,924 | ) | ||||||||||||||||
Proceeds from sale of property and equipment |
| 70 | | 18 | | 88 | ||||||||||||||||||
Proceeds from disposal of assets held for sale |
| 5,389 | | | | 5,389 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) investing activities |
| (29,389 | ) | | (72,548 | ) | | (101,937 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings from revolving credit facility |
| 2,146,992 | | 92,566 | | 2,239,558 | ||||||||||||||||||
Repayments of revolving credit facility |
| (2,118,942 | ) | | (49,895 | ) | | (2,168,837 | ) | |||||||||||||||
Outstanding checks |
| (3,582 | ) | | | | (3,582 | ) | ||||||||||||||||
Payments of other long-term debt |
| (287 | ) | (5 | ) | | | (292 | ) | |||||||||||||||
Payments of deferred financing costs |
| (597 | ) | | (509 | ) | | (1,106 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net cash provided by (used in) financing activities |
| 23,584 | (5 | ) | 42,162 | | 65,741 | |||||||||||||||||
|
|
|
|
|
|
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Effect of exchange rate changes on cash |
| | | (1,581 | ) | (1,581 | ) | |||||||||||||||||
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Net increase (decrease) in cash and cash equivalents |
| 7,837 | | (6,467 | ) | | 1,370 | |||||||||||||||||
Cash and cash equivalents - beginning of period |
| 12,346 | | 13,605 | | 25,951 | ||||||||||||||||||
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Cash and cash equivalents - end of period |
$ | | $ | 20,183 | $ | | $ | 7,138 | $ | | $ | 27,321 | ||||||||||||
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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, forecasts and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See Cautionary Statements on Forward-Looking Information.
Company Overview
We are the largest distributor of replacement tires in North America based on dollar amount of wholesale sales and number of warehouses. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 SKUs to approximately 80,000 customers (approximately 73,000 in the Unites States. and 7,000 in Canada). We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 21% in Canada.
We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 11.3%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.
We believe we distribute one of the broadest product offering in our industry, supplying our customers with nine of the top ten leading passenger and light truck tire brands. We carry the flagship brands from each of the four largest tire manufacturers Bridgestone, Continental, Goodyear and Michelin as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of The Hercules Tire & Rubber Company we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. In fiscal 2013, tire sales accounted for 97.4% of our net sales, with sales of passenger and light truck tires accounting for 82.3% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 2.6% of our net sales. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.
Industry Overview
The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brand tires during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.
From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008, for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The Rubber Manufacturers Association (RMA) projects that replacement tire shipments will increase by approximately 2% in the United States in 2014 as compared to 2013, as demand drivers continue to strengthen.
Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets will continue to be driven by favorable underlying dynamics, including:
| increases in the number and average age of passenger cars and light trucks; |
35
| increases in the number of miles driven; |
| increases in the number of licensed drivers as the U.S. and Canadian population continues to grow; |
| increases in the number of replacement tire SKUs; |
| growth of the high performance tire segment; and |
| shortening tire replacement cycles due to changes in product mix that increasingly favor high performance tires, which have shorter average lives. |
Recent Developments
Acquisitions and Expansion
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 23 locations throughout the contiguous United States. We expect to continue to evaluate additional geographic markets during the remainder of 2014 and beyond.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the Trail Tire Purchase Agreement) with Trail Tire Distributors Ltd. (Trail Tire) and the shareholders and principals of Trail Tire, pursuant to which TriCan agreed to acquire the wholesale distribution business of Trail Tire. Trail Tire is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada. We believe the acquisition of Trail Tire will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The Trail Tire acquisition closed for aggregate cash consideration of approximately $20.8 million (the Trail Tire Purchase Price). The aggregate cash consideration was funded through borrowings under our existing ABL credit facility. The Trail Tire Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, we finalized the post-closing working capital adjustments in accordance with the Trail Tire Purchase Agreement. This adjustment increased the Trail Tire Purchase Price by $1.5 million to $22.3 million with a corresponding increase to goodwill of $1.5 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the Extreme Purchase Agreement) with Extreme Wheel Distributors Ltd. (Extreme) and the shareholder and principal of Extreme, pursuant to which TriCan agreed to acquire the wholesale distribution business of Extreme. Extreme is a wholesale distributor of wheels and related accessories in Canada. We believe the acquisition of Extreme will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The Extreme acquisition closed for aggregate cash consideration of approximately $6.5 million (the Extreme Purchase Price). The aggregate cash consideration was funded through borrowings under our existing ABL credit facility. The Extreme Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, we finalized the post-closing working capital adjustments in accordance with the Extreme Purchase Agreement. This adjustment increased the Extreme Purchase Price by $0.7 million to $7.2 million with a corresponding increase to goodwill of $0.7 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the Kirks Tire Purchase Agreement) with Kirks Tire Ltd. (Kirks Tire), and the shareholders and principals of Kirks Tire, pursuant to which TriCan agreed to acquire the wholesale distribution business of Kirks Tire. Kirks Tire is engaged in (i) the wholesale distribution of tires, tire parts, tire accessories and related equipment and (ii) the retail sale and installation of tires, tire parts, and tire accessories and the manufacturing and sale of retread tires. Kirks Tires retail operations were not acquired by TriCan and will continue to operate under its current ownership. We believe the acquisition of Kirks Tire will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
The Kirks Tire acquisition closed for aggregate cash consideration of approximately $73.0 million (the Kirks Tire Purchase Price). The Kirks Tire Purchase Price was funded through borrowings under our existing ABL credit facility. The Kirks Tire Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, we finalized the post-closing working capital adjustments in accordance with the Kirks Tire Purchase Agreement. This adjustment increased the Kirks Tire Purchase Price by $4.7 million to $77.7 million with a corresponding increase to goodwill of $4.7 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the RTD Edmonton Purchase Agreement) with Regional Tire Distributors (Edmonton) Inc. (RTD Edmonton) and the shareholders and principals of RTD Edmonton, pursuant to which TriCan agreed to acquire the wholesale distribution business of RTD Edmonton. RTD Edmonton is a wholesale distributor of tires, tire parts, tire accessories and related equipment. We believe the acquisition of RTD Edmonton will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada.
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The RTD Edmonton acquisition closed for aggregate cash consideration of approximately $31.9 million (the RTD Edmonton Purchase Price). The RTD Edmonton Purchase Price was funded through borrowings under our existing ABL credit facility. The RTD Edmonton Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, we finalized the post-closing working capital adjustments in accordance with the RTD Edmonton Purchase Agreement. This adjustment increased the RTD Edmonton Purchase Price by $0.5 million to $32.4 million with a corresponding increase to goodwill of $0.5 million.
On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the RTD Calgary Purchase Agreement) with Regional Tire Distributors (Calgary) Inc. (RTD Calgary) and the shareholders and principals of RTD Calgary, pursuant to which TriCan agreed to acquire the wholesale distribution business of RTD Calgary. RTD Calgary is a wholesale distributor of tires, tire parts, tire accessories and related equipment. We believe the acquisition of RTD Calgary will further strengthen TriCans presence in the Alberta Province of Canada and complements TriCans current operations in Canada. .
The RTD Calgary acquisition closed for aggregate cash consideration of approximately $20.7 million (the RTD Calgary Purchase Price). The RTD Calgary Purchase Price was funded by borrowings under our existing ABL credit facility. The RTD Calgary Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. During the quarter ended October 4, 2014, we finalized the post-closing working capital adjustments in accordance with the RTD Calgary Purchase Agreement. This adjustment increased the RTD Calgary Purchase Price by $3.6 million to $24.3 million with a corresponding increase to goodwill of $3.6 million.
On March 28, 2014, we completed the acquisition of Terrys Tire Town Holdings, Inc., an Ohio corporation (Terrys Tire and such acquisition, the Terrys Tire Acquisition). Terrys Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the internet. Terrys Tire operated 10 distribution centers spanning from Virginia to Maine and in Ohio. We believe the acquisition of Terrys Tire will enhance our market position in these areas and aligns with our distribution centers, especially our new distribution centers that we opened over the past two years in the Northeast and Ohio.
The Terrys Tire acquisition closed for an aggregate purchase price of approximately $372.7 million (the Terrys Tire Purchase Price), consisting of cash consideration of approximately $358.0 million, contingent consideration of $12.5 million and non-cash consideration for debt assumed of $2.2 million. The cash consideration paid for the Terrys Tire Acquisition included estimated working capital adjustments and a portion of consideration contingent on certain events achieved prior to closing. During second quarter 2014, we finalized the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment decreased the Terrys Tire Purchase Price by $5.4 million to $372.7 million. The Terrys Tire Purchase Price was funded by a combination of borrowings under a new senior secured term loan facility, as more fully described under Liquidity and Capital Resources, and borrowings of approximately $72.5 million under Holdings existing U.S. ABL Facility. The Terrys Tire Purchase Price is subject to certain post-closing adjustments, including but not limited to, working capital adjustments.
As part of the acquisition of Terrys Tire, we acquired Terrys Tire commercial and retread businesses. As our core business does not include commercial and retread operations, we decided to divest these businesses. On July 31, 2014, we sold the commercial and retread businesses acquired as part of the Terrys Tire acquisition for $3.9 million.
On January 31, 2014, we completed the acquisition of Hercules Tire Holdings LLC (Hercules Holdings) pursuant to an Agreement and Plan of Merger, dated January 24, 2014 (the Merger Agreement). Hercules Holdings owns all of the capital stock of The Hercules Tire & Rubber Company (Hercules). Hercules is engaged in the business of purchasing, marketing, distributing, and selling replacement tires for passenger cars, trucks, and certain off road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States., six distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules® brand, which is one of the most sought-after proprietary tire brands in the industry. We believe the acquisition of Hercules will strengthen our presence in major markets such as California, Texas and Florida in addition to increasing our presence in Canada. Additionally, we believe Hercules strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow us to capitalize on the growing import market, as well as, provide the ability to expand the international sales of the Hercules® brand, which in 2013 had a 2% market share of the passenger and light truck market in North America and a 3% market share of highway truck tires in North America.
The Hercules acquisition closed for an aggregate purchase price of approximately $318.9 million (the Hercules Closing Purchase Price), consisting of net cash consideration of $310.0 million, contingent consideration of $3.5 million and non-cash consideration for debt assumed of $5.4 million. The Hercules Closing Purchase Price also includes an estimate for initial working capital adjustments. During second quarter 2014, we finalized the post-closing working capital adjustments in accordance with the
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Merger Agreement. This adjustment decreased the Hercules Closing Purchase Price by $0.4 million to $318.9 million. The Merger Agreement provides for the payment of up to $6.5 million in additional consideration contingent upon the occurrence of certain post-closing events (to the extent payable, the Hercules Additional Purchase Price and, collectively with the Hercules Closing Purchase Price, the Hercules Purchase Price). The cash consideration paid for the Hercules acquisition was funded by a combination of the issuance of additional Senior Subordinated Notes, as more fully described under Liquidity and Capital Resources, an equity contribution of $50.0 million from Holdings indirect parent and borrowings under Holdings credit agreement, as more fully described under Liquidity and Capital Resources The Hercules Closing Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.
On January 17, 2014, TriCan entered into an Asset Purchase Agreement with Kipling Tire Co. LTD (Kipling) pursuant to which TriCan agreed to acquire the wholesale distribution business of Kipling. Kipling has operated as a retail-wholesale business since 1982. Kiplings wholesale business distributes tires from its Etobicoke facilities to approximately 400 retail customers in Southern Ontario. Kiplings retail operations were not acquired by TriCan and will continue to operate under its current ownership. We believe this acquisition further strengthened TriCans presence in the Southern Ontario region of Canada.
Credit Agreement Amendment
In addition, on June 16, 2014, we amended our credit agreement relating to our senior secured term loan facility to borrow an additional $340 million on the same terms as our existing Term Loan (as defined below). Pursuant to the amendment, until August 15, 2014, we also had the right to borrow up to an additional $80 million on the same terms as our existing Term Loan. We borrowed this additional amount at the end of second quarter 2014. The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under our Senior Secured Notes (as defined below) and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.
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Results of Operations
Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended October 4, 2014 and September 28, 2013 each contain operating results for 13 weeks. The nine months ended October 4, 2014 contains operating results for 40 weeks while the nine months ended September 28, 2013 contains operating results for 39 weeks. It should be noted that our quarter-end reporting dates are different from our recently acquired Hercules subsidiary. Hercules has calendar quarter-end reporting dates with their third quarter of 2014 ending on September 30. There were no significant changes to the business subsequent to Hercules fiscal period end that would have a material impact on the condensed consolidated balance sheet or condensed consolidated statement of comprehensive income (loss) as of and for the quarter ended October 4, 2014. Terrys Tire, Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary each converted to our quarter-end reporting date during the quarter ended October 4, 2014.
Quarter Ended October 4, 2014 Compared to the Quarter Ended September 28, 2013
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:
Period Over | Period Over | Percentage of Net Sales | ||||||||||||||||||||||
Quarter | Quarter | Period | Period | For the Respective | ||||||||||||||||||||
Ended | Ended | Change | % Change | Period Ended | ||||||||||||||||||||
October 4, | September 28, | Favorable | Favorable | October 4, | September 28, | |||||||||||||||||||
In thousands |
2014 | 2013 | (unfavorable) | (unfavorable) | 2014 | 2013 | ||||||||||||||||||
Net sales |
$ | 1,324,429 | $ | 987,894 | $ | 336,535 | 34.1 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold |
1,100,913 | 817,544 | (283,369 | ) | (34.7 | %) | 83.1 | % | 82.8 | % | ||||||||||||||
Selling, general and administrative expenses |
187,665 | 144,766 | (42,899 | ) | (29.6 | %) | 14.2 | % | 14.7 | % | ||||||||||||||
Management fees |
1,810 | 1,587 | (223 | ) | (14.1 | %) | 0.1 | % | 0.2 | % | ||||||||||||||
Transaction expenses |
20,134 | 1,015 | (19,119 | ) | (1,883.6 | %) | 1.5 | % | 0.1 | % | ||||||||||||||
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Operating income (loss) |
13,907 | 22,982 | (9,075 | ) | (39.5 | %) | 1.1 | % | 2.3 | % | ||||||||||||||
Other income (expense): |
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Interest expense |
(32,148 | ) | (20,625 | ) | (11,523 | ) | (55.9 | %) | (2.4 | %) | (2.1 | %) | ||||||||||||
Loss on extinguishment of debt |
(82 | ) | | (82 | ) | (100.0 | %) | (0.0 | %) | 0.0 | % | |||||||||||||
Other, net |
(3,726 | ) | (648 | ) | (3,078 | ) | (475.0 | %) | (0.3 | %) | (0.1 | %) | ||||||||||||
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Income (loss) from continuing operations before income taxes |
(22,049 | ) | 1,709 | (23,758 | ) | (1,390.2 | %) | (1.7 | %) | 0.2 | % | |||||||||||||
Provision (benefit) for income taxes |
(7,649 | ) | 485 | (8,134 | ) | (1,677.1 | %) | (0.6 | %) | 0.0 | % | |||||||||||||
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Income (loss) from continuing operations |
(14,400 | ) | 1,224 | (15,624 | ) | (1,276.5 | %) | (1.1 | %) | 0.1 | % | |||||||||||||
Income (loss) from discontinued operations , net of tax |
(283 | ) | | (283 | ) | (100.0 | %) | (0.0 | %) | 0.0 | % | |||||||||||||
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Net income (loss) |
$ | (14,683 | ) | $ | 1,224 | $ | (15,907 | ) | (1,299.6 | %) | (1.1 | %) | 0.1 | % | ||||||||||
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Net Sales
Net sales for the quarter ended October 4, 2014 were $1,324.4 million, a $336.5 million, or 34.1%, increase, as compared with the quarter ended September 28, 2013. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire in 2014 and our 2013 acquisitions of Wholesale Tire Distributors (WTD) and Tire Distributors, Inc. (TDI). These growth initiatives added $265.6 million of incremental sales in the third quarter of 2014. In addition, we experienced an increase in comparable tire unit sales of $90.2 million primarily driven by an overall stronger sales unit environment. However, these increases were partially offset by lower net tire pricing of $20.3 million, primarily driven by competitive pricing positions in certain U.S. markets, as well as a shift in product mix in our lower priced point offerings.
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Cost of Goods Sold
Cost of goods sold for the quarter ended October 4, 2014 were $1,100.9 million, a $283.4 million, or 34.7%, increase, as compared with the quarter ended September 28, 2013. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers as well as the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire in 2014 and our 2013 acquisitions of WTD and TDI. These growth initiatives added $219.9 million of incremental costs in the third quarter of 2014. Cost of goods sold for the quarter ended October 4, 2014 also includes $2.9 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary as compared to $0.1 million during the quarter ended September 28, 2013. In addition, an overall stronger sales unit environment increased cost of goods sold by $74.8 million. These increases were partially offset by lower net tire pricing of $16.9 million.
Cost of goods sold as a percentage of net sales was 83.1% for the quarter ended October 4, 2014, an increase compared with 82.8% for the quarter ended September 28, 2013. The increase in cost of goods sold as a percentage of net sales was primarily driven by the $2.9 million non-cash amortization of the inventory step-up recorded in connection with the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary. This increase had a 0.2% impact on cost of goods sold as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended October 4, 2014 were $187.7 million, a $42.9 million, or 29.6%, increase as compared with the quarter ended September 28, 2013. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire in 2014 and our 2013 acquisitions of WTD and TDI. Combined, these factors added $41.9 million of incremental costs to the third quarter of 2014. In addition, we also experienced a $2.3 million increase in occupancy & vehicle expense due to higher costs as we expanded several of our distribution centers to better service our existing customers as well as a higher overall consumption of fuel and other vehicle related expenses.
Selling, general and administrative expenses as a percentage of net sales were 14.2% for the quarter ended October 4, 2014, a decrease compared with 14.7% for the quarter ended September 28, 2013. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily driven by our consolidation of the acquired Hercules and Terrys Tire distribution centers predominately resulting in lower compensation and occupancy costs. This decrease was partially offset by higher depreciation and amortization expense between periods which resulted in a 0.4% increase in selling, general and administrative expenses as a percentage of net sales.
Management Fees
Management fees for the quarter ended October 4, 2014 of $1.8 million represents a monitoring fee paid to our sponsor, TPG, for certain management, consulting and financial services as well as fees paid to our outside board of directors.
Transaction Expenses
Transaction expenses for the quarter ended October 4, 2014 were $20.1 million and were primarily related to costs associated with the acquisition and integration of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire, as well as with expenses related to potential future acquisitions and other corporate initiatives. During the quarter ended September 28, 2013, transaction expenses of $1.0 million primarily related to costs associated with our acquisitions of TDI and RTD, as well as with expenses related to potential future acquisitions and other corporate initiatives.
Interest Expense
Interest expense for the quarter ended October 4, 2014 was $32.1 million, a $11.5 million, or 55.9%, increase compared with the quarter ended September 28, 2013. This increase was due to higher debt levels associated with our ABL Facility, FILO Facility, Additional Subordinated Notes and Term Loan, all as defined under Liquidity and Capital Resources, which were driven by our 2014 acquisitions and the redemption of our Senior Secured Notes. This increase was partially offset by lower interest expense related to the redemption of our Senior Secured Notes in June 2014 as well as changes in the fair value of our interest rate swaps, which resulted in a $2.6 million decrease in interest expense.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the quarter ended October 4, 2014 of $0.1 million related to legal fees in connection with the early redemption of all $250.0 million aggregate principal amount of our 9.75% Senior Secured Notes on June 16, 2014.
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Provision (Benefit) for Income Taxes
Our income tax benefit for the quarter ended October 4, 2014 was $7.6 million, based on pre-tax loss of $22.1 million; our effective tax rate under the discrete method was 34.5%. For the quarter ended September 28, 2013, we recorded an income tax provision of $0.5 million, based on a pre-tax income of $1.7 million; our effective tax rate was 28.4%. The effective rate of the quarter-to-date tax benefit is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower than the statutory U.S. federal rate and the impact of several non-deductable tax items as well as our state effective tax rate, a result based on our legal entity tax structure and individual state tax filing requirements.
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Nine Months Ended October 4, 2014 Compared to the Nine Months Ended September 28, 2013
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:
Period Over | Period Over | Percentage of Net Sales | ||||||||||||||||||||||
Nine Months | Nine Months | Period | Period | For the Respective | ||||||||||||||||||||
Ended | Ended | Change | % Change | Period Ended | ||||||||||||||||||||
October 4, | September 28, | Favorable | Favorable | October 4, | September 28, | |||||||||||||||||||
In thousands |
2014 | 2013 | (unfavorable) | (unfavorable) | 2014 | 2013 | ||||||||||||||||||
Net sales |
$ | 3,667,480 | $ | 2,782,947 | $ | 884,533 | 31.8 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold |
3,081,603 | 2,328,192 | (753,411 | ) | (32.4 | %) | 84.0 | % | 83.7 | % | ||||||||||||||
Selling, general and administrative expenses |
568,978 | 417,591 | (151,387 | ) | (36.3 | %) | 15.5 | % | 15.0 | % | ||||||||||||||
Management fees |
17,385 | 3,833 | (13,552 | ) | (353.6 | %) | 0.5 | % | 0.1 | % | ||||||||||||||
Transaction expenses |
40,310 | 4,304 | (36,006 | ) | (836.6 | %) | 1.1 | % | 0.2 | % | ||||||||||||||
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Operating income (loss) |
(40,796 | ) | 29,027 | (69,823 | ) | (240.5 | %) | -1.1 | % | 1.0 | % | |||||||||||||
Other income (expense): |
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Interest expense |
(88,770 | ) | (55,252 | ) | (33,518 | ) | (60.7 | %) | -2.4 | % | -2.0 | % | ||||||||||||
Loss on extinguishment of debt |
(17,195 | ) | | (17,195 | ) | (100.0 | %) | -0.5 | % | 0.0 | % | |||||||||||||
Other, net |
(1,776 | ) | (3,556 | ) | 1,780 | 50.1 | % | 0.0 | % | -0.1 | % | |||||||||||||
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Income (loss) from continuing operations before income taxes |
(148,537 | ) | (29,781 | ) | (118,756 | ) | (398.8 | %) | -4.1 | % | -1.1 | % | ||||||||||||
Provision (benefit) for income taxes |
(50,625 | ) | (8,877 | ) | 41,748 | 470.3 | % | -1.4 | % | -0.3 | % | |||||||||||||
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Income (loss) from continuing operations |
(97,912 | ) | (20,904 | ) | (77,008 | ) | (368.4 | %) | -2.7 | % | -0.8 | % | ||||||||||||
Income (loss) from discontinued operations, net of tax |
(331 | ) | | (331 | ) | (100.0 | %) | 0.0 | % | 0.0 | % | |||||||||||||
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Net income (loss) |
$ | (98,243 | ) | $ | (20,904 | ) | $ | (77,339 | ) | (370.0 | %) | -2.7 | % | -0.8 | % | |||||||||
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Net Sales
Net sales for the nine months ended October 4, 2014 were $3,667.5 million, a $884.5 million, or 31.8%, increase, as compared with the nine months ended September 28, 2013. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire and our 2013 acquisitions of WTD, TDI and RTD. These growth initiatives added $729.9 million of incremental sales during the nine month period of 2014. In addition, we experienced an increase in comparable tire unit sales of $224.5 million primarily driven by an overall stronger sales unit environment and the inclusion of five additional selling days in our first quarter of 2014 which contributed approximately $47.0 million to the unit increase. However, these increases were partially offset by lower net tire pricing of $67.4 million, primarily driven by manufacturer marketing specials, competitive pricing positions in certain U.S. markets, as well as a shift in product mix in our lower priced point offerings.
Cost of Goods Sold
Cost of goods sold for the nine months ended October 4, 2014 were $3,081.6 million, a $753.4 million, or 32.4%, increase, as compared with the nine months ended September 28, 2013. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers as well as the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire in 2014 and our 2013 acquisitions of RTD, WTD and TDI. These growth initiatives added $604.8 million of incremental costs during the nine month period of 2014. Cost of goods sold for the nine months ended October 4, 2014 also includes $34.5 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Terrys Tire, Hercules and WTD as compared to $5.0 million during the nine months ended September 28, 2013. In addition, the inclusion of five additional selling days in our first quarter of 2014 and an overall stronger sales unit environment increased cost of goods sold by $186.8 million (of which approximately $39.1 million was due to the five additional selling days). These increases were partially offset by lower net tire pricing of $56.1 million.
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Cost of goods sold as a percentage of net sales was 84.0% for the nine months ended October 4, 2014, an increase compared with 83.7% for the nine months ended September 28, 2013. The increase in cost of goods sold as a percentage of net sales was primarily driven by the $34.5 million non-cash amortization of the inventory step-up recorded in connection with the Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Terrys Tire, Hercules and WTD acquisitions. This increase had a 0.9% impact on cost of goods sold as a percentage of net sales. Excluding the non-cash amortization of the inventory step-up, the decrease in cost of goods sold as a percentage of net sales was primarily driven by the margin contribution of the Hercules brand, a lower level of manufacturer price repositioning this year as compared to the prior year, and an incremental benefit from manufacturer programs during the current year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended October 4, 2014 were $569.0 million, a $151.4 million, or 36.3%, increase as compared with the nine months ended September 28, 2013. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire in 2014 and our 2013 acquisitions of RTD, WTD and TDI. Combined, these factors added $126.7 million of incremental costs to the nine month period of 2014. In addition, we also experienced a $17.7 million increase in salaries and wage expense primarily due to higher sales volume and related headcount, higher incentive and commission compensation and the inclusion of five additional selling days in our first quarter of 2014, which contributed approximately $3.8 million to the year-over-year increase. Additionally, occupancy and vehicle expense increased $4.6 million due to higher cost as we expanded several of our distribution centers to better service our existing customers as well as higher overall fuel consumption and other vehicle related expenses.
Selling, general and administrative expenses as a percentage of net sales were 15.5% for the nine months ended October 4, 2014, an increase compared with 15.0% for the nine months ended September 28, 2013. 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 and acquired distribution centers, as our consolidation of the Hercules distribution centers was not finalized until the latter part of the third quarter and the consolidation of the Terrys Tires distribution centers did not commence until the latter part of the second quarter and extended through the latter part of the third quarter.
Management Fees
Management fees for the nine months ended October 4, 2014 of $17.4 million represents a monitoring fee paid to our sponsor, TPG, for certain management, consulting and financial services as well as fees paid to our outside board of directors. In addition, the nine months ended October 4, 2014 includes a $13.5 million fee paid to TPG in connection with the acquisitions of Terrys Tire and Hercules.
Transaction Expenses
Transaction expenses for the nine months ended October 4, 2014 were $40.3 million and were primarily related to costs associated with the acquisition and integration of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Hercules and Terrys Tire, as well as with expenses related to potential future acquisitions and other corporate initiatives. During the nine months ended September 28, 2013, transaction expenses of $4.3 million primarily related to costs associated with our acquisitions of TDI, RTD and TriCan, as well as with expenses related to potential future acquisitions and other corporate initiatives.
Interest Expense
Interest expense for the nine months ended October 4, 2014 was $88.8 million, a $33.5 million, or 60.7%, increase compared with the nine months ended September 28, 2013. This increase was due to higher debt levels associated with our ABL Facility, FILO Facility, Additional Subordinated Notes and Term Loan, all as defined under Liquidity and Capital Resources, which were driven by our 2014 acquisitions and the redemption of our Senior Secured Notes. This increase was partially offset by lower interest expense related to the redemption of our Senior Secured Notes in June 2014 as well as changes in the fair value of our interest rate swaps, which resulted in a decrease of $1.4 million in interest expense.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the nine months ended October 4, 2014 of $17.2 million related to the early redemption of all $250.0 million aggregate principal amount of our 9.75% Senior Secured Notes on June 16, 2014 at a redemption price of 104.875% of the principal amount. Additionally, the loss on extinguishment of debt includes approximately $4.9 million related to the write-off of the unamortized original issuance discount and unamortized deferred financing fees associated with the Senior Secured Notes.
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Provision (Benefit) for Income Taxes
Our income tax benefit for the nine months ended October 4, 2014 was $50.6 million, based on pre-tax loss of $148.5 million; our effective tax rate under the discrete method was 34.1%. For the nine months ended September 28, 2013, we had an income tax benefit of $8.9 million, consisting of a $7.2 million U.S. tax benefit and a $1.7 million foreign tax benefit, and an effective tax benefit rate of 29.8%. The effective rate of the year-to-date tax benefit is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower than the statutory U.S. federal rate decreasing the rate by 0.8%.
Liquidity and Capital Resources
Overview
The following table contains several key measures that we think are relevant to our financial condition and liquidity:
October 4, | December 28, | |||||||
In thousands |
2014 | 2013 | ||||||
Cash and cash equivalents |
$ | 23,759 | $ | 35,760 | ||||
Working capital |
826,269 | 538,444 | ||||||
Total debt |
1,936,503 | 967,000 | ||||||
Total stockholders equity |
631,351 | 692,974 | ||||||
Debt-to-capital ratio |
75.4 | % | 58.3 | % |
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 availability under our ABL Facility and FILO Facility. We currently do not intend nor foresee a need to repatriate funds from our Canadian subsidiaries to the United States, and no provision for U.S. income taxes has been made with respect to such earnings. We expect our cash flow from U.S. operations, combined with availability under our U.S. ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending in the United Stated during the next twelve month period and for the foreseeable future. We expect cash flows from our Canadian operations, combined with availability under our Canadian ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending in Canada during the next twelve month period and thereafter for the foreseeable future.
We are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of October 4, 2014, our total indebtedness was $1,936.5 million with a debt-to-capital ratio of 75.4%. As of October 4, 2014, we have an additional $206.3 million of availability under our U.S. ABL Facility and an additional $71.1 million of availability under our Canadian ABL Facility. The availability under our U.S. and Canadian ABL Facilities is determined in accordance with our borrowing base.
Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control, many of which are described under Item 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:
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
October 4, | September 28, | |||||||
In thousands |
2014 | 2013 | ||||||
Cash provided by (used in) continuing operating activities |
$ | (113,799 | ) | $ | 39,147 | |||
Cash provided by (used in) discontinued operations |
1,562 | | ||||||
Cash provided by (used in) investing activities |
(890,210 | ) | (101,937 | ) | ||||
Cash provided by (used in) financing activities |
993,222 | 65,741 | ||||||
Effect of exchange rate changes on cash |
(2,776 | ) | (1,581 | ) | ||||
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Net increase (decrease) in cash and cash equivalents |
(12,001 | ) | 1,370 | |||||
Cash and cash equivalents - beginning of period |
35,760 | 25,951 | ||||||
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Cash and cash equivalents - end of period |
$ | 23,759 | $ | 27,321 | ||||
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Cash payments for interest |
$ | 77,185 | $ | 38,535 | ||||
Cash payments (receipts) for taxes, net |
$ | 12,185 | $ | 12,876 | ||||
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Operating Activities
Net cash used in continuing operating activities for the nine months ended October 4, 2014 was $113.8 million compared with cash provided by continuing operating activities of $39.1 million during the nine months ended September 28, 2013. During the current period, working capital requirements resulted in a cash outflow of $143.3 million, primarily driven by an increase in customer accounts receivable of $65.2 million and an increase in inventory levels of $112.0 million as a result of building out the product offering provided through the Hercules acquisition for a significant portion of our U.S. and Canadian distribution centers, the receipt of winter tires, particularly in our Canadian operations, for the winter selling season, and to a lesser extent, the build of inventory levels for the achievement of certain manufacturer annual program incentives. These increases to inventories were partially offset by the consolidation of numerous distribution centers related to our various U.S. and Canadian acquisitions in 2014 and the related inventory rationalization as a part of the consolidation process. These amounts were partially offset by changes in accounts payable and accrued expenses associated with the timing of vendor payments and accrued interest on our senior notes.
Net cash provided by operating activities for the nine months ended September 28, 2013 was $39.1 million. During the nine month period of 2013, working capital requirements resulted in a cash outflow of $14.9 million, primarily driven by an increase in customer accounts receivable and an increase in inventory levels as a result of stocking new distribution centers opened during the year, seasonal changes in inventory stocking levels (including the Canadian winter business) and our recent acquisitions. These amounts were partially offset by changes in accounts payable and accrued expenses associated with the timing of vendor payments and accrued interest on our senior notes. This cash outflow was more than offset by cash earnings during the period.
Investing Activities
Net cash used in investing activities for the nine months ended October 4, 2014 was $890.2 million, compared with $101.9 million during the nine months ended September 28, 2013. The change was primarily associated with cash paid for acquisitions, which resulted in a $772.7 million increase in the current period. In addition, we invested $51.9 million and $34.9 million in property and equipment purchases during the nine months ended October 4, 2014 and September 28, 2013, respectively, which included information technology upgrades, information technology application development and warehouse racking.
Financing Activities
Net cash provided by financing activities for the nine months ended October 4, 2014 was $993.2 million, compared with $65.7 million during the nine months ended September 28, 2013. The change was primarily related to proceeds received from the issuance of our Additional Subordinated Notes and Term Loan during the nine months ended October 4, 2014. These proceeds were used to finance a portion of the Hercules and Terrys Tire acquisitions as well to redeem all amounts outstanding under our Senior Secured Notes (as defined below). In addition, higher net borrowings from our ABL Facility and FILO Facility, specifically our U.S. ABL Facility, contributed to the period-over-period increase. The higher net borrowings under our ABL Facility and FILO Facility were due to the increase in cash outflow for working capital requirements between periods and cash paid for acquisitions. Additionally, the Company received an equity contribution of $50.0 million from TPG and certain co-investors during the nine months ended October 4, 2014.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest during the nine months ended October 4, 2014 were $77.2 million, compared with $38.5 million paid during the nine months ended September 28, 2013. The increase is primarily due to the timing of our period end on October 4, 2014,
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and as such, included an additional quarterly interest payment on our ABL Facility and FILO Facility as compared to the prior year. Additionally, higher levels of indebtedness incurred in connection with the issuance of our Additional Subordinated Notes and our Term Loan also contributed to the year-over-year increase.
Net cash payments for taxes during the nine months ended October 4, 2014 were $12.2 million, compared with $12.9 million during the nine months ended September 28, 2013. The difference between the periods primarily relates to the balance and timing of income tax extension payments and income tax payments due with returns.
Indebtedness
The following table summarizes our outstanding debt at October 4, 2014:
Interest Rate | Outstanding | |||||||||||
In thousands |
Matures | (1) | Balance | |||||||||
U.S. ABL Facility |
2017 | 3.0 | % | $ | 631,401 | |||||||
Canadian ABL Facility |
2017 | 4.5 | 53,861 | |||||||||
U.S. FILO Facility |
2017 | 5.8 | 80,000 | |||||||||
Canadian FILO Facility |
2017 | 6.3 | 14,551 | |||||||||
Term Loan |
2018 | 5.8 | 715,934 | |||||||||
Senior Subordinated Notes |
2018 | 11.50 | 421,545 | |||||||||
Capital lease obligations |
2015 - 2027 | 2.7 - 13.9 | 12,479 | |||||||||
Other |
2014 - 2021 | 2.3 - 10.6 | 6,732 | |||||||||
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Total debt |
1,936,503 | |||||||||||
Less - Current maturities |
(9,839 | ) | ||||||||||
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Long-term debt |
$ | 1,926,664 | ||||||||||
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(1) | Interest rates for each of the U.S. ABL Facility and the Canadian ABL Facility are the weighted average interest rates at October 4, 2014. |
ABL Facility
On January 31, 2014, in connection with the Hercules acquisition, we entered into the Second Amendment to Sixth Amended and Restated Credit Agreement (Credit Agreement), which provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the U.S. ABL Facility) and (ii) Canadian revolving credit commitments of $125.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the Canadian ABL Facility and, collectively with the U.S. ABL Facility, the ABL Facility). In addition, the Credit Agreement provides (i) the U.S. borrowers under the agreement with a first-in last-out facility (the U.S. FILO Facility) in the aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and (ii) the Canadian borrowers under the agreement with a first-in last-out facility (the Canadian FILO Facility and collectively with the U.S. FILO Facility, the FILO Facility) in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility is available to ATDI, Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that we designate in the future in accordance with the terms of the Credit Agreement. The Canadian ABL Facility is available to TriCan and any other Canadian subsidiaries that we designate in the future in accordance with the terms of the Credit Agreement. Provided that no default or event of default then exists or would arise therefrom, we have the option to request that the ABL Facility be increased by an amount not to exceed $175.0 million (up to $25.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks providing commitments for such increase. The maturity date for the ABL Facility is November 16, 2017. The maturity date for the FILO Facility is January 31, 2017.
As of October 4, 2014, we had $631.4 million outstanding under the U.S. ABL Facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $9.9 million, leaving $206.3 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at October 4, 2014 was $53.9 million, leaving $71.1 million available for additional borrowings. As of October 4, 2014, the outstanding balance of the U.S. FILO Facility was $80.0 million and the outstanding balance of the Canadian FILO Facility was $14.6 million.
Borrowings under the U.S. ABL Facility bear interest at a rate per annum equal to, at our option, either (a) 200 basis points over an adjusted LIBOR rate or (b) 100 basis points over an alternative base rate (the higher of the prime rate, the federal funds rate plus 50 basis points and one month-adjusted LIBOR rate plus 100 basis points). The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
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Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to, at our option, either (a) 100 basis points over an alternative Canadian base rate (the higher of the base rate as published by Bank of America, N.A., acting through its Canada branch, the federal funds rate plus 50 basis points and one month-LIBOR plus 100 basis points), (b) 100 basis points over a Canadian prime rate determined in accordance with the Canadian ABL Facility, (c) 200 basis points over a rate determined by reference to the average rate applicable to Canadian Dollar bankers acceptances having an identical or comparable term as the proposed loan amount or (d) 200 basis points over an adjusted LIBOR rate. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
Borrowings under the U.S. FILO Facility bear interest at a rate per annum equal to, at our option, either (a) 350 basis points over an adjusted LIBOR rate or (b) 250 basis points over an alternative base rate (the higher of the prime rate, the federal funds rate plus 50 basis points and one month-adjusted LIBOR plus 100 basis points). The applicable margins under the U.S. FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
Borrowings under the Canadian FILO Facility bear interest at a rate per annum equal to, at our option, either (a) 250 basis points over an alternative Canadian base rate (the higher of the base rate as published by Bank of America, N.A., acting through its Canada branch, the federal funds rate plus 50 basis points and one month-LIBOR plus 100 basis points), (b) 250 basis points over a Canadian prime rate determined in accordance with the Canadian ABL Facility, (c) 350 basis points over a rate determined by reference to the average rate applicable to Canadian Dollar bankers acceptances having an identical or comparable term as the proposed loan amount or (d) 350 basis points over an adjusted LIBOR rate. The applicable margins under the Canadian FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.
The U.S. and Canadian borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
| 85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus |
| The lesser of (a) 70% of the lesser of cost or market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus |
| The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable. |
The U.S. FILO and the Canadian FILO borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:
| 5% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus |
| 10% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable. |
All obligations under the U.S. ABL Facility and the U.S. FILO 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. The Canadian ABL Facility and the Canadian FILO Facility are unconditionally guaranteed by the U.S. loan parties, TriCan and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the U.S. FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility and the Canadian FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets of the U.S. loan parties and the Canadian loan parties and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.
The ABL Facility and FILO Facility contain customary covenants, including covenants that restricts our ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates or change our fiscal year. The terms of the ABL Facility and FILO Facility generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions requiring compliance with certain availability levels and fixed charge coverage ratios under the ABL Facility and other customary negotiated exceptions. If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate 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 October 4, 2014, our additional borrowing availability under the ABL Facility was above the required amount and we were therefore not subject to the additional covenants.
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Senior Secured Term Loan
In connection with the acquisition of Terrys Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for a senior secured term loan facility in the aggregate principal amount of $300.0 million (the Initial Term Loan). The Initial Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Initial Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Initial Term Loan were used to finance a portion of the Terrys Tire Purchase Price.
On June 16, 2014, ATDI amended the Initial Term Loan (the Incremental Amendment) to borrow an additional $340.0 million (the Incremental Term Loan) on the same terms as the Initial Term Loan. Pursuant to the Incremental Amendment, until August 15, 2014, ATDI also had the right to borrow up to an additional $80.0 million (the Delayed Draw Term Loan and collectively with the Initial Term Loan and the Incremental Term Loan, the Term Loan) on the same terms as the Initial Term Loan. The proceeds from the Incremental Term Loan, net of related debt issuance costs paid at closing, amounted to approximately $335.7 million, and were used, in part, to redeem all $250.0 million aggregate principal amounts of notes outstanding under ATDIs Senior Secured Notes and related fees and expenses as more fully described below, and the remaining proceeds will be used for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions. We received the proceeds from the Delayed Draw Term Loan at the end of the second quarter of 2014. The maturity date for the Term Loan is June 1, 2018.
Borrowings under the Term Loan bear interest at a rate per annum equal to, at our option, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 475 basis points or (b) 375 basis points over an alternative base rate determined by reference of the higher of the federal funds rate plus 50 basis points, the prime rate and 100 basis points over the one month Eurodollar rate. The Eurodollar rate is subject to an interest rate floor of 100 basis points. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the agreement.
All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDIs existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.
The Term Loan contains customary covenants, including covenants that restrict our ability to incur additional debt, create 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, change the nature of our business or change our fiscal year. The terms of the Term Loan generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning January 1, 2014 and other customary negotiated exceptions.
We were required to make a principal payment under the Term Loan equal to $1.6 million on the last business day of June 2014. Commencing with the last business day of September 2014, we are required to make principal payments equal to $1.8 million on the last business day of each March, June, September and December. In addition, subject to certain exceptions, we are required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of its annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayments provision related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the agreement.
Senior Secured Notes
On May 16, 2014, ATDI delivered a Notice of Full Redemption, providing for the redemption of all $250.0 million aggregate principal amount of the 9.75% Senior Secured Notes (Senior Secured Notes) on June 16, 2014 (the Redemption Date) at a price equal to 104.875% of the principal amount of the Senior Secured Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the Redemption Date (the Redemption Price). On June 16, 2014, using proceeds from the Incremental Term Loan, the Senior Secured Notes were redeemed for a Redemption Price of $263.2 million.
Senior Subordinated Notes
On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the Initial Subordinated Notes). Interest on the Initial Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010.
In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of an additional $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the Additional Subordinated Notes and, collectively with the Initial Subordinated Notes, the Senior Subordinated Notes). The
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Additional Subordinated Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $221.1 million. The Additional Subordinated Notes will accrete based on an effective interest rate of 12% to an aggregate accreted value of $225.0 million, the full principal amount at maturity.
The Additional Subordinated Notes have identical terms to the Initial Subordinated Notes except the Additional Subordinated Notes accrues interest from January 31, 2014. The Additional Subordinated Notes and the Initial Subordinated Notes are treated as a single class of securities for all purposes under the indenture. The Senior Subordinated Notes will mature on June 1, 2018.
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 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.
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. The terms of the Senior Subordinated Notes generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning April 4, 2010 and other customary negotiated exceptions.
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.
49
The following table shows a reconciliation of Adjusted EBITDA from the most directly comparable GAAP measure, income (loss) from continuing operations in order to show the differences in these measures of operating performance:
Quarter | Quarter | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
October 4, | September 28, | October 4, | September 28, | |||||||||||||
In thousands |
2014 | 2013 | 2014 | 2013 | ||||||||||||
Income (loss) from continuing operations |
$ | (14,400 | ) | $ | 1,224 | $ | (97,912 | ) | $ | (20,904 | ) | |||||
Depreciation and amortization |
41,725 | 27,316 | 107,738 | 78,456 | ||||||||||||
Interest expense |
32,148 | 20,625 | 88,770 | 55,252 | ||||||||||||
Income tax provision (benefit) |
(7,649 | ) | 485 | (50,625 | ) | (8,877 | ) | |||||||||
Management fee |
1,810 | 1,587 | 17,385 | 3,833 | ||||||||||||
Stock-based compensation |
791 | 596 | 2,778 | 2,047 | ||||||||||||
Transaction fees |
20,134 | 1,015 | 40,310 | 4,304 | ||||||||||||
Non-cash inventory step up |
2,873 | 100 | 34,513 | 5,007 | ||||||||||||
Early debt extinguishment |
82 | | 17,195 | | ||||||||||||
Other |
1,670 | 1,391 | 1,682 | 3,378 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | 79,184 | $ | 54,339 | $ | 161,834 | $ | 122,496 | ||||||||
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We have no significant off balance sheet arrangements, other than liabilities related to leases of Winston Tire Company (Winston Tire) that we guaranteed when we sold Winston Tire in 2001. As of October 4, 2014, our total obligations as guarantor on these leases are approximately $1.4 million extending over five years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $1.2 million as of October 4, 2014. 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 quarter ended October 4, 2014, 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 fiscal year ended December 28, 2013.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. We adopted this guidance on December 29, 2013 (the first day of our 2014 fiscal year) and the adoption did not have a material impact on our consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, (ASU 2014-08). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on a companys operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed
50
of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statement previously issued. We are currently assessing the impact, if any on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The standards core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under todays guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us beginning in fiscal year 2017 and, at that time we may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. We are currently evaluating the method and impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.
51
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk
Our ABL Facility, FILO Facility and Term Loan are exposed to fluctuations in interest rates which could impact our results of operations and financial condition. Interest on the ABL Facility, FILO Facility and Term Loan are tied to, at our option, either a base rate, or a prime rate, or LIBOR. At October 4, 2014, the total amount outstanding under our ABL Facility, FILO Facility and Term Loan that was subject to interest rate changes was $1,495.7 million.
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 October 4, 2014, $1,145.7 million of the total outstanding balance of our ABL Facility, FILO Facility and Term Loan that was 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 $11.5 million.
Foreign Currency Exchange Rate Risk
The financial position and results of operations for TriCan, our 100% owned subsidiary acquired during 2012, are impacted by movements in the exchange rates between the Canadian dollar and the U.S. dollar. As of October 4, 2014, we did not have any foreign currency derivatives in place. We assess the market risk of changes in foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact on our earnings. During the nine months ended October 4, 2014, a hypothetical 10% fluctuation in the U.S. dollar to Canadian dollar exchange rate would have affected our net income (loss) by $1.3 million.
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
(a) | We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
(b) | As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. |
Changes in Internal Control Over Financial Reporting
During the quarter ended October 4, 2014, 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.
52
Item 1. | Legal Proceedings. |
We are involved from time to time in various lawsuits, including alleged class action lawsuits arising out of the ordinary conduct of our business. Although no assurances can be given, we do not expect that any of these matters will have a material adverse effect on our business or financial condition. We are also involved in various litigation proceedings incidental to the ordinary course of our business. We believe, based on consultation with legal counsel, that none of these will have a material adverse effect on our financial condition or results of operations.
Item 1A. | Risk Factors. |
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
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 October 4, 2014, 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. |
53
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 14, 2014 | 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) |
54
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 14, 2014
/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 14, 2014
/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 October 4, 2014 (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 14, 2014 | 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 | |||||
Intangible Assets Based on Estimated Fair Value (Detail) (USD $)
In Thousands, unless otherwise specified |
0 Months Ended | 9 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 9 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | 9 Months Ended | 0 Months Ended | 0 Months Ended | 0 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Oct. 04, 2014
|
Oct. 04, 2014
|
Apr. 30, 2013
Regional Tire Holdings Inc.
|
Mar. 28, 2014
Terry's Tire Town Holdings, Inc.
|
Jan. 31, 2014
Hercules
|
Jun. 27, 2014
Trail Tire Distributors Ltd
|
Jun. 27, 2014
Extreme Wheel Distributors Ltd
|
Jun. 27, 2014
Kirks Tire Ltd
|
Jun. 27, 2014
Regional Tire Distributors (Edmonton) Inc
|
Jun. 27, 2014
Regional Tire Distributors (Calgary) Inc
|
Oct. 04, 2014
Customer list
|
Apr. 30, 2013
Customer list
Regional Tire Holdings Inc.
|
Apr. 30, 2013
Customer list
Regional Tire Holdings Inc.
|
Mar. 28, 2014
Customer list
Terry's Tire Town Holdings, Inc.
|
Mar. 28, 2014
Customer list
Terry's Tire Town Holdings, Inc.
|
Jan. 31, 2014
Customer list
Hercules
|
Jan. 31, 2014
Customer list
Hercules
|
Jun. 27, 2014
Customer list
Trail Tire Distributors Ltd
|
Jun. 27, 2014
Customer list
Trail Tire Distributors Ltd
|
Jun. 27, 2014
Customer list
Extreme Wheel Distributors Ltd
|
Jun. 27, 2014
Customer list
Extreme Wheel Distributors Ltd
|
Jun. 27, 2014
Customer list
Kirks Tire Ltd
|
Jun. 27, 2014
Customer list
Kirks Tire Ltd
|
Jun. 27, 2014
Customer list
Regional Tire Distributors (Edmonton) Inc
|
Jun. 27, 2014
Customer list
Regional Tire Distributors (Edmonton) Inc
|
Jun. 27, 2014
Customer list
Regional Tire Distributors (Calgary) Inc
|
Jun. 27, 2014
Customer list
Regional Tire Distributors (Calgary) Inc
|
Oct. 04, 2014
Tradenames
|
Apr. 30, 2013
Tradenames
Regional Tire Holdings Inc.
|
Apr. 30, 2013
Tradenames
Regional Tire Holdings Inc.
|
Mar. 28, 2014
Tradenames
Terry's Tire Town Holdings, Inc.
|
Jan. 31, 2014
Tradenames
Hercules
|
Jan. 31, 2014
Tradenames
Hercules
|
Jun. 27, 2014
Tradenames
Trail Tire Distributors Ltd
|
Jun. 27, 2014
Tradenames
Extreme Wheel Distributors Ltd
|
Jun. 27, 2014
Tradenames
Kirks Tire Ltd
|
Jun. 27, 2014
Tradenames
Regional Tire Distributors (Edmonton) Inc
|
Jun. 27, 2014
Tradenames
Regional Tire Distributors (Calgary) Inc
|
Oct. 04, 2014
Favorable leases
|
Apr. 30, 2013
Favorable leases
Regional Tire Holdings Inc.
|
Apr. 30, 2013
Favorable leases
Regional Tire Holdings Inc.
|
Mar. 28, 2014
Favorable leases
Terry's Tire Town Holdings, Inc.
|
Mar. 28, 2014
Favorable leases
Terry's Tire Town Holdings, Inc.
|
Jan. 31, 2014
Favorable leases
Hercules
|
Jun. 27, 2014
Favorable leases
Trail Tire Distributors Ltd
|
Jun. 27, 2014
Favorable leases
Extreme Wheel Distributors Ltd
|
Jun. 27, 2014
Favorable leases
Kirks Tire Ltd
|
Jun. 27, 2014
Favorable leases
Regional Tire Distributors (Edmonton) Inc
|
Jun. 27, 2014
Favorable leases
Regional Tire Distributors (Calgary) Inc
|
|||||||||||||||||||
Acquired Finite-Lived Intangible Assets [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible Assets, Estimated Fair Value | $ 431,999 | $ 42,990 | $ 186,161 | $ 155,704 | $ 10,922 | $ 3,985 | $ 43,971 | $ 21,549 | $ 9,707 | $ 423,126 | [1] | $ 40,720 | $ 185,776 | [1] | $ 147,216 | [1] | $ 10,922 | [1] | $ 3,985 | [1] | $ 43,971 | [1] | $ 21,549 | [1] | $ 9,707 | [1] | $ 8,488 | [2] | $ 1,900 | $ 8,488 | [2] | $ 385 | [3] | $ 370 | $ 385 | [3] | |||||||||||||||||||||||||||||||
Acquired finite-lived intangible assets, useful life | 18 years | 18 years | 16 years | 18 years | 18 years | 18 years | 18 years | 18 years | 18 years | 18 years | 15 years | 5 years | 15 years | 15 years | 15 years | 15 years | 15 years | 15 years | 15 years | 5 years | 4 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | 5 years | |||||||||||||||||||||||||||||||||||||||
|
Pre-Tax Effect of Derivative Instruments on Condensed Consolidated Statement of Comprehensive Income (Loss) (Parenthetical) (Detail) (USD $)
In Millions, unless otherwise specified |
Oct. 04, 2014
Interest rate swap, fixed rate 1.105% and expired in February 2013
1Q 2011 Swap
|
Sep. 28, 2013
Interest rate swap, fixed rate 1.105% and expired in February 2013
1Q 2011 Swap
|
Feb. 24, 2011
Interest rate swap, fixed rate 1.105% and expired in February 2013
1Q 2011 Swap
|
Feb. 24, 2011
Interest Rate Swap
1Q 2011 Swap
|
Oct. 04, 2014
Interest Rate Swap
3Q 2011 Swaps
|
Dec. 28, 2013
Interest Rate Swap
3Q 2011 Swaps
|
Sep. 28, 2013
Interest Rate Swap
3Q 2011 Swaps
|
Sep. 23, 2011
Interest Rate Swap
3Q 2011 Swaps
|
Oct. 04, 2014
Interest Rate Swap
3Q 2012 Swaps
|
Dec. 28, 2013
Interest Rate Swap
3Q 2012 Swaps
|
Sep. 28, 2013
Interest Rate Swap
3Q 2012 Swaps
|
Aug. 01, 2012
Interest Rate Swap
3Q 2012 Swaps
|
Oct. 04, 2014
Interest Rate Swap
3Q 2013 Swaps
|
Dec. 28, 2013
Interest Rate Swap
3Q 2013 Swaps
|
Sep. 28, 2013
Interest Rate Swap
3Q 2013 Swaps
|
Sep. 04, 2013
Interest Rate Swap
3Q 2013 Swaps
|
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivative Instruments, Gain (Loss) [Line Items] | ||||||||||||||||
Notional amount of interest rate swap | $ 50.0 | $ 50.0 | $ 50.0 | $ 75.0 | $ 100.0 | $ 100.0 | $ 100.0 | $ 100.0 | $ 100.0 | $ 100.0 | $ 100.0 | $ 100.0 | $ 200.0 | $ 200.0 | $ 200.0 | $ 100.0 |
Long-Term Debt (Detail) (USD $)
In Thousands, unless otherwise specified |
Oct. 04, 2014
|
Dec. 28, 2013
|
---|---|---|
Debt Instrument [Line Items] | ||
Term Loan | $ 715,934 | |
Senior Secured Notes | 248,219 | |
Senior Subordinated Notes | 421,545 | 200,000 |
Capital lease obligations | 12,479 | 12,330 |
Other | 6,732 | 1,098 |
Total debt | 1,936,503 | 967,000 |
Less - Current maturities | (9,839) | (564) |
Long-term debt | 1,926,664 | 966,436 |
United States
|
||
Debt Instrument [Line Items] | ||
ABL Facility | 631,401 | 417,066 |
United States | FILO Facility
|
||
Debt Instrument [Line Items] | ||
ABL Facility | 80,000 | 51,863 |
Canada
|
||
Debt Instrument [Line Items] | ||
ABL Facility | 53,861 | 36,424 |
Canada | FILO Facility
|
||
Debt Instrument [Line Items] | ||
ABL Facility | $ 14,551 |
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