AAP_10Q_10.6.2012
Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 6, 2012
OR
o 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 001-16797
________________________

ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

 Delaware
(State or other jurisdiction of
incorporation or organization)
    54-2049910
(I.R.S. Employer
Identification No.)
 
5008 Airport Road, Roanoke, Virginia 24012
(Address of Principal Executive Offices)
(Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 

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 Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 definition of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 8, 2012, the registrant had outstanding 73,364,071 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
 



Table of Contents

 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i

Table of Contents

PART I.  FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES 

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 6, 2012, December 31, 2011 and October 8, 2011
(in thousands, except per share data)
(unaudited)

 
October 6,
2012
 
December 31,
2011
 
October 8,
2011
Assets
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
479,383

 
$
57,901

 
$
65,929

Receivables, net
204,555

 
140,007

 
131,409

Inventories, net
2,193,369

 
2,043,158

 
2,109,721

Other current assets
70,582

 
52,754

 
67,063

Total current assets
2,947,889

 
2,293,820

 
2,374,122

Property and equipment, net of accumulated depreciation of $1,075,753, $983,622 and $963,845
1,270,432

 
1,223,099

 
1,191,453

Assets held for sale
788

 
615

 
707

Goodwill
76,389

 
76,389

 
51,378

Intangible assets, net
28,649

 
31,380

 
29,122

Other assets, net
33,059

 
30,451

 
31,286

 
$
4,357,206

 
$
3,655,754

 
$
3,678,068

Liabilities and Stockholders' Equity
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Current portion of long-term debt
$
699

 
$
848

 
$
949

Accounts payable
1,825,162

 
1,653,183

 
1,586,058

Accrued expenses
413,950

 
385,746

 
390,283

Other current liabilities
141,043

 
148,098

 
128,338

Total current liabilities
2,380,854

 
2,187,875

 
2,105,628

Long-term debt
599,550

 
415,136

 
599,438

Other long-term liabilities
229,324

 
204,829

 
195,376

Commitments and contingencies


 


 


Stockholders' equity:
 

 
 

 
 

Preferred stock, nonvoting, $0.0001 par value

 

 

Common stock, voting, $0.0001 par value
7

 
11

 
11

Additional paid-in capital
515,730

 
500,237

 
485,242

Treasury stock, at cost
(25,193
)
 
(1,644,767
)
 
(1,642,807
)
Accumulated other comprehensive income
2,683

 
2,804

 
7,621

Retained earnings
654,251

 
1,989,629

 
1,927,559

Total stockholders' equity
1,147,478

 
847,914

 
777,626

 
$
4,357,206

 
$
3,655,754

 
$
3,678,068


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

1

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Forty Week Periods Ended
October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 6,
2012
 
October 8,
2011
 
October 6,
2012
 
October 8,
2011
Net sales
$
1,457,527

 
$
1,464,988

 
$
4,875,802

 
$
4,842,890

Cost of sales, including purchasing and warehousing costs
732,177

 
740,485

 
2,440,921

 
2,424,338

Gross profit
725,350

 
724,503

 
2,434,881

 
2,418,552

Selling, general and administrative expenses
574,990

 
546,683

 
1,890,762

 
1,865,828

Operating income
150,360

 
177,820

 
544,119

 
552,724

Other, net:
 

 
 

 
 
 
 
Interest expense
(8,048
)
 
(8,150
)
 
(25,849
)
 
(25,876
)
Other income (expense), net
312

 
(614
)
 
759

 
(771
)
Total other, net
(7,736
)
 
(8,764
)
 
(25,090
)
 
(26,647
)
Income before provision for income taxes
142,624

 
169,056

 
519,029

 
526,077

Provision for income taxes
53,121

 
63,503

 
196,414

 
197,834

Net income
$
89,503

 
$
105,553

 
$
322,615

 
$
328,243

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.22

 
$
1.43

 
$
4.41

 
$
4.27

Diluted earnings per share
$
1.21

 
$
1.41

 
$
4.34

 
$
4.19

 
 
 
 
 
 
 
 
Average common shares outstanding
73,166

 
73,381

 
73,052

 
76,595

Average common shares outstanding - assuming dilution
73,992

 
74,730

 
74,107

 
78,058


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Twelve and Forty Week Periods Ended
October 6, 2012 and October 8, 2011
(in thousands)
(unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 6,
2012
 
October 8,
2011
 
October 6,
2012
 
October 8,
2011
Net income
$
89,503

 
$
105,553

 
$
322,615

 
$
328,243

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs, net of $73, $67, $242 and $224 tax
(113
)
 
(105
)
 
(375
)
 
(350
)
Unrealized gain on hedge arrangements, net of $0, $3,056, $163 and $3,056 tax

 
4,759

 
254

 
4,759

Amortization of unrecognized losses on interest rate swaps, net of $0, $1,129, $0 and $3,644 tax

 
1,353

 

 
4,809

Other comprehensive income (loss)
(113
)
 
6,007

 
(121
)
 
9,218

Comprehensive income
$
89,390

 
$
111,560

 
$
322,494

 
$
337,461


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

2

Table of Contents


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Forty Week Periods Ended
October 6, 2012 and October 8, 2011
(in thousands)
(unaudited)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock,
at cost
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance, December 31, 2011

 
$

 
106,537

 
$
11

 
$
500,237

 
33,738

 
$
(1,644,767
)
 
$
2,804

 
$
1,989,629

 
$
847,914

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
322,615

 
322,615

Changes in net unrecognized other postretirement benefit costs, net of $242 tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(375
)
 
 

 
(375
)
Unrealized gain on hedge arrangement, net of $163 tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
254

 
 
 
254

Issuance of shares upon the exercise of stock options
 

 
 

 
860

 
 

 
5,328

 
 

 
 

 
 

 
 

 
5,328

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(25,627
)
 
 
 
 
 
 
 
 
 
(25,627
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
21,806

 
 

 
 

 
 

 
 

 
21,806

Issuance of restricted stock, net of forfeitures
 

 
 

 
4

 
 

 
 

 
 

 
 

 
 

 
 

 

Amortization of restricted stock balance
 

 
 

 
 

 
 

 
4,965

 
 

 
 

 
 

 
 

 
4,965

Share-based compensation
 

 
 

 
 

 
 

 
7,167

 
 

 
 

 
 

 
 

 
7,167

Stock issued under employee stock purchase plan
 

 
 

 
26

 
 

 
1,819

 
 

 
 

 
 

 
 

 
1,819

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
323

 
(25,193
)
 
 

 
 

 
(25,193
)
Retirement of treasury stock
 
 
 
 
(33,738
)
 
(4
)
 
 
 
(33,738
)
 
1,644,767

 
 
 
(1,644,763
)
 

Cash dividends
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(13,230
)
 
(13,230
)
Other
 

 
 

 
 

 
 

 
35

 
 

 
 

 
 

 
 

 
35

Balance, October 6, 2012

 
$

 
73,689

 
$
7

 
$
515,730

 
323

 
$
(25,193
)
 
$
2,683

 
$
654,251

 
$
1,147,478

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2011

 
$

 
105,682

 
$
11

 
$
456,645

 
23,726

 
$
(1,028,612
)
 
$
(1,597
)
 
$
1,612,927

 
$
1,039,374

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
328,243

 
328,243

Changes in net unrecognized other postretirement benefit costs, net of $224 tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(350
)
 
 

 
(350
)
Unrealized gain on hedge arrangement, net of $3,056 tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,759

 
 
 
4,759

Amortization of unrecognized losses on interest rate swaps, net of $3,644 tax
 

 
 

 
 

 
 

 
 

 
 

 
 

 
4,809

 
 

 
4,809

Issuance of shares upon the exercise of stock options
 

 
 

 
438

 

 
10,626

 
 

 
 

 
 

 
 

 
10,626

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(3,151
)
 
 
 
 
 
 
 
 
 
(3,151
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
5,064

 
 

 
 

 
 

 
 

 
5,064

Issuance of restricted stock, net of forfeitures
 
 
 
 
3

 
 
 
 
 
 
 
 
 
 
 
 
 

Amortization of restricted stock balance
 

 
 

 
 

 
 

 
5,452

 
 

 
 

 
 

 
 

 
5,452

Share-based compensation
 

 
 

 
 

 
 

 
8,780

 
 

 
 

 
 

 
 

 
8,780

Stock issued under employee stock purchase plan
 

 
 

 
29

 
 

 
1,745

 
 

 
 

 
 

 
 

 
1,745

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
9,983

 
(614,195
)
 
 

 
 

 
(614,195
)
Cash dividends
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(13,611
)
 
(13,611
)
Other
 

 
 

 
 

 
 

 
81

 
 

 
 

 
 

 
 

 
81

Balance, October 8, 2011

 
$

 
106,152

 
$
11

 
$
485,242

 
33,709

 
$
(1,642,807
)
 
$
7,621

 
$
1,927,559

 
$
777,626


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.

3

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 6, 2012 and October 8, 2011
(in thousands)
(unaudited)
 
Forty Week Periods Ended
 
October 6,
2012
 
October 8,
2011
Cash flows from operating activities:
 
 
 
Net income
$
322,615

 
$
328,243

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
143,767

 
134,480

Share-based compensation
12,132

 
14,232

Loss on property and equipment, net
1,911

 
3,357

Other
1,214

 
796

Provision for deferred income taxes
18,402

 
45,374

Excess tax benefit from share-based compensation
(21,867
)
 
(5,099
)
Net (increase) decrease in:
 
 
 
Receivables, net
(64,171
)
 
(6,854
)
Inventories, net
(148,759
)
 
(245,851
)
Other assets
(14,827
)
 
17,715

Net increase in:
 
 
 
Accounts payable
171,979

 
293,609

Accrued expenses
75,876

 
14,720

Other liabilities
6,510

 
16,260

Net cash provided by operating activities
504,782

 
610,982

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(201,210
)
 
(207,505
)
Business acquisitions, net of cash acquired
(5,332
)
 
(18,170
)
Proceeds from sales of property and equipment
348

 
1,114

Net cash used in investing activities
(206,194
)
 
(224,561
)
Cash flows from financing activities:
 

 
 

Decrease in bank overdrafts
(14,527
)
 
(9,555
)
Decrease in financed vendor accounts payable

 
(31,648
)
Issuance of senior unsecured notes
299,904

 

Payment of debt related costs
(2,648
)
 
(3,656
)
Borrowings under credit facilities
58,500

 
1,363,200

Payments on credit facilities
(173,500
)
 
(1,064,000
)
Dividends paid
(17,586
)
 
(18,541
)
Proceeds from the issuance of common stock, primarily exercise of stock options
7,182

 
12,452

Tax withholdings related to the exercise of stock appreciation rights
(25,627
)
 
(3,151
)
Excess tax benefit from share-based compensation
21,867

 
5,099

Repurchase of common stock
(25,193
)
 
(629,189
)
Contingent consideration related to previous business acquisition
(4,755
)
 

Other
(723
)
 
(712
)
Net cash provided by (used in) financing activities
122,894

 
(379,701
)
Net increase in cash and cash equivalents
421,482

 
6,720

Cash and cash equivalents, beginning of period
57,901

 
59,209

Cash and cash equivalents, end of period
$
479,383

 
$
65,929

 
 
 
 

4

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 6, 2012 and October 8, 2011
(in thousands)
(unaudited)
 
Forty Week Periods Ended
 
October 6,
2012
 
October 8,
2011
Supplemental cash flow information:
 
 
 
Interest paid
$
18,616

 
$
24,901

Income tax payments
107,031

 
114,277

Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
23,739

 
22,213

Changes in other comprehensive income (loss)
(121
)
 
9,218

Retirement of treasury stock
1,644,767

 

Contingent consideration accrued on acquisition

 
6,156


The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements

5

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)



1.
Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiary, Advance Stores Company, Incorporated ("Stores"), and its subsidiaries (collectively, the "Company"). All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated financial statements for the fiscal year ended December 31, 2011, or Fiscal 2011.

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for Fiscal 2011 (filed with the Securities and Exchange Commission, or SEC, on February 28, 2012).

The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full fiscal year. The first quarter of each of the Company's fiscal years contains 16 weeks while the remaining three quarters contain 12 weeks each.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

New Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board, or FASB, issued ASU No. 2012-02 “Intangible-Goodwill and Other – Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 modifies the requirement to test intangible assets that are not subject to amortization based on events or changes in circumstances that might indicate that the asset is impaired now requiring the test only if it is more likely than not that the asset is impaired. Furthermore, ASU 2012-02 provides entities the option of performing a qualitative assessment to determine if it is more likely than not that the fair value of an intangible asset is less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

In September 2011, the FASB, issued ASU No. 2011-08 “Intangible-Goodwill and Other – Testing Goodwill for Impairment.” ASU 2011-08 provides entities the option of performing a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform a two-step quantitative goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. The adoption of ASU 2011-08 had no impact on the Company’s consolidated financial condition, results of operations or cash flows.


6

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income – Presentation of Comprehensive Income.” ASU 2011-05 requires comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update should be applied retrospectively and is effective for interim and annual reporting periods beginning after December 15, 2011. The Company adopted this guidance in the first quarter of 2012. The adoption of ASU 2011-05 is for presentation purposes only and had no material impact on the Company’s condensed consolidated financial statements.

 
2.
Inventories, net:

Inventories are stated at the lower of cost or market. The Company used the LIFO method of accounting for approximately 95% of inventories at October 6, 2012, December 31, 2011 and October 8, 2011. Under LIFO, the Company’s cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in Fiscal 2012 and prior years. As a result of utilizing LIFO, the Company recorded a reduction to cost of sales of $20,684 for the forty weeks ended October 6, 2012. The Company's overall costs to acquire inventory for the same or similar products have generally decreased as the Company has been able to leverage its continued growth, execution of merchandise strategies and realization of supply chain efficiencies. As a result of utilizing LIFO, the Company recorded an increase to cost of sales of $16,741 for the forty weeks ended October 8, 2011 due to an increase in supply chain costs and inflationary pressures affecting certain product categories.

An actual valuation of inventory under the LIFO method is performed by the Company at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected fiscal year-end inventory levels and costs.

Inventory balances at October 6, 2012, December 31, 2011 and October 8, 2011 were as follows:

 
October 6,
2012
 
December 31,
2011
 
October 8,
2011
Inventories at FIFO, net
$
2,070,582

 
$
1,941,055

 
$
1,999,651

Adjustments to state inventories at LIFO
122,787

 
102,103

 
110,070

Inventories at LIFO, net
$
2,193,369

 
$
2,043,158

 
$
2,109,721


3.
Goodwill and Intangible Assets:

Goodwill

The Company has goodwill recorded in both the Advance Auto Parts ("AAP") and Autopart International ("AI") segments. The following table reflects the carrying amount of goodwill pertaining to the Company's two segments and the changes in goodwill carrying amounts. 

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Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


 
 
AAP Segment
 
AI Segment
 
Total
Balance at December 31, 2011
 
$
58,095

 
$
18,294

 
$
76,389

Fiscal 2012 activity
 

 

 

Balance at October 6, 2012
 
$
58,095

 
$
18,294

 
$
76,389

 
 
 
 
 
 
 
Balance at January 1, 2011
 
$
16,093

 
$
18,294

 
$
34,387

Fiscal 2011 activity
 
16,991

 

 
16,991

Balance at October 8, 2011
 
$
33,084

 
$
18,294

 
$
51,378


Intangible Assets Other Than Goodwill

The gross and net carrying amounts of acquired intangible assets as of October 6, 2012, December 31, 2011 and October 8, 2011 are comprised of the following:
 
 
Acquired intangible assets
 
 
 
Subject to Amortization
 
Not Subject to Amortization
 
Total Intangible Assets
(excluding goodwill)
 
Customer
Relationships
 
Acquired Technology
 
Other
 
Trademark and
Tradenames
 
Gross:
 
 
 
 
 
 
 
 
 
Gross carrying amount at
    December 31, 2011
$
9,800

 
$
7,750

 
$
885

 
$
20,550

 
$
38,985

Additions

 

 

 

 

Gross carrying amount at
    October 6, 2012
$
9,800

 
$
7,750

 
$
885

 
$
20,550

 
$
38,985

 
 
 
 
 
 
 
 
 
 
Gross carrying amount at
    January 1, 2011
$
9,800

 
$

 
$
885

 
$
20,550

 
$
31,235

Additions

 
4,750

 

 

 
4,750

Gross carrying amount at
    October 8, 2011
$
9,800

 
$
4,750

 
$
885

 
$
20,550

 
$
35,985

 
 
 
 
 
 
 
 
 
 
Net:
 

 
 
 
 

 
 

 
 

Net carrying amount at
    December 31, 2011
$
3,618

 
$
6,987

 
$
225

 
$
20,550

 
$
31,380

Additions

 

 

 

 

2012 amortization
738

 
1,987

 
6

 

 
2,731

Net book value at October 6, 2012
$
2,880

 
$
5,000

 
$
219

 
$
20,550

 
$
28,649

 
 
 
 
 
 
 
 
 
 
Net carrying amount at
    January 1, 2011
$
4,578

 
$

 
$
232

 
$
20,550

 
$
25,360

Additions

 
4,750

 

 

 
4,750

2011 amortization
738

 
244

 
6

 

 
988

Net book value at October 8, 2011
$
3,840

 
$
4,506

 
$
226

 
$
20,550

 
$
29,122

 

8

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


Future Amortization Expense

The table below shows expected amortization expense for the next five years for acquired intangible assets recorded as of October 6, 2012:

Fiscal Year
 
Amount
Remainder of 2012
 
$
819

2013
 
3,550

2014
 
2,788

2015
 
751

2016
 
7

Thereafter
 
184


4.
Receivables, net:

Receivables consist of the following:
 
 
October 6,
2012
 
December 31,
2011
 
October 8,
2011
 
Trade
 
$
90,571

 
$
19,079

 
$
23,465

 
Vendor
 
113,340

 
118,309

 
105,338

 
Other
 
5,970

 
6,675

 
6,601

 
Total receivables
 
209,881

 
144,063

 
135,404

 
Less: Allowance for doubtful accounts
 
(5,326
)
 
(4,056
)
 
(3,995
)
 
Receivables, net
 
$
204,555

 
$
140,007

 
$
131,409

 

During Fiscal 2012, the Company began the in-sourcing of its commercial credit function. This initiative consists of the transition from using a third party financial institution to settle credit transactions with its Commercial customers to processing those transactions internally, thus increasing the trade receivable balance during the current year.

Through this program, the Company grants credit to certain Commercial customers who meet the Company's credit requirements. The Company's concentration of credit risk with respect to trade receivables is limited because the Company's customer base consists of a large number of customers with relatively small balances, which allows the credit risk to be spread across a broad base. The Company also mitigates its exposure to credit risk through a credit approval process including, credit checks, pre-determined credit limits and accounts receivable and credit monitoring procedures.

9

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


5.
Long-term Debt:

Long-term debt consists of the following:
 
October 6,
2012
 
December 31,
2011
 
October 8,
2011
Revolving facility at variable interest rates (1.77%, 1.78% and 1.81% at October 6, 2012, December 31, 2011 and October 8, 2011, respectively) due May 27, 2016
$

 
$
115,000

 
$
299,200

5.75% Senior Unsecured Notes (net of unamortized discount of $999, $1,078 and $1,101 at October 6, 2012, December 31, 2011 and October 8, 2011, respectively) due May 1, 2020
299,001

 
298,922

 
298,899

4.50% Senior Unsecured Notes (net of unamortized discount of $90 at October 6, 2012) due January 15, 2022
299,910

 

 

Other
1,338

 
2,062

 
2,288

 
600,249

 
415,984

 
600,387

Less: Current portion of long-term debt
(699
)
 
(848
)
 
(949
)
Long-term debt, excluding current portion
$
599,550

 
$
415,136

 
$
599,438

 
Bank Debt

The Company has a $750,000 unsecured five-year revolving credit facility with Stores serving as the borrower. The revolving credit facility also provides for the issuance of letters of credit with a sub-limit of $300,000, and swingline loans in an amount not to exceed $50,000. The Company may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not exceeding $250,000 (up to a total commitment of $1,000,000). Voluntary prepayments and voluntary reductions of the revolving balance are permitted in whole or in part, at the Company’s option, in minimum principal amounts as specified in the revolving credit facility. The revolving credit facility matures on May 27, 2016.

As of October 6, 2012, the Company had no borrowings outstanding under its revolving credit facility, but had letters of credit outstanding of $88,493, which reduced the availability under the revolving credit facility to $661,507. The letters of credit generally have a term of one year or less and serve as collateral for the Company's self-insurance policies and routine purchases of imported merchandise.

The interest rate on borrowings under the revolving credit facility is based, at the Company’s option, on an adjusted LIBOR rate, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.5% per annum for each of the adjusted LIBOR and alternate base rate borrowings. A facility fee is charged on the total amount of the revolving credit facility, payable in arrears. The current facility fee rate is 0.25% per annum. Under the terms of the revolving credit facility, the interest rate and facility fee are based on the Company’s credit rating.

The Company’s revolving credit facility contains covenants restricting its ability to, among other things:  (1) create, incur or assume additional debt, (2) incur liens or engage in sale-leaseback transactions, (3) make loans and investments (including acquisitions), (4) guarantee obligations, (5) engage in certain mergers and liquidations, (6) change the nature of the Company’s business and the business conducted by its subsidiaries, (7) enter into certain hedging transactions, and (8) change Advance’s status as a holding company. The Company is also required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. The Company was in compliance with its covenants in place at October 6, 2012 and December 31, 2011, respectively. The Company’s revolving credit facility also provides for customary events of default, covenant defaults and cross-defaults to its other material indebtedness.

Senior Unsecured Notes

The Company’s 5.75% senior unsecured notes were issued in April 2010 at 99.587% of the principal amount of $300,000 and are due May 1, 2020 (the "2020 Notes"). The 2020 Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year. The Company’s 4.50% senior unsecured notes were issued in January 2012 at

10

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


99.968% of the principal amount of $300,000 and are due January 15, 2022 (the "2022 Notes" or collectively with 2020 Notes, "the Notes"). The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. Advance served as the issuer of the Notes with certain of Advance’s domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture and supplemental indentures (collectively the “Indenture”) among the Company, the subsidiary guarantors and Wells Fargo Bank, National Association, as Trustee.

The Company may redeem some or all of the Notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in the Indenture), the Company will be required to offer to repurchase the notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by each of the subsidiary guarantors. The Company will be permitted to release guarantees without the consent of holders of the Notes under the circumstances described in the Indenture: (i) upon the release of the guarantee of the Company's other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon the Company's exercise of its legal or covenant defeasance option.

The Indenture contains customary provisions for events of default including for (i) failure to pay principal or interest when due and payable, (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice, (iii) a default under any debt for money borrowed by the Company or any of its subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25,000 without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by the Company of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding, and (iv) events of bankruptcy, insolvency or reorganization affecting the Company and certain of its subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of the Company and its subsidiaries to incur debt secured by liens and to enter into sale and lease-back transactions.

Debt Guarantees

Certain domestic subsidiaries of Stores, including its Material Subsidiaries (as defined in the revolving credit facility), serve as guarantors of the Notes and revolving credit facility with Advance also serving as a guarantor of the revolving credit facility. The subsidiary guarantees related to the Company’s Notes and revolving credit facility are full and unconditional and joint and several, and there are no restrictions on the ability of Advance to obtain funds from its subsidiaries. Also, Advance has no independent assets or operations, and the subsidiaries not guaranteeing the Notes and revolving credit facility are minor as defined by SEC regulations.

6.
Derivative Instruments and Hedging Activities:

From September 2011 through January 2012, the Company executed a series of forward treasury rate locks in anticipation of the issuance of the 2022 Notes. The treasury rate locks, which were derivative instruments, were designated as cash flow hedges to offset the Company's exposure to increases in the underlying U.S. Treasury benchmark rate. This rate was used to establish the fixed interest rate for 2022 Notes which was comprised of the underlying U.S. Treasury benchmark rate, plus a credit spread premium. Upon issuance of the 2022 Notes, the cumulative change in fair market value of the treasury rate locks was not significant due to the narrow margin between the lock rate and the underlying treasury rate.

The Company's previously outstanding interest rate swaps matured on October 5, 2011. The Company had entered into these interest rate swaps as a hedge to the variable rate interest payments on its bank debt. Effective April 24, 2010, the Company’s outstanding interest rate swaps no longer qualified for hedge accounting as a result of the Company’s intent to pay off its bank debt with the proceeds from the offering of the 2020 Notes. Accordingly, the Company recorded all subsequent changes in the fair value of the interest rate swaps through earnings and amortized to interest expense the remaining balance of previously recorded unrecognized loss in accumulated other comprehensive loss over the remaining life of the swaps.


11

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheet as of October 6, 2012, December 31, 2011 and October 8, 2011:
 
 
Balance Sheet
Location
 
Fair Value as of
October 6,
2012
 
Fair Value as of
December 31,
2011
 
Fair Value as of
October 8,
2011
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Treasury rate locks
Other current assets
 
$

 
$
4,986

 
$
7,815

 
The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the twelve and forty weeks ended October 6, 2012 and October 8, 2011, respectively:

Interest rate swaps
 
Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative,
net of tax
(Effective
Portion)
 
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
 
Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income, net of
tax (Effective
Portion)
 
Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)
 
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative, net
of tax
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
For the Twelve Weeks Ended October 6, 2012
 
$

 
Interest expense
 
$

 
Other (expense)
income, net
 
$

For the Twelve Weeks Ended October 8, 2011
 
$
4,759

 
Interest expense
 
$
(1,353
)
 
Other (expense) income, net
 
$
68

For the Forty Weeks Ended October 6, 2012
 
$
254

 
Interest expense
 
$
108

 
Other (expense) income, net
 
$
66

For the Forty Weeks Ended October 8, 2011
 
$
4,759

 
Interest expense
 
$
(4,809
)
 
Other (expense) income, net
 
$
(132
)

7.
Fair Value Measurements:
 
The Company’s financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of these assets or liabilities. These levels are:

Level 1 – Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities at the measurement date, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are less active, and inputs other than quoted prices that are observable for the asset or liability or corroborated by other observable market data.
Level 3 – Unobservable inputs for assets or liabilities that are not able to be corroborated by observable market data and reflect the use of a reporting entity’s own assumptions. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.


12

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
 
The following table sets forth the Company’s financial liabilities that were measured at fair value on a recurring basis as of October 6, 2012, December 31, 2011 and October 8, 2011:

 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
As of October 6, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration related to previous business acquisitions
$
23,021

 
$

 
$

 
$
23,021

 
 
 
 
 
 
 
 
As of December 31, 2011
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Treasury rate locks
$
4,986

 
$

 
$
4,986

 
$

Contingent consideration related to previous business acquisitions
27,776

 

 

 
27,776

 
 
 
 
 
 
 
 
As of October 8, 2011
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Treasury rate locks
$
7,815

 
$

 
$
7,815

 
$

Contingent consideration related to previous business acquisitions
$
6,156

 
$

 
$

 
$
6,156

 
The fair values of the Company’s treasury rate locks and interest rate swaps represent the estimated amounts that the Company would receive or pay to terminate the agreements taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities (based on the forward yield curve). The fair value of the contingent consideration, which is recorded in Accrued expenses and Other long-term liabilities, was based on various estimates including the Company's estimate of the probability of achieving the targets and the time value of money. During the second quarter of 2012, contingent consideration decreased primarily due to a payment of $4,755 as result of the achievement of a performance condition related to a previous acquisition.

The carrying amount of the Company’s cash and cash equivalents, accounts receivable, bank overdrafts, accounts payable, accrued expenses and current portion of long term debt approximate their fair values due to the relatively short term nature of these instruments. As of October 6, 2012, December 31, 2011 and October 8, 2011, the fair value of the Company’s long-term debt with a carrying value of $599,550, $415,136 and $599,438, respectively, was approximately $675,000, $446,000 and $619,000, respectively. The fair value of the Company’s senior unsecured notes was determined based on quoted market prices. The Company believes that the carrying value of its other long-term debt and certain long-term liabilities approximate fair value.


13

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). At October 6, 2012, the Company had no significant non-financial assets or liabilities that had been adjusted to fair value subsequent to initial recognition.
 
8.
Stock Repurchase Program:

The Company’s stock repurchase program allows it to repurchase its common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the SEC. The Company's $500,000 stock repurchase program in place as of October 6, 2012 was authorized by its Board of Directors on May 14, 2012.

During the twelve weeks ended October 6, 2012, the Company repurchased no shares of its common stock under its stock repurchase program. During the forty weeks ended October 6, 2012, the Company repurchased 257 shares of its common stock at an aggregate cost of $19,589, or an average price of $76.18 per share under its stock repurchase program. The Company had $492,385 remaining under its stock repurchase program as of October 6, 2012. The Company repurchased 2 shares of its common stock at an aggregate cost of $151, or an average price of $72.85 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the twelve weeks ended October 6, 2012. The Company repurchased 66 shares of its common stock at an aggregate cost of $5,604, or an average price of $84.61 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock during the forty weeks ended October 6, 2012. The Company also retired 33,738 shares of treasury stock during the forty weeks ended October 6, 2012.

During the twelve weeks ended October 8, 2011, the Company repurchased 1,700 shares of its common stock at an aggregate cost of $99,968, or an average price of $58.81 per share under its $300,000 stock repurchase program authorized by its Board of Directors on August 9, 2011. During the forty weeks ended October 8, 2011, the Company repurchased 9,912 shares of its common stock at an aggregate cost of $609,650, or an average price of $61.51 per share. Additionally, the Company repurchased 1 share of its common stock at an aggregate cost of $44 and 73 shares of its common stock at an aggregate cost of $4,500, in connection with the net settlement of shares issued as a result of the vesting of restricted stock, during the twelve and forty weeks ended October 8, 2011, respectively.

9.
Earnings per Share:
 
Certain of the Company’s shares granted to employees in the form of restricted stock are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the twelve week periods ended October 6, 2012 and October 8, 2011, earnings of $203 and $276, respectively, were allocated to the participating securities. For the forty week periods ended October 6, 2012 and October 8, 2011, earnings of $760 and $924, respectively, were allocated to the participating securities.
 
Diluted earnings per share are calculated by including the effect of dilutive securities. Share-based awards to purchase approximately 187 and 52 shares of common stock that had an exercise price in excess of the average market price of the common stock during the twelve week periods ended October 6, 2012 and October 8, 2011, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive. Share-based awards to purchase approximately 213 and 51 shares of common stock that had an exercise price in excess of the average market price of the common stock during the forty week periods ended October 6, 2012 and October 8, 2011, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive.


14

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


The following table illustrates the computation of basic and diluted earnings per share for the twelve and forty week periods ended October 6, 2012 and October 8, 2011, respectively:
 
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
October 6,
2012
 
October 8,
2011
 
October 6,
2012
 
October 8,
2011
Numerator
 
 
 
 
 
 
 
Net income applicable to common shares
$
89,503

 
$
105,553

 
$
322,615

 
$
328,243

Participating securities' share in earnings
(203
)
 
(276
)
 
(760
)
 
(924
)
Net income applicable to common shares
$
89,300

 
$
105,277

 
$
321,855

 
$
327,319

Denominator
 

 
 

 
 
 
 
Basic weighted average common shares
73,166

 
73,381

 
73,052

 
76,595

Dilutive impact of share-based awards
826

 
1,349

 
1,055

 
1,463

Diluted weighted average common shares
73,992

 
74,730

 
74,107

 
78,058

 
 
 
 
 
 
 
 
Basic earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.22

 
$
1.43

 
$
4.41

 
$
4.27

 
 
 
 
 
 
 
 
Diluted earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.21

 
$
1.41

 
$
4.34

 
$
4.19


10.
Warranty Liabilities:

The following table presents changes in the Company’s warranty reserves:
 
October 6,
2012
 
December 31,
2011
 
October 8,
2011
 
(40 weeks ended)
 
(52 weeks ended)
 
(40 weeks ended)
Warranty reserve, beginning of period
$
38,847

 
$
36,352

 
$
36,352

Additions to warranty reserves
29,332

 
43,013

 
31,384

Reserves utilized
(30,983
)
 
(40,518
)
 
(29,609
)
 
 
 
 
 
 
Warranty reserve, end of period
$
37,196

 
$
38,847

 
$
38,127

 
The Company’s warranty liabilities are included in Accrued expenses in its condensed consolidated balance sheets.
 
11.
Segment and Related Information:

The Company has the following two reportable segments: AAP and AI. As of October 6, 2012, the AAP segment is comprised of 3,517 stores in the Northeastern, Southeastern and Midwestern areas of the United States (included in the Southeastern area are 26 stores in Puerto Rico and the Virgin Islands.) These stores, which primarily operate under the trade names “Advance Auto Parts” and “Advance Discount Auto Parts,” offer a broad selection of brand name and proprietary automotive replacement parts, accessories and maintenance items for domestic and imported cars and light trucks. We aggregate the financial results of AAP's geographic areas, which are individually considered operating segments, due to the economic similarities of those areas.

Included in our geographic areas are sales generated from our e-commerce platforms. Our e-commerce platforms primarily consist of our online website and Commercial ordering platforms as part of our integrated operating approach of serving our DIY and Commercial customers. Our online website allows our DIY customers to pick up merchandise at a conveniently

15

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 6, 2012 and October 8, 2011
(in thousands, except per share data)
(unaudited)


located store location or have their purchases shipped directly to them. The majority of our online sales are picked up at store locations. Through our online ordering platform, Commercial customers can conveniently place orders with a designated store location.

The AI segment consists solely of the operations of Autopart International, Inc., which mainly operates stores under the “Autopart International” trade name and serves the Commercial market. As of October 6, 2012, AI operated 210 stores primarily located in the Northeastern and Mid-Atlantic regions of the United States and Florida.

The Company evaluates each of its segment’s financial performance based on net sales and operating profit for purposes of allocating resources and assessing performance. The accounting policies of the reportable segments are generally the same as those described in the Annual Report on Form 10-K for the year ended December 31, 2011.

The following table summarizes financial information for each of the Company's business segments for the twelve and forty weeks ended October 6, 2012 and October 8, 2011, respectively.
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 6,
2012
 
October 8,
2011
 
October 6,
2012
 
October 8,
2011
Net sales
 
 
 
 
 
 
 
AAP
$
1,386,791

 
$
1,394,916

 
$
4,646,688

 
$
4,618,556

AI
74,538

 
73,604

 
241,146

 
236,459

Eliminations (1)
(3,802
)
 
(3,532
)
 
(12,032
)
 
(12,125
)
Total net sales
$
1,457,527

 
$
1,464,988

 
$
4,875,802

 
$
4,842,890

 
 
 
 
 
 
 
 
Income before provision for income taxes
 
 
 
 
 
 
 
AAP
$
140,141

 
$
164,586

 
$
508,137

 
$
515,029

AI
2,483

 
4,470

 
10,892

 
11,048

Total income before provision for income taxes
$
142,624

 
$
169,056

 
$
519,029

 
$
526,077

 
 
 
 
 
 
 
 
Provision for income taxes
 
 
 
 
 
 
 
AAP
$
52,155

 
$
61,684

 
$
192,069

 
$
193,319

AI
966

 
1,819

 
4,345

 
4,515

Total provision for income taxes
$
53,121

 
$
63,503

 
$
196,414

 
$
197,834

 
 
 
 
 
 
 
 
Segment assets
 
 
 
 
 
 
 
AAP
$
4,090,931

 
$
3,414,516

 
$
4,090,931

 
$
3,414,516

AI
266,275

 
263,552

 
266,275

 
263,552

Total segment assets
$
4,357,206

 
$
3,678,068

 
$
4,357,206

 
$
3,678,068

 
(1) 
For the twelve weeks ended October 6, 2012, eliminations represented net sales of $2,504 from AAP to AI and $1,298 from AI to AAP. For the twelve weeks ended October 8, 2011, eliminations represented net sales of $1,867 from AAP to AI and $1,665 from AI to AAP. For the forty weeks ended October 6, 2012, eliminations represented net sales of $7,695 from AAP to AI and $4,337 from AI to AAP. For the forty weeks ended October 8, 2011, eliminations represented net sales of $6,574 from AAP to AI and $5,551 from AI to AAP.

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. Our first quarter consists of 16 weeks divided into four equal periods. Our remaining three quarters consist of 12 weeks with each quarter divided into three equal periods.

Certain statements in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are usually identified by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "likely," "may," "plan," "position," "possible," "potential," "probable," "project," "projection," "should," "strategy," "will," or similar expressions. We intend for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available.

Although we believe that our plans, intentions and expectations as reflected in or suggested by any forward-looking statements are reasonable, we do not guarantee or give assurance that such plans, intentions or expectations will be achieved.  Actual results may differ materially from our anticipated results described or implied in our forward-looking statements, and such differences may be due to a variety of factors. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.

Listed below and discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 (filed with the Securities and Exchange Commission, or SEC, on February 28, 2012), which we refer to as our 2011 Form 10-K, are some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report. These include, but are not limited to, the following:
 
a decrease in demand for our products;
competitive pricing and other competitive pressures;
our ability to implement our business strategy;
our ability to expand our business, including the location of available and suitable real estate for new store locations, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;
our ability to attract and retain qualified employees, or Team Members;
deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, uncertain credit markets or other recessionary type conditions could have a negative impact on our business, financial condition, results of operations and cash flows;
regulatory and legal risks, such as environmental or OSHA risks, including being named as a defendant in administrative investigations or litigation, and the incurrence of legal fees and costs, the payment of fines or the payment of sums to settle litigation cases or administrative investigations or proceedings;
security breach or other cyber security incident;
business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism; and
the impact of global climate change or legal and regulatory responses to such change.

We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the SEC and you should not place undue reliance on those statements.


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Introduction

We are a leading specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States. Our stores carry an extensive product line for cars, vans, sport utility vehicles and light trucks. We serve both "do-it-yourself," or DIY, and “do-it-for-me,” or Commercial, customers. Our Commercial customers consist primarily of delivery customers for whom we deliver products from our store locations to our Commercial customers’ places of business, including national garage chains, independent garages, service stations and auto dealers. At October 6, 2012, we operated a total of 3,727 stores.

We operate in two reportable segments: Advance Auto Parts, or AAP, and Autopart International, Inc., or AI. The AAP segment is comprised of our store operations within the Northeastern, Southeastern and Midwestern regions of the United States, Puerto Rico and the Virgin Islands which primarily operate under the trade names “Advance Auto Parts” and “Advance Discount Auto Parts.” At October 6, 2012, we operated 3,517 stores in the AAP segment. Our AAP stores offer a broad selection of brand name and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars and light trucks. Through our integrated operating approach, we serve our DIY and Commercial customers from our store locations and online at www.AdvanceAutoParts.com. Our online website allows our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to their home or business. Our Commercial customers can conveniently place their orders online.

At October 6, 2012, we operated 210 stores in the AI segment under the “Autopart International” trade name. AI’s business primarily serves the Commercial market from its store locations in the Northeastern and Mid-Atlantic regions of the United States and Florida. For additional information regarding our segments, see Note 11, Segment and Related Information, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Management Overview

We generated earnings per diluted share, or diluted EPS, of $1.21 during our twelve weeks ended October 6, 2012 ( or the third quarter of Fiscal 2012) compared to $1.41 for the comparable period of Fiscal 2011. The decrease in our diluted EPS was primarily due to a decrease in our operating income. Consistent with our second quarter, our sales during the third quarter remained constrained particularly in our colder weather markets. The current economy affected our sales consistent with many other retailers, including our peer companies in the automotive aftermarket industry, as consumers faced high unemployment and gas prices and low consumer confidence. During the third quarter, we increased store labor and advertising along with more targeted promotional activity in response to the difficult sales environment. The increase in store labor was focused on providing better service to our Commercial customers and improving weekend staffing to better serve our DIY customers. While price promotions negatively impacted our top line during the third quarter, we believe they will positively contribute to our growth in the future by retaining current customers and attracting new customers. Despite our current performance, we remain encouraged by (i) the long-term dynamics of the automotive aftermarket industry, (ii) initiatives that are underway in support of our strategies and (iii) the improvement in our comparable Commercial sales from the second quarter to the third quarter.

Although our operating income for the third quarter of Fiscal 2012 declined over the comparable period of last year, we generated significant operating cash flow through the third quarter of Fiscal 2012. We currently have a significant amount of cash on-hand to invest in capital improvements and initiatives to support our strategies.  As discussed later in the "Business and Industry Update," we remain committed to investing in our two key strategies.


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Summary of Third Quarter Financial Results

A high-level summary of our financial results for the third quarter of Fiscal 2012 is included below:
 
Net sales during the third quarter of Fiscal 2012 were $1,457.5 million, a decrease of 0.5% as compared to the third quarter of Fiscal 2011, driven by a 1.8% decrease in comparable store sales partially offset by the addition of 82 net new stores over the past 12 months.
Our operating income for the third quarter of Fiscal 2012 was $150.4 million, a decrease of $27.5 million over the comparable period of Fiscal 2011. As a percentage of total sales, operating income was 10.3%, a decrease of 182 basis points, due to higher SG&A partially offset by a slight improvement in gross profit rate.
Our inventory balance as of October 6, 2012 increased $83.6 million, or 4.0%, over the comparable period last year to support our inventory availability initiatives.
We generated operating cash flow of $504.8 million during the forty weeks ended October 6, 2012, a decrease of 17.4% over the comparable period in Fiscal 2011, with the largest portion of the decrease consisting of an increase in accounts receivable resulting from the in-sourcing of our Commercial credit program.

Refer to the "Results of Operations" and "Liquidity" sections for further details of our income statement and cash flow results, respectively.

Business and Industry Update

Our two key strategies, Superior Availability and Service Leadership, remain unchanged in Fiscal 2012. Superior Availability is aimed at product availability and maximizing the speed, reliability and efficiency of our supply chain. Service Leadership leverages our product availability in addition to more consistent execution of customer-facing initiatives to strengthen our integrated operating approach of serving our DIY and Commercial customers whether in our stores or on-line. Through these two key strategies, we believe we can continue to build on the initiatives discussed below and produce favorable financial results over the long term. Sales to Commercial customers remain the biggest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, increased to 38% for the third quarter of Fiscal 2012 compared to 37% for the same period in Fiscal 2011.

A few of the priorities under our strategies include:

Improving in-market availability through the continued expansion of our HUB network and completion of store inventory upgrades;
The commencement of outbound shipments to our stores from our new Remington, Indiana distribution center during the third quarter of Fiscal 2012, which will provide needed capacity and upgraded supply chain technology;
Our continued efforts to enhance e-commerce offerings; and
The in-sourcing of our Commercial credit function and addition of other customer offerings to support the continued investment in our Commercial business.

The automotive aftermarket industry is influenced by a number of general macroeconomic factors similar to those affecting the overall retail industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and spending habits, and competition. While we feel that the difficult conditions affecting the macroeconomic environment continue to constrain consumer spending, we remain confident that the long-term dynamics of the automotive aftermarket industry are positive.

Favorable industry dynamics include:
 
an increase in number and average age of vehicles;
a long-term expectation that miles driven will increase based on historical trends; and
a fragmented commercial market.
 
Conversely, the factors negatively affecting the automotive aftermarket industry include:
 
high gas prices and unemployment rates and relatively low consumer confidence;
later maintenance and part failure intervals on newer cars due to an increase in quality; and
an overall reduction in discretionary spending on elective maintenance and other accessories.
 

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While we believe the deceleration in our sales will not be a long-term trend given the overall positive long-term industry dynamics, we do anticipate constrained sales for the remainder of Fiscal 2012 based on the current trend of lower customer demand. Despite the lower sales, we are committed to achieving our long-term sales growth and profitability goals by remaining focused on our Commercial sales growth while balancing support and discretionary expenses with the additional cost of investments in our key strategies.

Consolidated Operating Results and Key Statistics and Metrics

The following table highlights certain consolidated operating results and key statistics and metrics for the twelve and forty weeks ended October 6, 2012 and October 8, 2011, respectively, and the fiscal years ended December 31, 2011 and January 1, 2011. We use these key statistics and metrics to measure the financial progress of our key strategies.
 
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
 
 
 
 
October 6, 2012
 
October 8, 2011
 
October 6, 2012
 
October 8, 2011
 
FY 2011
 
FY 2010
Operating Results:
 
 
 
 
 
 
 
 
 
 
 
Total net sales (in 000s)
$
1,457,527

 
$
1,464,988

 
$
4,875,802

 
$
4,842,890

 
$
6,170,462

 
$
5,925,203

Comparable store sales growth(1)
(1.8
%)
 
2.2
%
 
(0.5
)%
 
2.0
%
 
2.2
%
 
8.0
%
Gross profit
49.8
%
 
49.5
%
 
49.9
 %
 
49.9
%
 
49.7
%
 
50.0
%
SG&A
39.4
%
 
37.3
%
 
38.8
 %
 
38.5
%
 
39.0
%
 
40.1
%
Operating profit
10.3
%
 
12.1
%
 
11.2
 %
 
11.4
%
 
10.8
%
 
9.9
%
Diluted earnings per share
$
1.21

 
$
1.41

 
$
4.34

 
$
4.19

 
$
5.11

 
$
3.95

 
 
 
 
 
 
 
 
 
 
 
 
Key Statistics and Metrics:
 

 
 

 
 
 
 
 
 

 
 

Number of stores, end of period
3,727

 
3,645

 
3,727

 
3,645

 
3,662

 
3,563

Total store square footage, end of period (in 000s)
27,194

 
26,533

 
27,194

 
26,533

 
26,663

 
25,950

Total Team Members, end of period
54,220

 
52,386

 
54,220

 
52,386

 
52,002

 
51,017

Sales per store
   (in 000s)(2)(3)
$
1,683

 
$
1,702

 
$
1,683

 
$
1,702

 
$
1,708

 
$
1,697

Operating income per store (in 000s)(2)(4)
$
178

 
$
177

 
$
178

 
$
177

 
$
184

 
$
168

Gross margin return on inventory(2)(5)