Advance Auto Parts 2004 Annual Report Download - page 29

Advance฀Auto฀Parts,฀Inc.฀and฀Subsidiaries
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฀ In฀ November฀ 2004,฀ the฀ FASB฀ issued฀ SFAS฀ No.฀ 151,฀
“Inventory฀Costs.”฀The฀new฀statement฀amends฀Accounting฀
Research฀Bulletin฀No.฀43,฀Chapter฀4,฀“Inventory฀Pricing,”฀
to฀ clarify฀ the฀ accounting฀ for฀ abnormal฀ amounts฀ of฀ idle฀
facility฀expense,฀freight,฀handling฀costs฀and฀wasted฀mate-
rial.฀This฀statement฀requires฀that฀those฀items฀be฀recognized฀
as฀ current-period฀ charges฀ and฀ requires฀ that฀ allocation฀ of฀
fixed฀ production฀ overheads฀ to฀ the฀ cost฀ of฀ conversion฀ be฀
based฀ on฀the฀ normal฀capacity฀ of฀the฀production฀facilities.฀
This฀statement฀is฀effective฀for฀fiscal฀years฀beginning฀after฀
June฀15,฀2005.฀We฀do฀not฀expect฀the฀adoption฀of฀this฀state-
ment฀to฀have฀a฀material฀impact฀on฀our฀financial฀condition฀
or฀results฀of฀operations.
฀ In฀ December฀ 2004,฀ the฀ FASB฀ issued฀ SFAS฀ No.฀ 123฀
(revised฀2004),฀“Share-Based฀Payment,”฀or฀SFAS฀No.฀123R.฀
SFAS฀ No.฀ 123R฀ replaces฀ SFAS฀No.฀123,฀ “Accounting฀for฀
Stock-Based฀Compensation”฀and฀supersedes฀APB฀Opinion฀
No.฀25,฀“Accounting฀for฀Stock฀Issued฀to฀Employees,”฀and฀
subsequently฀ issued฀ stock฀ option฀ related฀ guidance.฀ This฀
statement฀ establishes฀ standards฀ for฀ the฀ accounting฀ for฀
transactions฀in฀which฀an฀entity฀exchanges฀its฀equity฀instru-
ments฀ for฀ goods฀ or฀ services,฀ primarily฀ on฀ accounting฀ for฀
transactions฀in฀which฀an฀entity฀obtains฀employee฀services฀
in฀ share-based฀ payment฀ transactions.฀ It฀ also฀ addresses฀
transactions฀in฀which฀an฀entity฀incurs฀liabilities฀in฀exchange฀
for฀goods฀or฀services฀that฀are฀based฀on฀the฀fair฀value฀of฀the฀
entity’s฀ equity฀ instruments฀ or฀ that฀ may฀ be฀ settled฀ by฀ the฀
issuance฀ of฀ those฀ equity฀ instruments.฀ Entities฀ will฀ be฀
required฀to฀measure฀the฀cost฀of฀employee฀services฀received฀
in฀ exchange฀for฀an฀award฀of฀equity฀ instruments฀ based฀on฀
the฀grant-date฀fair฀value฀of฀the฀award฀(with฀limited฀excep-
tions).฀That฀cost฀will฀be฀recognized฀over฀the฀period฀during฀
which฀ an฀ employee฀ is฀ required฀ to฀ provide฀ service฀ in฀
exchange฀ for฀ the฀ award฀ (usually฀ the฀ vesting฀ period).฀ The฀
grant-date฀fair฀value฀of฀employee฀share฀options฀and฀similar฀
instruments฀will฀be฀estimated฀using฀option-pricing฀models.฀
If฀an฀equity฀award฀is฀modified฀after฀the฀grant฀date,฀incre-
mental฀compensation฀cost฀will฀be฀recognized฀in฀an฀amount฀
equal฀to฀the฀excess฀of฀the฀fair฀value฀of฀the฀modified฀award฀
over฀the฀fair฀value฀of฀the฀original฀award฀immediately฀before฀
the฀modification.
฀ We฀are฀required฀to฀apply฀SFAS฀No.฀123R฀to฀all฀awards฀
granted,฀modified฀or฀settled฀as฀of฀the฀beginning฀of฀the฀first฀
interim฀or฀annual฀reporting฀period฀that฀begins฀after฀June฀15,฀
2005.฀ We฀ are฀ also฀ required฀ to฀ use฀ either฀ the฀ modified-฀
prospective฀ method฀ or฀ modified-retrospective฀ method.฀
Under฀ the฀ modified-prospective฀ method,฀ we฀ must฀ recog-
nize฀compensation฀cost฀for฀all฀awards฀subsequent฀to฀adopt-
ing฀the฀standard฀and฀for฀the฀unvested฀portion฀of฀previously฀
granted฀ awards฀ outstanding฀ upon฀ adoption.฀ Under฀ the฀
modified-retrospective฀method,฀we฀must฀restate฀our฀previ-
ously฀issued฀financial฀statements฀to฀recognize฀the฀amounts฀฀
we฀previously฀calculated฀and฀reported฀on฀a฀pro฀forma฀basis,฀
as฀ if฀ the฀ prior฀ standard฀ had฀ been฀ adopted.฀ Under฀ both฀
methods,฀we฀are฀permitted฀to฀use฀either฀the฀straight฀line฀or฀
an฀accelerated฀method฀to฀amortize฀the฀cost฀as฀an฀expense฀
for฀awards฀with฀graded฀vesting.฀The฀standard฀permits฀and฀
encourages฀early฀adoption.
฀ We฀have฀commenced฀our฀analysis฀of฀the฀impact฀of฀SFAS฀
No.฀ 123R,฀but฀have฀ not฀ yet฀decided:฀(1)฀ whether฀ we฀elect฀฀
to฀ early฀ adopt,฀ (2)฀ if฀ we฀ elect฀ to฀ early฀ adopt,฀ what฀ date฀฀
we฀ would฀ do฀ so,฀ (3)฀ whether฀ we฀ will฀ use฀ the฀ modified-
prospective฀ or฀ modified-retrospective฀ method,฀ and฀ (4)฀
whether฀we฀will฀elect฀to฀use฀straight-line฀or฀an฀accelerated฀
method.฀Accordingly,฀we฀ have฀not฀determined฀the฀impact฀
that฀the฀adoption฀of฀SFAS฀No.฀123R฀will฀have฀on฀our฀finan-
cial฀position฀or฀results฀of฀operations.
Quantitative฀and฀Qualitative฀Disclosures฀About฀Market฀Risks
฀ We฀ are฀ exposed฀ to฀ cash฀ f low฀ risk฀ due฀ to฀ changes฀ in฀
interest฀rates฀with฀respect฀to฀our฀long-term฀debt.฀Our฀long-
term฀debt฀currently฀consists฀of฀borrowings฀under฀a฀senior฀
credit฀facility฀and฀is฀primarily฀vulnerable฀to฀movements฀in฀
the฀LIBOR฀rate.฀While฀we฀cannot฀predict฀the฀impact฀inter-
est฀rate฀movements฀will฀have฀on฀our฀debt,฀exposure฀to฀rate฀
changes฀is฀managed฀through฀the฀use฀of฀hedging฀activities.฀
Our฀future฀exposure฀ to฀interest฀rate฀risk฀increased฀during฀
2004฀due฀to฀the฀expiration฀of฀our฀$150.0฀million฀zero-cost฀
collar฀during฀November฀2004.
฀ In฀ March฀2003,฀we฀entered฀into฀ two฀interest฀rate฀swap฀
agreements฀ on฀ an฀ aggregate฀ of฀ $125฀ million฀ of฀ our฀ debt฀
under฀our฀credit฀facility.฀The฀first฀swap฀allows฀us฀to฀fix฀our฀
LIBOR฀ rate฀ at฀ 2.269%฀ on฀ $75.0฀ million฀ of฀ variable฀ rate฀
debt฀for฀a฀term฀of฀36฀months,฀expiring฀in฀the฀first฀quarter฀
of฀ fiscal฀ 2006.฀ The฀ second฀ swap฀ allows฀ us฀ to฀ fix฀ our฀
LIBOR฀ rate฀ at฀ 1.79%฀ on฀ $50.0฀ million฀ of฀ variable฀ rate฀฀
debt฀for฀a฀term฀of฀24฀months,฀expiring฀in฀the฀first฀quarter฀
of฀fiscal฀2005.
฀ Subsequent฀to฀January฀1,฀2005฀and฀in฀an฀effort฀to฀man-
age฀our฀future฀interest฀rate฀risk,฀we฀entered฀into฀the฀follow-
ing฀three฀new฀interest฀rate฀swap฀agreements฀on฀an฀aggregate฀
of฀$175฀million฀of฀debt฀under฀our฀senior฀credit฀facility.฀The฀
detail฀for฀the฀individual฀swaps฀is฀as฀follows:
•฀ ฀The฀first฀ swap,฀ beginning฀in฀March฀ 2005,฀allows฀ us฀ to฀
fix฀our฀total฀interest฀rate฀at฀4.153%฀on฀$50฀million฀of฀our฀
debt฀for฀a฀term฀of฀48฀months;
•฀ ฀The฀second฀swap,฀beginning฀in฀March฀2005,฀allows฀us฀to฀
fix฀our฀total฀interest฀rate฀at฀4.255%฀on฀$75฀million฀of฀our฀
debt฀for฀a฀term฀of฀60฀months;฀and
•฀ ฀The฀third฀swap,฀beginning฀in฀March฀2006,฀allows฀us฀to฀
fix฀our฀total฀ interest฀rate฀at฀4.6125%฀on฀$50฀million฀of฀
our฀debt฀for฀a฀term฀of฀54฀months.