Advance Auto Parts 2004 Annual Report Download - page 36

34
Notes฀to฀Consolidated฀Financial฀Statements฀(continued)
For฀the฀Years฀Ended฀January฀1,฀2005,฀January฀3,฀2004,฀and฀December฀28,฀2002฀(in฀thousands,฀except฀per฀share฀data)
Merger฀and฀Integration฀Costs
฀ As฀ a฀ result฀ of฀ the฀ Discount฀ Auto฀ Parts฀ (“Discount”)฀
acquisition฀in฀2001,฀the฀Company฀incurred฀costs฀related฀to,฀
among฀ other฀ things,฀ overlapping฀ administrative฀ functions฀
and฀store฀conversions,฀all฀of฀which฀have฀been฀expensed฀as฀
incurred.฀These฀costs฀are฀presented฀as฀expenses฀associated฀
with฀the฀merger฀and฀integration฀in฀the฀accompanying฀state-
ments฀of฀operations.
฀ For฀the฀fiscal฀years฀ended฀January฀3,฀2004฀and฀December฀
28,฀ 2002,฀ the฀ Company฀ incurred฀ $10,417฀ and฀ $35,532,฀
respectively,฀of฀merger฀and฀integration฀and฀merger-related฀
restructuring฀expenses.
Warranty฀Costs
฀ The฀ Company’s฀ vendors฀ are฀ primarily฀ responsible฀ for฀
warranty฀ claims.฀ Warranty฀ costs฀ relating฀ to฀ merchandise฀
and฀services฀sold฀under฀warranty,฀which฀are฀not฀covered฀by฀
vendors’฀warranties,฀are฀estimated฀based฀on฀the฀Company’s฀
historical฀ experience฀ and฀ are฀ recorded฀ in฀ the฀ period฀ the฀
product฀ is฀ sold.฀ The฀ Company฀ has฀ applied฀ the฀ disclosure฀
requirements฀of฀Financial฀Accounting฀Standards฀Board,฀or฀
FASB,฀Interpretation฀No.฀45,฀“Guarantor’s฀Accounting฀and฀
Disclosure฀ Requirements฀ for฀ Guarantees,฀ Including฀ the฀
Indirect฀ Guarantees฀ of฀ Indebtedness฀ of฀ Others”฀ as฀ they฀
relate฀to฀warranties.฀The฀following฀table฀presents฀changes฀
in฀our฀defective฀and฀warranty฀reserves.
January฀1,฀
2005
January฀3,฀
2004
December฀28,฀
2002
Defective฀and฀warranty฀
reserve,฀beginning฀฀
of฀period฀.................... $฀฀฀15,578 $฀฀฀15,620 $฀฀฀21,587
Reserves฀established(1)฀.. 13,071 13,755 11,632
Reserves฀utilized฀.......... (17,689) (13,797) (16,015)
Other฀adjustments(2)฀...... —— (1,584)
Defective฀and฀฀
warranty฀reserve,฀
end฀of฀period฀............. $฀฀฀10,960 $฀฀฀15,578 $฀฀฀15,620
(1)฀฀Reserves฀ at฀ January฀ 3,฀ 2004฀ include฀ $1,656฀ of฀ reserves฀ established฀ for฀ the฀
transition฀of฀the฀discontinued฀ operations฀of฀the฀wholesale฀dealer฀network,฀of฀
which฀$1,605฀was฀utilized฀during฀2004.
(2)฀฀Represents฀subsequent฀adjustments฀to฀the฀Company’s฀original฀purchase฀price฀
allocation฀from฀the฀acquisition฀of฀Discount.฀These฀adjustments฀were฀the฀result฀
of฀obtaining฀additional฀information฀related฀to฀the฀estimated฀costs฀of฀outstand-
ing฀ warranties฀ and฀ have฀ been฀ allocated฀ proportionately฀ to฀ our฀ non-current฀
assets,฀ primarily฀ property฀ and฀ equipment.฀ These฀ adjustments฀ had฀ no฀ direct฀
impact฀on฀the฀statement฀of฀operations,฀but฀reduced฀the฀depreciable฀base฀of฀the฀
associated฀non-current฀assets.
Revenue฀Recognition฀and฀Trade฀Receivables
฀ The฀ Company฀ recognizes฀ merchandise฀ revenue฀ at฀ the฀
point฀ of฀sale฀ to฀ customers.฀ Service฀revenue฀is฀recognized฀
upon฀performance฀of฀the฀service.฀The฀Company฀establishes฀฀
reserves฀ for฀ returns฀ and฀ allowances฀ at฀ the฀ time฀ of฀ sale฀฀
based฀ on฀ current฀ sales฀ levels฀ and฀ historical฀ return฀ rates.฀
The฀ majority฀ of฀ sales฀ are฀ made฀ for฀ cash;฀ however,฀ the฀
Company฀extends฀credit฀to฀certain฀commercial฀customers฀
through฀a฀third-party฀provider฀of฀private฀label฀credit฀cards.฀
Receivables฀under฀the฀private฀label฀credit฀card฀program฀are฀
transferred฀to฀the฀third-party฀provider฀on฀a฀limited฀recourse฀
basis.฀ The฀ Company฀ provides฀ an฀ allowance฀ for฀ doubtful฀
accounts฀ on฀ receivables฀ sold฀ with฀ recourse฀ based฀ upon฀฀
factors฀ related฀ to฀ credit฀ risk฀ of฀ specific฀ customers,฀ his-
torical฀trends฀and฀other฀ information.฀This฀ arrangement฀is฀
accounted฀for฀as฀a฀secured฀borrowing.฀Receivables฀and฀the฀
related฀ secured฀ borrowings฀ under฀ the฀ private฀ label฀ credit฀
card฀ were฀ $26,898฀ and฀ $20,623฀ at฀ January฀ 1,฀ 2005฀ and฀
January฀3,฀2004,฀respectively,฀and฀are฀included฀in฀accounts฀
receivable฀and฀other฀current฀liabilities,฀respectively,฀in฀the฀
accompanying฀consolidated฀balance฀sheets.
Earnings฀Per฀Share฀of฀Common฀Stock
฀ Basic฀ earnings฀ per฀ share฀ of฀ common฀ stock฀ has฀ been฀
computed฀based฀on฀the฀weighted-average฀number฀of฀com-
mon฀ shares฀ outstanding฀ during฀ the฀ period.฀ Diluted฀ earn-
ings฀ per฀ share฀ of฀ common฀ stock฀ reflects฀ the฀ increase฀ in฀฀
the฀weighted-average฀number฀of฀common฀shares฀outstand-
ing฀ assuming฀ the฀ exercise฀ of฀ outstanding฀ stock฀ options,฀
calculated฀on฀the฀treasury฀stock฀method.฀There฀were฀340,฀
59฀and฀116฀antidilutive฀ options฀ for฀the฀fiscal฀ years฀ ended฀
January฀1,฀2005,฀January฀3,฀2004฀and฀December฀28,฀2002,฀
respectively.
Stock฀Split
฀ On฀October฀29,฀2003,฀the฀Company’s฀Board฀of฀Directors฀
declared฀ a฀ two-for-one฀ stock฀ split฀ of฀ the฀ Company’s฀฀
common฀ stock,฀ effected฀ as฀ a฀ 100%฀ stock฀ dividend.฀ The฀
dividend฀was฀distributed฀on฀January฀2,฀2004฀to฀holders฀of฀
record฀ as฀ of฀ December฀ 11,฀ 2003฀ and฀ began฀ trading฀ on฀฀
a฀ post-split฀ basis฀ on฀ January฀ 5,฀ 2004.฀ All฀ share฀ and฀ per฀
share฀amounts฀in฀the฀accompanying฀consolidated฀financial฀
statements฀ have฀ been฀restated฀ to฀ reflect฀ the฀effects฀ of฀the฀
stock฀split.
Stock-Based฀Compensation
฀ The฀ Company฀ has฀ stock-based฀ compensation฀ plans฀
including฀fixed฀stock฀option฀plans,฀deferred฀stock฀units฀and฀
an฀ employee฀ stock฀ purchase฀ plan.฀ As฀ permitted฀ under฀
Statement฀of฀Financial฀Accounting฀Standard,฀or฀SFAS,฀No.฀
123,฀ “Accounting฀ for฀ Stock-Based฀ Compensation,”฀ the฀
Company฀accounts฀for฀its฀stock฀options฀using฀the฀intrinsic฀
value฀method฀prescribed฀in฀ Accounting฀Principles฀Board,฀
or฀ APB,฀ Opinion฀ No.฀ 25,฀ “Accounting฀ for฀ Stock฀ Issued฀฀
to฀Employees,”฀or฀APB฀No.฀25.฀Under฀APB฀No.฀25,฀com-
pensation฀cost฀for฀stock฀options฀is฀measured฀as฀the฀excess,฀฀