Advance Auto Parts 2004 Annual Report Download - page 37

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Advance฀Auto฀Parts,฀Inc.฀and฀Subsidiaries
35
if฀ any,฀ of฀ the฀ market฀ price฀ of฀ the฀ Company’s฀ common฀฀
stock฀ at฀ the฀ measurement฀ date฀ over฀ the฀ exercise฀ price.฀
Accordingly,฀the฀Company฀has฀not฀recognized฀compensa-
tion฀expense฀on฀ the฀ issuance฀ of฀ its฀ fixed฀options฀ because฀
the฀ exercise฀ price฀ equaled฀ the฀ fair฀ market฀ value฀ of฀ the฀
underlying฀ stock฀ on฀ the฀ grant฀ date.฀ In฀ addition,฀ the฀
Company฀has฀not฀recognized฀compensation฀expense฀for฀its฀
employee฀stock฀purchase฀plan฀ since฀ it฀is฀intended฀to฀ be฀ a฀
plan฀ that฀ qualifies฀ under฀ Section฀ 423฀ of฀ the฀ Internal฀
Revenue฀ Code฀ of฀ 1986,฀ as฀ amended.฀ The฀ issuance฀ of฀
deferred฀ stock฀ units฀ results฀ in฀ compensation฀ expense฀ as฀
discussed฀in฀the฀Equity฀Compensation฀footnote฀(Note฀19).
฀ As฀ required฀ by฀ SFAS฀ No.฀ 148,฀ “Accounting฀ for฀ Stock-
Based฀ Compensation—Transition฀ and฀ Disclosure฀ an฀
amendment฀ of฀ FASB฀ Statement฀ No.฀ 123,”฀ the฀ following฀
table฀ reflects฀ the฀ impact฀ on฀ net฀ income฀ and฀ earnings฀ per฀
share฀ as฀ if฀ the฀ Company฀ had฀ adopted฀ the฀ fair฀ method฀ of฀
recognizing฀stock-based฀compensation฀costs฀as฀prescribed฀
by฀SFAS฀No.฀123.
2004 2003 2002
Net฀income,฀as฀reported฀.......... $187,988 $124,935 $65,019
Add:฀Total฀stock-based฀
employee฀compensation฀
expense฀included฀in฀
reported฀net฀income,฀net฀of฀
related฀tax฀effects฀................ 304 — —
Deduct:฀Total฀stock-based฀
employee฀compensation฀
expense฀determined฀under฀
fair฀value฀based฀method฀for฀
all฀awards,฀net฀of฀related฀
tax฀effects฀............................ (5,977) (4,636) (1,894)
Pro฀forma฀net฀income฀.............. $182,315 $120,299 $63,125
Net฀income฀per฀share:
฀ Basic,฀as฀reported฀................ $฀ 2.54 $฀ 1.71 $฀ 0.93
฀ Basic,฀pro฀forma฀.................. 2.47 1.65 0.90
฀ Diluted,฀as฀reported฀............. 2.49 1.67 0.90
฀ Diluted,฀pro฀forma฀............... 2.41 1.61 0.87
฀ The฀fair฀value฀of฀each฀stock฀option฀was฀estimated฀on฀the฀
date฀ of฀ the฀ grant฀ using฀ the฀ Black-Scholes฀ option-pricing฀
model฀with฀the฀following฀weighted-average฀assumptions:
2004 2003 2002
Risk-free฀interest฀rate฀......................... 3.3% 3.1% 4.4%
Expected฀dividend฀yield฀..................... —— —
Expected฀stock฀price฀volatility฀.......... 34.3% 41.0% 17.0%
Expected฀life฀of฀stock฀options฀............ 4฀years 4฀years 4฀years
฀ The฀weighted-average฀fair฀value฀of฀stock฀options฀granted฀
during฀fiscal฀2004,฀2003฀and฀2002฀used฀in฀computing฀pro฀
forma฀compensation฀expense฀was฀$12.42,฀$7.61฀and฀$8.20฀
per฀share,฀respectively.
Financed฀Vendor฀Accounts฀Payable
฀ During฀ the฀ first฀ quarter฀ on฀ fiscal฀ 2004,฀ the฀ Company฀
entered฀a฀short-term฀financing฀program฀with฀a฀bank฀allow-
ing฀it฀to฀extend฀its฀payment฀terms฀on฀certain฀merchandise฀
purchases.฀ Under฀ this฀ program,฀ the฀ Company฀ issues฀฀
negotiable฀ instruments฀ to฀ vendors฀ in฀ lieu฀ of฀ a฀ cash฀ pay-
ment.฀The฀vendor฀presents฀the฀instrument฀to฀the฀bank฀for฀฀
payment฀ at฀ an฀ agreed฀ upon฀ discount฀ rate.฀ The฀ Company฀
records฀this฀discount฀given฀by฀the฀vendor฀to฀the฀value฀of฀its฀
inventory฀upon฀the฀ Company’s฀issuance฀of฀the฀negotiable฀
instrument฀and฀accretes฀this฀discount฀to฀the฀resulting฀short-
term฀payable฀to฀the฀bank฀through฀interest฀expense฀over฀the฀
extended฀ term.฀ At฀ January฀ 1,฀ 2005,฀ $56,896฀ was฀ payable฀฀
to฀ the฀ bank฀ by฀ the฀ Company฀ under฀ this฀ program฀ and฀ is฀
included฀ in฀ the฀ accompanying฀ condensed฀ consolidated฀฀
balance฀sheets฀as฀Financed฀Vendor฀Accounts฀Payable.
Lease฀Accounting
฀ The฀Company฀leases฀certain฀store฀locations,฀distribution฀
centers,฀ office฀ space,฀ equipment฀ and฀ vehicles,฀ some฀ of฀
which฀ are฀ with฀ related฀ parties.฀ Initial฀ terms฀ for฀ facility฀
leases฀are฀typically฀10฀to฀15฀years,฀followed฀by฀additional฀
terms฀ containing฀ renewal฀ options฀ at฀ 5-year฀ intervals,฀ and฀
may฀ include฀ rent฀ escalation฀ clauses.฀ The฀ total฀ amount฀ of฀
the฀minimum฀rent฀is฀expensed฀on฀a฀straight-line฀basis฀over฀
the฀initial฀term฀of฀the฀lease฀unless฀external฀economic฀fac-
tors฀ exist฀ such฀ that฀ renewals฀ are฀ reasonably฀ assured,฀ in฀
which฀case฀the฀Company฀would฀include฀the฀renewal฀period฀
in฀ its฀ amortization฀period.฀In฀those฀instances฀ the฀renewal฀
period฀would฀be฀included฀in฀the฀lease฀term฀for฀purposes฀of฀
establishing฀ an฀ amortization฀ period฀ and฀ determining฀ if฀
such฀lease฀qualified฀as฀a฀capital฀or฀operating฀lease.฀In฀addi-
tion฀ to฀ minimum฀ fixed฀ rentals,฀ some฀ leases฀ provide฀ for฀
contingent฀ facility฀ rentals.฀ Contingent฀ facility฀ rentals฀ are฀
determined฀on฀the฀basis฀of฀a฀percentage฀of฀sales฀in฀excess฀
of฀ stipulated฀ minimums฀ for฀ certain฀ store฀ facilities฀ as฀
defined฀ in฀ the฀ individual฀ lease฀ agreements.฀ Most฀ of฀ the฀
leases฀ provide฀that฀the฀Company฀ pay฀taxes,฀maintenance,฀
insurance฀ and฀ certain฀ other฀ expenses฀ applicable฀ to฀ the฀
leased฀premises฀and฀include฀options฀to฀renew.฀Management฀
expects฀that,฀in฀the฀normal฀course฀of฀business,฀leases฀that฀
expire฀will฀be฀renewed฀or฀replaced฀by฀other฀leases.