Advance Auto Parts 2004 Annual Report Download - page 38

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Hedge฀Activities
฀ In฀ March฀ 2003฀ the฀ Company฀ entered฀ into฀ two฀ interest฀
rate฀ swap฀ agreements฀ to฀ limit฀ its฀ cash฀ flow฀ risk฀ on฀ an฀
aggregate฀ of฀ $125,000฀ of฀ its฀ variable฀ rate฀ debt.฀ The฀ first฀
swap฀allows฀the฀Company฀to฀fix฀its฀LIBOR฀rate฀at฀2.269%฀
on฀ $75,000฀ of฀ debt฀ for฀ a฀ term฀ of฀ 36฀ months,฀ expiring฀฀
the฀ first฀ quarter฀ of฀ fiscal฀ 2006.฀ The฀ second฀ swap฀ allows฀
the฀ Company฀ to฀ fix฀ its฀ LIBOR฀rate฀ at฀ 1.79%฀on฀an฀ addi-
tional฀ $50,000฀ of฀ debt฀ for฀ a฀ term฀ of฀ 24฀ months,฀ expiring฀
the฀first฀quarter฀of฀fiscal฀2005.
฀ In฀ September฀2002,฀the฀ Company฀entered฀into฀a฀hedge฀
agreement฀in฀the฀form฀of฀a฀zero-cost฀collar,฀which฀protects฀
the฀Company฀from฀interest฀rate฀fluctuations฀in฀the฀LIBOR฀
rate฀ on฀$150,000฀of฀its฀variable฀rate฀debt฀under฀its฀senior฀
credit฀facility.฀The฀collar฀consists฀of฀an฀interest฀rate฀ceiling฀
at฀4.5%฀and฀an฀interest฀rate฀ floor฀of฀1.56%฀ for฀a฀ term฀ of฀฀
24฀months.฀Under฀this฀hedge,฀the฀Company฀will฀continue฀฀
to฀ pay฀ interest฀ at฀ prevailing฀ rates฀ plus฀ any฀ spread,฀ as฀
defined฀by฀the฀Company’s฀credit฀facility,฀but฀will฀be฀reim-
bursed฀for฀any฀amounts฀paid฀on฀the฀LIBOR฀rate฀in฀excess฀
of฀the฀ceiling.฀Conversely,฀ the฀ Company฀will฀be฀ required฀฀
to฀pay฀the฀financial฀institution฀that฀originated฀the฀collar฀if฀
the฀ LIBOR฀ rate฀ is฀ less฀ than฀ the฀ floor.฀ The฀ collar฀ expired฀
during฀November฀2004.
฀ In฀ accordance฀ with฀ SFAS฀ No.฀ 133,฀ “Accounting฀ for฀
Derivative฀ Instruments฀ and฀ Hedging฀ Activities,”฀ the฀ fair฀
value฀of฀the฀hedge฀arrangement฀is฀recorded฀as฀an฀asset฀or฀
liability฀in฀the฀accompanying฀consolidated฀balance฀sheets฀
at฀January฀3,฀2004.฀The฀Company฀has฀adopted฀the฀“matched฀
terms”฀accounting฀method฀as฀provided฀by฀Derivative฀
Implementation฀Group,฀or฀DIG,฀Issue฀No.฀G20,฀“Assessing฀
and฀ Measuring฀ the฀ Effectiveness฀ of฀ a฀ Purchased฀ Option฀
Used฀in฀a฀Cash฀Flow฀Hedge”฀for฀the฀zero-cost฀collar,฀and฀
DIG฀ Issue฀ No.฀ 9,฀ “Assuming฀ No฀ Ineffectiveness฀ When฀
Critical฀Terms฀of฀ the฀Hedging฀ Instrument฀ and฀the฀ Hedge฀
Transaction฀Match฀in฀a฀Cash฀Flow฀Hedge”฀for฀the฀interest฀
rate฀ swaps.฀ Accordingly,฀ the฀ Company฀ has฀ matched฀ the฀
critical฀terms฀of฀each฀hedge฀instrument฀to฀the฀hedged฀debt฀
and฀used฀the฀anticipated฀terminal฀value฀of฀zero฀to฀assume฀
the฀ hedges฀ have฀ no฀ ineffectiveness.฀ In฀ addition,฀ the฀
Company฀ will฀ record฀ all฀ adjustments฀ to฀ the฀ fair฀ value฀ of฀
the฀ hedge฀ instruments฀ in฀ accumulated฀ other฀ comprehen-
sive฀income฀(loss)฀through฀the฀maturity฀date฀of฀the฀appli-
cable฀hedge฀arrangement.฀The฀fair฀value฀at฀January฀1,฀2005฀
was฀ an฀ unrecognized฀ gain฀ of฀ $814฀ on฀ the฀ swaps.฀ Any฀
amounts฀ received฀ or฀ paid฀ under฀ these฀ hedges฀ will฀ be฀฀
recorded฀ in฀ the฀ statements฀ of฀ operations฀ as฀ earned฀ or฀฀
incurred.฀Comprehensive฀income฀for฀the฀fiscal฀years฀ended฀
January฀1,฀2005฀and฀January฀3,฀2004฀is฀as฀follows:
January฀1,฀
2005
January฀3,฀
2004
Net฀income฀................................................. $187,988 $124,935
Unrealized฀gain฀on฀hedge฀฀
฀ arrangements฀......................................... 1,343 63
Comprehensive฀income฀............................. $189,331 $124,998
฀ Based฀on฀the฀estimated฀current฀and฀future฀fair฀values฀of฀
the฀hedge฀arrangements฀at฀January฀1,฀2005,฀the฀Company฀
estimates฀amounts฀currently฀included฀in฀accumulated฀other฀
comprehensive฀income฀that฀will฀be฀reclassified฀to฀earnings฀
in฀the฀next฀12฀months฀will฀consist฀of฀a฀gain฀of฀$627฀associ-
ated฀with฀the฀interest฀rate฀swaps.
฀ Subsequent฀ to฀ January฀ 1,฀ 2005,฀ the฀ Company฀ entered฀
into฀three฀interest฀rate฀swap฀agreements฀on฀an฀aggregate฀of฀
$175฀ million฀ of฀ debt฀ under฀ its฀ senior฀ credit฀ facility.฀ The฀
first฀ swap,฀ beginning฀ in฀ March฀ 2005,฀ provides฀ for฀ the฀
Company฀ to฀ fix฀ its฀ total฀ interest฀ rate฀ at฀ 4.153%฀ on฀ $50฀฀
million฀of฀debt฀for฀a฀term฀of฀48฀months.฀The฀second฀swap,฀
beginning฀in฀March฀2005,฀provides฀for฀the฀Company฀to฀fix฀
its฀total฀interest฀rate฀at฀4.255%฀on฀$75฀million฀of฀debt฀for฀a฀
term฀ of฀ 60฀ months.฀ The฀ third฀ swap,฀ beginning฀ in฀ March฀
2006,฀provides฀for฀the฀Company฀to฀fix฀its฀total฀interest฀rate฀
at฀4.6125%฀on฀$50฀million฀of฀debt฀for฀a฀term฀of฀54฀months.
Segment฀Reporting
฀ The฀ Company฀ operates฀ in฀ one฀ business฀ segment฀ as฀
defined฀ by฀ the฀ provisions฀ of฀ SFAS฀ No.฀ 131,฀ “Disclosures฀
About฀Segments฀of฀an฀Enterprise฀and฀Related฀Information,”฀
which฀ defines฀ how฀ operating฀ segments฀ are฀ determined฀฀
and฀ requires฀ disclosures฀ about฀ products,฀ services,฀ major฀
customers฀ and฀ geographic฀ areas.฀ Prior฀ to฀ the฀ Company’s฀
discontinuance฀ of฀ the฀ Wholesale฀ Distribution฀ Network฀ in฀
fiscal฀2003฀(Note฀3),฀ the฀Company฀ operated฀ in฀two฀ busi-
ness฀segments.
Recent฀Accounting฀Pronouncements
฀ In฀April฀2002,฀the฀FASB฀issued฀SFAS฀No.฀145,฀“Rescis-
sion฀of฀FASB฀Statements฀No.฀4,฀44฀and฀64,฀Amendment฀of฀
FASB฀Statement฀No.฀13฀and฀Technical฀Corrections.”฀As฀a฀
result฀ of฀ rescinding฀ FASB฀ Statement฀ No.฀ 4,฀ “Reporting฀
Gains฀ Losses฀ from฀ Extinguishment฀ of฀ Debt,”฀ gains฀ and฀
losses฀from฀extinguishment฀of฀debt฀should฀be฀classified฀as฀
extraordinary฀items฀only฀if฀they฀meet฀the฀criteria฀in฀APB฀
Opinion฀ No.฀ 30,฀ “Reporting฀ the฀ Results฀ of฀ Operations—
Reporting฀ the฀ Effects฀ of฀ Disposal฀ of฀ a฀ Segment฀ of฀ a฀฀
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)