Advance Auto Parts 2005 Annual Report Download - page 45

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.
Hedge Activities
The Company has entered into interest rate swap
agreements to limit its cash flow risk on its variable
rate debt. In March 2005 the Company entered into
three interest rate swap agreements on an aggregate
of $175,000 of debt under its senior credit facility.
The detail for the individual swaps is as follows:
• The first swap fixed the Company’s LIBOR rate at
4.153% on $50,000 of debt for a term of 48 months,
expiring in March 2009.
• The second swap fixed the Company’s LIBOR rate
at 4.255% on $75,000 of debt for a term of 60
months, expiring in February 2010.
• Beginning in March 2006, the third swap will fix
the Company’s LIBOR rate at 4.6125% on $50,000
of debt for a term of 54 months, expiring in
September 2010.
Additionally, the Company entered into two inter-
est rate swap agreements in March 2003 to limit its
cash flow risk on an aggregate of $125,000 of its vari-
able 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 in March 2006. The
second swap, which fixed the Company’s LIBOR rate
at 1.79% on $50,000 of variable rate debt, expired in
March 2005.
In accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” or
SFAS No. 133, the fair value of these hedges is
recorded as an asset or liability in the accompanying
consolidated balance sheets at December 31, 2005
and January 1, 2005, respectively. The Company uses
the “matched terms” accounting method as provided
by Derivative Implementation Group Issue No. G9,
“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. Therefore, the Company has recorded all adjust-
ments to the fair value of the hedge instruments in
accumulated other comprehensive income through
the maturity date of the applicable hedge arrange-
ment. The fair value at December 31, 2005 was an
unrecognized gain of $3,090 on the swaps. Any
amounts received or paid under these hedges will be
recorded in the statement of operations as earned or
incurred. Comprehensive income for the fiscal years
ended December 31, 2005, January 1, 2005 and
January 3, 2004 is as follows:
December 31, January 1, January 3,
2005 2005 2004
Net income ..................... $234,725 $187,988 $124,935
Unrealized gain on
hedge arrangements ... 2,276 1,343 63
Comprehensive income... $237,001 $189,331 $124,998
Based on the estimated current and future fair val-
ues of the hedge arrangements at December 31, 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 $1,101 associated with the inter-
est rate swaps.
Segment Reporting
SFAS No. 131, “Disclosures About Segments of an
Enterprise and Related Information,” defines how
operating segments are determined and requires dis-
closures about products, services, major customers
and geographic areas. Subsequent to the disposal of
the Company’s Wholesale Distribution Network
(Note 5) and prior to the acquisition of Autopart
International, or AI, in September 2005, the
Company operated in one business segment as
defined by the provisions of SFAS No. 131. AI’s
results of operations and financial position for the
year ended December 31, 2005 were insignificant to
our consolidated operations due to the timing of the
acquisition. In addition, the Company is evaluating
the nature of the AI operations as it relates to the
Company’s consolidated operations and related seg-
ment disclosure requirements, if any.
Recent Accounting Pronouncements
In November 2004 the FASB issued SFAS No. 151,
“Inventory Costs.” The 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 material. This statement requires
that those items be recognized as current-period
charges and requires that allocation of fixed produc-
tion 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. The Company does not expect the
adoption of this statement to have a material impact
on its financial condition, results of operations or
cash flows.
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
Advance Auto Parts I Annual Report 2005 I 43