Advance Auto Parts 2015 Annual Report Download - page 72

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ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
January 2, 2016, January 3, 2015 and December 28, 2013
(in thousands, except per share data)
F-18
shrink are established based on the results of physical inventories conducted by the Company, with the assistance of an
independent third party, in substantially all of the Company’s stores over the course of the year, other targeted inventory counts
in its stores, results from recent cycle counts in its distribution facilities and historical and current loss trends.
The Company also establishes reserves for potentially excess and obsolete inventories based on (i) current inventory
levels, (ii) the historical analysis of product sales and (iii) current market conditions. The Company has return rights with many
of its vendors and the majority of excess inventory is returned to its vendors for full credit. In certain situations, the Company
establishes reserves when less than full credit is expected from a vendor or when liquidating product will result in retail prices
below recorded costs.
The following table presents changes in the Company’s inventory reserves for years ended January 2, 2016, January 3,
2015 and December 28, 2013:
January 2,
2016
January 3,
2015
December 28,
2013
Inventory reserves, beginning of period $ 49,439 $ 37,523 $ 31,418
Additions to inventory reserves 97,226 92,773 65,466
Reserves utilized (76,282)(80,857)(59,361)
Inventory reserves, end of period $ 70,383 $ 49,439 $ 37,523
3. Acquisitions:
General Parts International, Inc.
On January 2, 2014, the Company acquired GPI in an all-cash transaction. GPI, formerly a privately-held company, was a
leading distributor and supplier of original equipment and aftermarket replacement products for Commercial markets operating
under the Carquest and Worldpac brands. As of the acquisition date, GPI operated 1,233 Carquest stores and 103 Worldpac
branches located in 45 states and Canada and serviced approximately 1,400 independently-owned Carquest stores. The
acquisition of GPI allowed the Company to expand its geographic presence, Commercial capabilities and overall scale to better
serve customers.
The Company acquired all of GPI's assets and liabilities as a result of the transaction. Under the terms of the agreement, the
Company acquired all of the outstanding stock of GPI for a purchase price of $2,080,804 (subject to adjustment for certain
closing items) consisting of $1,307,991 in cash to GPI's shareholders, the repayment of $694,301 of GPI debt and $78,512 in
make-whole fees and transaction-related expenses paid by the Company on GPI's behalf. The Company funded the purchase
price with cash on-hand, $700,000 from a term loan and $306,046 from a revolving credit facility. Refer to Note 7, Long-Term
Debt, for a more detailed description of this debt. The Company recognized $26,970 of acquisition-related costs during 2013,
which was included in SG&A expenses and interest expense. The Company recognized no acquisition-related costs during
Fiscal 2014 or Fiscal 2015, as all of these costs were recognized during Fiscal 2013. The Company has included the financial
results of GPI in its consolidated financial statements commencing January 2, 2014. GPI contributed sales of $3,040,493 and
net income of $58,535 during 2014. The net income reflects amortization related to the acquired intangible assets and
integration expenses.
The Company placed $200,881 of the total purchase price in escrow to secure indemnification obligations of the sellers
relating to the accuracy of representations and warranties and the satisfaction of covenants. Half of the escrow funds were
disbursed to the Sellers on July 2, 2015 and the remaining amounts will be distributed on January 2, 2017, after deducting for
any claims indemnified from escrow. At the acquisition date, the Company recognized a net indemnification asset of $4,283
with respect to liabilities for which it intends to make a claim from escrow. According to the agreement, the Company will be
indemnified, for the escrow term of three years, against losses incurred relating to taxes owed by GPI for periods prior to June
30, 2013.