S-1 1 d738352ds1.htm FORM S-1 Form S-1

As filed with the Securities and Exchange Commission on June 16, 2014

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ATD CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   5013   27-2763683
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer Identification Number)

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

William E. Berry

President and Chief Executive Officer

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Craig E. Marcus

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

(617) 951-7000

 

J. Michael Gaither

Executive Vice President, General Counsel and Secretary

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

 

William V. Fogg

D. Scott Bennett

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

(212) 474-1131

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

        Large accelerated filer  ¨    Accelerated filer  ¨   Non-accelerated filer  x   Smaller reporting company  ¨        
    

(Do not check if a

smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed maximum
aggregate

offering price(1)(2)

 

Amount of

registration fee

Common stock, $0.01 par value

  $100,000,000   $12,880

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, amended.
(2) Includes shares that may be sold upon exercise of the underwriters’ option to purchase additional shares. See “Underwriting.”

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated June 16, 2014

PROSPECTUS

             Shares

 

LOGO

ATD Corporation

Common Stock

 

 

This is ATD’s initial public offering. We are selling                  shares of our common stock. The selling stockholders identified are selling                  shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.

We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on                     under the symbol “            .”

After the completion of this offering, investment funds affiliated with TPG Global, LLC will continue to own a majority of the voting power of our outstanding shares of common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of             . See “Principal and Selling Stockholders.”

Investing in the common stock involves risks that are described in the ‘‘Risk Factors ’’ section beginning on page 17 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount

   $           $     

Proceeds, before expenses, to us(1)

   $           $     

Proceeds, before expenses, to the selling stockholders

   $           $     

 

  (1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting (Conflicts of Interest).”

The underwriters may also exercise their option to purchase up to an additional                 shares from us and the selling stockholders at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2014.

 

 

 

BofA Merrill Lynch   Deutsche Bank Securities   Goldman, Sachs & Co.

 

Barclays   J.P. Morgan   UBS Investment Bank

 

 

 

TPG Capital BD, LLC   RBC Capital Markets   SunTrust Robinson Humphrey

 

 

The date of this prospectus is                     , 2014.


TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     17   

Cautionary Note Regarding Forward-Looking Statements

     33   

Use of Proceeds

     35   

Dividend Policy

     36   

Capitalization

     37   

Dilution

     38   

Selected Consolidated Financial and Other Data

     40   

Unaudited Pro Forma Combined Condensed Financial Information

     45   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   

Business

     79   

Management

     91   

Executive Compensation

     98   

Certain Relationships and Related Party Transactions

     115   

Principal and Selling Stockholders

     117   

Description of Indebtedness

     119   

Description of Capital Stock

     124   

Shares Eligible for Future Sale

     126   

Material United States Federal Income Tax Considerations for Non-U.S. Holders

     128   

Underwriting (Conflicts of Interest)

     133   

Legal Matters

     141   

Experts

     141   

Where You Can Find More Information

     141   

Index to Consolidated Financial Statements and Financial Statement Schedules

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be distributed to you. Neither we nor the underwriters have authorized anyone to provide you with different information, and neither we nor the underwriters take responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

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Industry and Market Data

This prospectus includes market data and forecasts with respect to the replacement tire industry. Although we are responsible for all of the disclosure contained in this prospectus, in some cases we rely on and refer to market data that was obtained from publicly available information and industry publications and surveys, including Modern Tire Dealer, Tire Review and Rubber Manufacturers Association (“RMA”) data, that we believe to be reliable. Other industry and market data included in this prospectus are from internal analyses based upon data available from known sources or other proprietary research and analysis. We believe this data to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because this information cannot always be verified with complete certainty due to the limitations on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market and other similar industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable.

Trademarks and Service Marks

We own or have rights to trademarks and service marks that we use in connection with the operation of our business. The proprietary brand names under which we market our products are trademarks of our company. We value our brand names because they help develop brand identification. All of our trademarks are of perpetual duration as long as they are periodically renewed. We currently intend to maintain all of them in force. The principal proprietary brand names under which we market our products are: HERCULES® tires, IRONMAN® tires, CAPITOL® tires, NEGOTIATOR® tires, REGUL® tires, DYNATRAC® tires, CRUISERALLOY® custom wheels, DRIFZ® custom wheels, ICW® custom wheels, PACER® custom wheels and O.E. PERFORMANCE® custom wheels. Our other trademarks include: AMERICAN TIRE DISTRIBUTORS®, ATD®, TRICAN TIRE DISTRIBUTORS INC®, REGIONAL TIRE DISTRIBUTORS®, ATDONLINE®, ATDSERVICEBAY®, TIREBUYER.COM® and TIRE PROS®.

All other trademarks or service marks appearing in this prospectus that are not identified as marks owned by us are the property of their respective owners.

Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may be listed without the ®, SM and TM symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

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PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and our financial statements and the related notes, before deciding to buy shares of our common stock. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “ATD Corporation,” “the Company,” “we,” “our,” and “us” refer collectively to ATD Corporation and its consolidated subsidiaries for the period, commencing on May 29, 2010, and to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries for the period prior to May 29, 2010. The consolidated financial data for 2010 are presented in this prospectus for two periods: January 3, 2010 through May 28, 2010, which represents the period immediately preceding the Merger (as defined below), and May 29, 2010 through January 1, 2011, which represents the period following the Merger. Prior to the Merger, ATD Corporation had no operations or activities other than transaction costs related to the Merger. See “—Summary Historical Consolidated Financial Information” for more information. Unless otherwise noted, all information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares and gives effect to the one-for-         reverse split of our outstanding shares of common stock that we effected on                     , 2014.

Our Company

We are the largest distributor of replacement tires in North America. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 stock-keeping units (“SKUs”), to approximately 80,000 customers. In 2013, we distributed more than 40 million replacement tires after giving effect to recent acquisitions. We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 18% in Canada.

Geographic Footprint

 

LOGO

 

 

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We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 11.3%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.

We believe we distribute one of the broadest product offerings in our industry, supplying our customers with nine of the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of The Hercules Tire and Rubber Company (“Hercules”) we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.

Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand organically in existing markets as well as in new geographic areas. We also expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. In addition, we are investing in technology and each sales channel to fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above-market growth in all market environments and to continue to enhance our profitability and cash flows.

From fiscal 2009 to fiscal 2013, net sales increased from $2.2 billion to $3.8 billion, reflecting a compound annual growth rate of 15.3%, and Adjusted EBITDA increased from $101.0 million to $195.5 million, reflecting a compound annual growth rate of 17.9%. Over the same period, according to the RMA, unit volume in the U.S. replacement tire market grew at a compound annual growth rate of 1.2%. Our superior growth was driven by our organic initiatives and our acquisitions. In fiscal 2009, our net income was $4.9 million and in fiscal 2013 our net loss was $6.4 million. This decrease in net income was primarily the result of increased interest expense related to our acquisition by TPG in 2010, as well as interest associated with our eight acquisitions from 2010 through 2013, and non-cash amortization expense related to our intangible assets.

For the quarter ended April 5, 2014 and the year ended December 28, 2013, our net sales were $1.2 billion and $5.0 billion, respectively, our Adjusted EBITDA was $31.3 million and $231.8 million, respectively, and our net loss was $52.9 million and $55.2 million, respectively, in each case including the pro forma effects of our recent acquisitions. Additional information regarding Adjusted EBITDA and pro forma Adjusted EBITDA, including a reconciliation of Adjusted EBITDA to net income (loss) and a reconciliation of pro forma Adjusted EBITDA to pro forma net income (loss), is included in “—Summary Consolidated Financial and Other Data.” Additional information regarding the pro forma effects of our recent acquisitions is included in “—Summary Consolidated Financial and Other Data” and “Unaudited Pro Forma Combined Condensed Financial Information.”

Our Industry

According to Modern Tire Dealer, the U.S. replacement tire market generated annual retail sales of approximately $37.3 billion in 2013. Passenger tires, medium truck tires and light truck tires accounted for 66.9%, 16.9% and 13.1%, respectively, of the total U.S. market. Farm, specialty and other types of tires accounted for the remaining 3.1% of the total U.S. market. The Canadian replacement tire market generated annual retail sales of approximately $3.7 billion in 2012. Passenger and light truck tires accounted for 53% while

 

 

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commercial tires accounted for 20% of the total Canadian replacement tire market. Farm, specialty and other types of tires accounted for the remaining 27% of the total Canadian replacement tire market. According to a Tire Review survey conducted in 2013, U.S. tire dealers buy 55.4% of their consumer tires from wholesale distributors like us and 27.7% direct from tire manufacturers, with the remaining volume coming from various other sources.

In the United States and Canada, replacement tires are sold to consumers through several different channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. Between 1990 and 2013, independent tire retailers and automotive dealerships have enjoyed the largest increase in U.S. replacement tire market share, according to Modern Tire Dealer, moving from 54% to 60.5% and 1% to 7.5% of the market, respectively. In 2012, replacement tire sales to independent tire retailers and automotive dealerships represented approximately 44% and 18%, respectively, of Canadian replacement tire market share. Mass merchandisers, warehouse clubs, manufacturer-owned stores and web-based marketers comprise the remaining market share in both the United States and Canada.

Since 2000, the number of specific tire sizes in the market has increased by 61%. One driver of this increase was above-market growth in high-performance tires, which experienced a compound annual growth rate of approximately 9% between 2000 and 2008. The increase in the number of tire sizes, coupled with the large number of brands in the market place, has driven SKU proliferation in the replacement tire market. As a result of this SKU proliferation and due to their capital and physical space constraints, many tire retailers are unable to carry sufficient inventory to meet the demands of their customers. This trend has helped increase the need for distributors in the replacement tire market.

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brands during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.

From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008 for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The RMA projects that replacement tire shipments will increase by approximately 2% in the United States in 2014 as compared to 2013, as demand drivers continue to strengthen.

Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets will continue to be driven by favorable underlying dynamics, including:

 

    increases in the number and average age of passenger cars and light trucks;

 

    increases in the number of miles driven;

 

    increases in the number of licensed drivers as the U.S. and Canadian population continues to grow;

 

    increases in the number of replacement tire SKUs;

 

    growth of the high-performance tire market; and

 

    shortening of tire replacement cycles due to changes in product mix that increasingly favor high-performance tires, which have shorter average lives.

 

 

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Our Competitive Strengths

We believe the following key strengths have enabled us to become the largest distributor of replacement tires in North America and position us to achieve future revenue growth in excess of the long-term growth rates of the U.S. and Canadian replacement tire industry:

Leading Position in a Large and Highly Fragmented Marketplace. We are the largest distributor of replacement tires in North America with an estimated market share in 2013 of approximately 14%, after giving effect to our recently completed acquisitions, in a $37.3 billion market in the United States. Our estimated market share in 2013 of the replacement passenger and light truck tire market in Canada was approximately 18%, after giving effect to our recently completed acquisitions. We believe our scale provides us key competitive advantages relative to our smaller, and generally regionally-focused, competitors. These include the ability to: efficiently stock and deliver a wide variety of tires; invest in services, including sales tools and technologies, to support our customers; and realize operating efficiencies from our scalable infrastructure. We believe our leading market position and presence in each of the key market channels, combined with our commitment to distribution, as opposed to the retail operations engaged in by our customers, enhances our ability to expand our sales footprint cost effectively both in our existing markets and in new domestic geographic markets.

Scale Advantage from Extensive and Efficient Distribution Network. We believe we have the largest independent replacement tire distribution network in North America with more than 140 distribution centers (excluding distribution centers acquired in our recent acquisitions that are expected to be closed as part of the integration process) and approximately 1,000 delivery vehicles. Our distribution footprint services geographic regions in the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013, and we believe our geographic coverage in Canada is also very extensive. Our extensive distribution footprint, combined with sophisticated inventory management and logistics technologies, enables us to deliver the vast majority of orders on a same or next day basis, which is critical for tire retailers who are typically limited by physical inventory capacity and working capital constraints. Our delivery technologies allow us to more effectively and efficiently organize and optimize our route systems to provide timely product delivery. Our distribution systems are integrated with our proprietary business-to-business ATDOnline® order fulfillment system that captures more than 65% of our orders electronically, and our Oracle enterprise resource planning (“ERP”) system provides a scalable platform that can support future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit.

Broad Product Offering from Diverse Supplier Base. We believe we offer the most comprehensive selection of passenger and light truck tires in the industry through a diverse group of suppliers. We supply nine of the top ten leading passenger and light truck tire brands, and we carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. Our tire product line includes a full suite of flag, associate and proprietary brand tires, allowing us to service a broad range of price points from entry-level imported products to the faster-growing high- performance category. Through our acquisition of Hercules, we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition to tires, we also offer custom wheels and accessories and related tire supplies and tools. We believe that our broad product offering drives increased sales among existing customers, attracts new customers and increases customer retention.

Broad Range of Value-Added Services. We provide a wide range of services that enable our tire retailer customers to operate their businesses more profitably. These services include convenient access to and timely delivery of the broadest product offerings available in the industry, as well as fundamental business support services, such as administration of tire manufacturer affiliate programs and credit, training and access to consumer market data, which enable our tire retailer customers to better service their individual markets. We provide our U.S. customers with convenient 24/7 access to our extensive product offerings through our

 

 

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innovative and proprietary business-to-business web portal, ATDOnline®. Our online services also include TireBuyer.com®, which allows our U.S. independent tire retailers the ability to participate in the Internet marketing of tires to consumers. We also provide select, qualified U.S. independent tire retailers with the opportunity to participate in our Tire Pros® franchise program through which they receive advertising and marketing support and the benefits of a national brand identity. We believe our value-added services as well as the integration between our infrastructure and our customers’ operations enable us to maintain high rates of customer retention and build strong customer loyalty.

Diversified Customer Base and Longstanding Customer Relationships Across Multiple Channels. We serve a highly diversified customer base in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We believe we are the only distributor of replacement tires in North America that services each of these key market channels. Our business is diversified across the key market channels and reflects the evolving complexity of the North American replacement tire market, with independent tire retailers accounting for 76% of our net sales in 2013 as compared to 85% of our net sales in 2009. We believe we are a top supplier to many of our customers and maintain relationships with our top 20 customers that exceed a decade on average. We believe the diversity of our customer base and the strength of our customer relationships present an opportunity to grow market share regardless of macroeconomic and replacement tire market conditions.

Consistent Financial Performance and Strong Cash Flow Generation. Our financial performance has benefited from substantial growth that has been achieved through a combination of organic initiatives and acquisitions. Over the ten-year period from fiscal 2003 to fiscal 2013, our net sales grew at a compound annual rate of 13.2%, reflecting our strong revenue base, evolving business mix, scalable operating model and successful growth strategies. In addition, we believe the low capital intensity of our business combined with the efficient management of our working capital, due in part to our advanced inventory management systems in the United States that we are also in the process of implementing in Canada, and close vendor relationships, will enable us to generate strong cash flows. In addition, as a result of our presence in each major channel within the replacement tire market and based upon our ability to rationalize our operating costs, as necessary, we experienced only moderate margin contraction during the recent economic downturn.

Experienced Management Team Supported by Strong Equity Sponsorship. Our senior management team, led by our President and Chief Executive Officer William E. Berry, has an average of over 20 years of experience in the replacement tire distribution industry. Management has a proven track record of implementing successful initiatives in a leveraged environment, including the execution of a disciplined acquisition strategy, which has contributed to our gross profit expansion and above-market net sales growth. In addition, we have reduced costs through the integration of operating systems and introduction of standard operating practices, particularly in the United States, resulting in improved operating efficiencies, reduced headcount and improved operating profit at existing and acquired locations. We also benefit from the extensive management and business experience provided by our Sponsor, TPG.

Our Business Strategy

Our objective is to further expand our position as the largest distributor of replacement tires in North America and establish our company as the leading distributor in each of the key market channels that we serve, while continuing to provide our customers with a range of value-added services such as frequent and timely delivery of inventory, the broadest and deepest range of products, and other business support services. We intend to accomplish this objective, drive above-market growth and further enhance our profitability and cash flows by executing on the following key operating strategies:

Grow Organically in Excess of Market. It is at the core of our strategy to grow our profits and cash flows organically through further penetration of all of our key market channels, through greenfield expansion,

 

 

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through further penetration of our Hercules® brand, the number one private brand in North America in 2013 based on unit sales, through further establishment and expansion of TireBuyer.com®, and through further expansion and development of our value-added services.

Expand Penetration in Each of the Key Market Channels. We have a significant presence in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We regularly seek opportunities to grow our market share in each channel by customizing our sales strategies to suit the particular needs of that channel, and are focused on training and deploying sales personnel to help build our sales, particularly in the faster-growing automotive dealership channel, and strengthen and expand our relationships with retailers. We have observed an increase in sales through web-based marketers and seek to grow our presence in that channel through our Internet site, TireBuyer.com®.

Continue Greenfield Expansion in Existing and New Geographic Markets. While we already have the largest distribution footprint in the North American replacement tire market, servicing geographic regions in the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013 and with geographic coverage in Canada that we believe is also very extensive, we believe there are numerous further underserved areas in both our existing geographic markets as well as in areas not currently serviced by us that are favorably situated to support and grow additional distribution centers. Since 2010, we have successfully opened 23 greenfield distribution centers, and we intend to continue to expand our existing footprint in the United States and Canada in areas where we see opportunities.

Expand our Hercules® Brand. Through our recently completed acquisition of Hercules, we now market the proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. We believe our expansive distribution network in the United States and Canada, combined with our greater access to capital, will allow us to both expand product availability and increase market share of the Hercules® brand. Further, we expect that Hercules’ multi-decade Asian sourcing experience, including its 250,000 square foot warehouse in northern China, will enhance our supply and distribution capabilities.

Grow TireBuyer.com® into a Premier Internet Tire Provider. TireBuyer.com® is an Internet site that enables our U.S. independent tire retailer customers to connect with consumers and sell to them over the Internet. TireBuyer.com® allows our broad base of independent tire retailers to participate in a greater share of the growing Internet tire market. We believe that TireBuyer.com® complements and services our participating U.S. independent tire retailers by providing them access to a sales and marketing channel previously unavailable to them. In 2012, the TireBuyer.com® site was re-launched on a newer, faster and more flexible platform, which has enhanced the overall consumer experience and resulted in increased traffic to the site.

Continue to Develop and Expand our Value-Added Services. Our Tire Pros® franchise program enables us to deliver advertising and marketing support to tire retailers operating as Tire Pros® franchisees. The Tire Pros® franchise program allows participating local tire retailers to enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identities. In return, we benefit from increasing volume penetration among, and further aligning ourselves with, our franchisees. We are focused on continuing to upgrade and improve the Tire Pros® franchise program and seek opportunities to develop similar programs in the future. In addition, individual manufacturers offer a variety of relatively complex programs for tire retailers that sell their products, providing cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist them in managing the administration of these programs through dedicated staff. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.

 

 

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Selectively Pursue Acquisitions. We expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. Over the past six years we have successfully acquired and integrated nine businesses representing, in the aggregate, over $850 million in annual revenue through 2013, and on a pro forma basis, including our recently completed acquisitions of Hercules and Terry’s Tire Town Holdings, Inc. (“Terry’s Tire”), the 2013 annual revenue of businesses acquired is over $2 billion in the aggregate. We believe our position as the largest distributor of replacement tires in North America, combined with our access to capital and our scalable platform, has allowed us to make acquisitions at very attractive post-synergy valuations.

Leverage Our Infrastructure in Existing Markets. Through infrastructure expansions over the past several years in the United States, we have developed a scalable platform with available incremental distribution capacity. Our distribution infrastructure enables us to efficiently add new customers, such as corporate accounts, and service growing channels, such as automotive dealerships, thereby increasing profitability by leveraging the utilization of our existing assets. We expect to complete the implementation of a similar platform in Canada near the beginning of 2015. We believe our relative penetration in existing markets is largely a function of the services we offer and the length of time we have operated locally. Specifically, in new geographic markets, we have experienced growth in market share over time, and in markets that we have served the longest, we generally have market share well in excess of our national average.

Utilize Technology Platform to Continue to Increase Distribution Efficiency. We intend to continue to invest in our inventory and warehouse management systems and logistics technology in order to further increase our efficiency and profit margins and improve customer service. For example, we operate on our Oracle ERP platform in the United States and are in the process of implementing it in Canada. We continue to evaluate and incorporate technical solutions including utilization of handheld scanning for receiving, picking and delivery of products to our customers. We believe these increased efficiencies will continue to enhance our reputation with our customers for providing timely service, while also reducing costs. Additionally, we continue to roll out customized electronic solutions and point of sale (“POS”) system integration for our larger customers.

Maintain a Comprehensive and Deep Tire Portfolio to Meet Our Customers’ Needs. We provide a broad range of products covering a broad range of price points from entry-level imported products to faster-growing high-performance tires, through a full suite of flag, associate and proprietary brand tires. We acquired the Hercules® brand in January 2014 and intend to further expand its market presence throughout North America. We intend to continue to focus on high-performance tires, given the growth in demand for such tires, while maintaining our emphasis on providing broad and entry level tire offerings. Our comprehensive tire portfolio is designed to satisfy all of our customers’ needs and allow us to become the supplier of choice, thereby increasing customer penetration and retention across all channels.

Recent Developments

As part of our ongoing business strategy, we intend to expand organically in existing markets as well as enter into previously underserved markets and new geographic areas. Since the second half of 2010, we opened new distribution centers in 23 locations throughout the contiguous United States. We expect to continue to evaluate additional geographic markets during the remainder of 2014 and beyond.

On March 28, 2014, we completed the acquisition of Terry’s Tire. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and

 

 

7


others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the Internet. Terry’s Tire operated ten distribution centers spanning from Virginia to Maine and in Ohio. We believe the acquisition of Terry’s Tire will enhance our market position in these areas and aligns very well with our distribution centers, especially our new distribution centers that we opened over the past two years in the Northeast and Ohio.

On January 31, 2014, we completed the acquisition of Hercules Tire Holdings LLC (“Hercules Holdings”) pursuant to an Agreement and Plan of Merger, dated January 24, 2014. Hercules Holdings owns all of the capital stock of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling replacement tires for passenger cars, trucks and certain off-road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, six distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules® brand, which is one of the most sought-after proprietary tire brands in the industry. We believe the acquisition of Hercules will strengthen our presence in major markets such as California, Texas and Florida in addition to increasing our presence in Canada. Additionally, Hercules’ strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow us to capitalize on the growing import market, as well as provide the ability to expand the international sales of the Hercules® brand. Finally, this acquisition will allow us to be a brand marketer of the Hercules® brand, which in 2013 had a 2% market share of the passenger and light truck market in North America and a 3% market share of highway truck tires in North America.

On April 30, 2013, we completed the acquisition of Regional Tire Holdings, Inc. (“RTD Holdco”) pursuant to a Share Purchase Agreement dated as of March 22, 2013, among TriCan Tire Distributors (“TriCan”), ATDI, RTD Holdco and Regional Tire Distributors Inc., a 100% owned subsidiary of RTD Holdco (“RTD”). RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada.

In addition, on June 16, 2014, we amended our credit agreement relating to our senior secured term loan facility to borrow an additional $340 million on the same terms as our existing Term Loan (as defined below). Pursuant to the amendment, until August 15, 2014, we also have the right to borrow up to an additional $80 million on the same terms as our existing Term Loan. The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under our Senior Secured Notes (as defined below) and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.

Risk Factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Among these important risks are the following:

 

    Demand for tire products is lower when general economic conditions are weak and decreases in the availability of consumer credit or consumer spending could adversely affect our business, results of operations or cash flows.

 

    We depend on manufacturers to provide us with the products we sell and disruptions in these relationships or manufacturers’ operations could adversely affect our results of operations, financial condition and cash flows.

 

    The failure of our information technology systems could disrupt our business operations, which could have a material adverse effect on our business, financial condition and results of operations.

 

 

8


    Our business requires a significant amount of cash, and fluctuations in our cash flows may adversely affect our ability to fund our business or acquisitions or satisfy our debt obligations.

 

    Our substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

 

    The industry in which we operate is highly competitive and our failure to effectively compete may adversely affect our results of operations, financial condition and cash flows.

 

    We face risks related to integration of our recent significant acquisitions.

 

    We may not realize the growth opportunities and cost savings synergies that we anticipated from our recent significant acquisitions.

 

    Pricing volatility for raw materials acquired by our suppliers could result in increased costs and may affect our profitability.

 

    Attempts to expand our distribution services into new geographic markets may adversely affect our business, results of operations, financial condition or cash flows.

 

    We regularly seek to grow our business through acquisitions, and our inability to identify desirable acquisition targets or integrate such acquisitions, including our recent significant acquisitions, could have a material adverse effect on us.

 

    Future acquisitions could require us to issue additional debt or equity.

For additional information about the risks we face, please see the section of this prospectus captioned “Risk Factors.”

Our Sponsor

TPG is a leading global private investment firm founded in 1992 with over $59 billion of assets under management as of March 31, 2014, and offices in San Francisco, Fort Worth, Austin, Beijing, Chongqing, Hong Kong, Houston, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, Paris, São Paulo, Shanghai, Singapore and Tokyo. TPG has extensive experience with global public and private investments executed through leveraged buyouts, recapitalizations, spinouts, growth investments, joint ventures and restructurings. The firm’s investments span a variety of industries, including healthcare, financial services, travel and entertainment, technology, energy, industrials, retail, consumer, real estate and media and communications.

Following the completion of this offering, affiliates of TPG Global, LLC (together with its affiliates, “TPG” or the “Sponsor”) will own approximately     % of our common stock, or     % if the underwriters’ option to purchase additional shares of our common stock is fully exercised. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of              and TPG will continue to have significant influence over us and decisions made by stockholders and may have interests that differ from yours. See “Risk Factors—Risks Related to our Common Stock and this Offering—TPG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.”

 

 

9


Corporate Information and Structure

On May 28, 2010, pursuant to an Agreement and Plan of Merger dated as of April 20, 2010, we were acquired by TPG and certain co-investors (the “Merger”). ATD Corporation is a Delaware corporation that was formed in 2010 in connection with the Merger under the name Accelerate Parent Corp. On June 5, 2014, Accelerate Parent Corp. changed its name to ATD Corporation. The only material asset of ATD Corporation is the equity of Accelerate Holdings Corp., which is the holder of 100% of the equity of American Tire Distributors Holdings, Inc. (“Holdings”), which is the holder of 100% of the equity of American Tire Distributors, Inc. (“ATDI”), through which we conduct our operations. Our principal executive offices are located at 12200 Herbert Wayne Court, Suite 150, Huntersville, North Carolina 28078, and our telephone number at that address is (704) 992-2000. Our website address is http://www.atd-us.com. Our website and the information contained on our website do not constitute a part of this prospectus.

The following chart shows our simplified organizational structure immediately following the consummation of this offering assuming no exercise of the underwriters’ option to purchase additional shares:

 

LOGO

 

 

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The Offering

 

Common stock offered by us

            shares

 

Common stock offered by the selling stockholders

            shares

 

Common stock to be outstanding after this offering

            shares (or             shares if the underwriters exercise their option to purchase additional shares in full)

 

Option to purchase additional shares

The underwriters have an option for a period of 30 days to purchase up to             additional shares of our common stock from us and the selling stockholders.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to: (i) repay a portion of our long-term indebtedness; and (ii) pay a $12.5 million termination fee to TPG under our transaction and monitoring fee letter. We intend to use the remainder of the net proceeds, if any, for working capital and other general corporate purposes, including supporting our strategic growth opportunities in the future. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Dividend policy

Our board of directors does not currently intend to pay dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in the agreements governing our indebtedness and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our board of directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our board of directors may deem relevant. See “Dividend Policy” and “Description of Indebtedness.”

 

Principal stockholders

Upon completion of this offering, TPG will continue to beneficially own a controlling interest in us. As a result, we intend to avail ourselves of the controlled company exemption under the rules of                     . See “Risk Factors” and “Management.”

 

 

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Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed symbol

“             ”

 

Conflicts of Interest

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, own in excess of 10% of our issued and outstanding common stock. Therefore, a “conflict of interest” is deemed to exist under FINRA Rule 5121(f)(5)(B). In addition, because the TPG Funds (as defined below) are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under Rule 5121(f)(5)(C)(ii) of the Financial Industry Regulatory Authority (“FINRA”). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. However, no “qualified independent underwriter” is required because the underwriters primarily responsible for managing this offering are free of any “conflict of interest,” as that term is defined in the rule. See “Use of Proceeds” and “Underwriting (Conflicts of Interest).”

The number of shares of common stock to be outstanding after this offering is based on             shares of common stock outstanding as of                     , 2014 (after giving effect to the one-for-                 reverse stock split effected on                     , 2014) and excludes the following:

 

                shares reserved for future issuance in connection with the exercise of outstanding stock options at a weighted-average exercise price of $         per share; and

 

                shares of common stock reserved for future issuance under our equity incentive plans.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    the adoption of our amended and restated certificate of incorporation and our amended and restated bylaws, to be effective upon the closing of this offering;

 

    no exercise by the underwriters of their option to purchase up to             additional shares of our common stock in this offering; and

 

    a one-for-             reverse stock split of our common stock that became effective on                     , 2014.

 

 

12


Summary Consolidated Financial and Other Data

The following table sets forth summary historical consolidated financial and other data for the periods indicated. The summary historical financial and other data as of December 28, 2013 and December 29, 2012 and for fiscal years 2013, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical balance sheet data as of December 31, 2011 have been derived from our unaudited consolidated financial statements as of such date, which are not included in this prospectus. The summary historical financial and other data as of April 5, 2014 and for the first quarters of 2014 and 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary historical balance sheet data as of March 30, 2013 have been derived from our unaudited consolidated financial statements for such quarter, which are not included in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods, and operating results for the first quarter of 2014 are not necessarily indicative of the results that may be expected for the year ending January 3, 2015. The pro forma data for fiscal year 2013 and the first quarter of 2014 have been derived from our unaudited pro forma condensed combined financial data included elsewhere in this prospectus.

Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to 52-week fiscal years, and the associated quarters having only 13 weeks. The 2011 fiscal year, which ended December 31, 2011, the 2012 fiscal year, which ended December 29, 2012, and the 2013 fiscal year, which ended December 28, 2013, each contain operating results for 52 weeks. The quarter ended April 5, 2014 contains operating results for 14 weeks while the quarter ended March 30, 2013 contains operating results for 13 weeks. It should be noted that the Company’s recently acquired subsidiaries, Hercules and Terry’s Tire, have different quarter-end reporting dates than that of the Company for the first quarter of 2014, with their quarters ending on March 31. Prior to the acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end and RTD had a January 31 fiscal year end, but each such subsidiary changed its year end to be the same as that of the Company, effective as of their respective acquisition dates. It should also be noted that, prior to fiscal 2013, our year-end reporting date was different from that of our TriCan subsidiary. For fiscal 2012, TriCan had a calendar year-end reporting date. TriCan converted to our fiscal year-end reporting date during fiscal 2013. The impact from these differences on the consolidated financial statements was not material. This summary historical consolidated financial data should be read in conjunction with the disclosures set forth under “Unaudited Pro Forma Combined Condensed Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. Due to our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting future results. See “Risk Factors—Risks Related to our Business and Industry—Because of our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results.”

 

 

13


Dollars in thousands

(except for per share data)

  

First Quarter
2014 (1)

   

First Quarter
2013

   

Fiscal Year
2013 (2)

   

Fiscal Year
2012 (3)

   

Fiscal Year
2011 (4)

 

Statement of Operations Data:

          

Net sales

   $ 1,075,469      $ 839,978      $ 3,839,269      $ 3,455,864      $ 3,050,240   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

     917,314        708,156        3,188,409        2,887,421        2,535,020   

Selling, general and administrative expenses

     177,918        136,504        574,987        506,558        437,260   

Transaction expenses

     4,686        1,023        6,719        5,246        3,946   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (24,449     (5,705     69,154        56,639        74,014   

Other income (expense):

          

Interest expense

     (24,399     (17,240     (74,316     (72,910     (67,572

Other, net (5)

     (1,802     (973     (5,196     (3,895     (2,110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

     (50,650     (23,918     (10,358     (20,166     4,332   

Income tax provision (benefit)

     (16,606     (7,627     (3,982     (5,965     4,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (34,044   $ (16,291   $ (6,376   $ (14,201   $ (132
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share (6)

   $ (0.05   $ (0.02   $ (0.01   $ (0.02   $ (0.00

Diluted net income (loss) per share (6)

   $ (0.05   $ (0.02   $ (0.01   $ (0.02   $ (0.00

Weighted average shares outstanding (6)

          

Basic

     756,390,625        734,168,402        734,168,402        688,300,235        684,172,402   

Diluted

     756,390,625        734,168,402        734,168,402        688,300,235        684,172,402   

Other Financial Data:

          

Cash flows provided by (used in):

          

Operating activities

   $ (72,625   $ 2,132      $ 100,982      $ 10,072      $ (90,699

Investing activities

     (689,243     (16,697     (118,435     (167,821     (92,249

Financing activities

     765,613        4,210        22,998        168,824        186,263   

Depreciation and amortization

     29,323        25,031        105,458        89,167        78,071   

Capital expenditures

     14,402        11,873        47,127        52,388        31,044   

EBITDA (7)

     3,072        18,353        169,416        141,911        149,975   

Adjusted EBITDA (7)

     29,010        23,911        195,486        165,416        164,255   

Balance Sheet Data:

          

Cash and cash equivalents

   $ 37,824      $ 23,832      $ 35,760      $ 34,700      $ 23,682   

Working capital (8)

     799,264        558,179        541,051        556,646        457,443   

Total assets

     3,520,902        2,453,692        2,541,655        2,486,837        2,285,364   

Total debt (9)

     1,710,106        964,262        967,000        951,204        835,808   

Total stockholder’s equity

     691,348        675,386        680,054        692,753        642,773   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

First Quarter
2014

         

Fiscal Year
2013

       

Pro Forma Data:

        

Pro forma net sales

   $ 1,219,939        $ 4,954,939     

Pro forma Adjusted EBITDA (10)

     31,337          231,811     

Pro forma net income (loss)

     (52,938       (55,200  

 

(1) Reflects the acquisition of Terry’s Tire in March 2014 and the acquisition of Hercules and Kipling Tire Co. LTD in January 2014.

 

(2) Reflects the acquisition of Wholesale Tire Distributors Inc. in December 2013, the acquisition of Tire Distributors, Inc. (“TDI”) in August 2013 and the acquisition of RTD in April 2013.

 

(3) Reflects the acquisition of Triwest Trading (Canada) Ltd. d/b/a TriCan Tire Distributors in November 2012 and the acquisition of Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil in May 2012.

 

(4) Reflects the acquisition of Bowlus Service Company d/b/a North Central Tire in April 2011.

 

 

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(5) Other, net primarily includes bank fees and credit card charges to us, net of financing service fees that we charge our customers.

 

(6) Does not reflect the one-for         reverse stock split effected on                  , 2014.

 

(7) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA as further adjusted to reflect the items set forth in the table below. The presentation of EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our GAAP results and the following reconciliation, we believe provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We also believe that such measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies similar to ours. Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing items that we do not believe are indicative of our core operating performance. Our board of directors also uses Adjusted EBITDA in determining compensation for our management. The adjustments from EBITDA to Adjusted EBITDA include management and advisory fees paid to our Sponsor, non-cash stock compensation expense, transaction expenses related to our acquisitions, non-cash amortization of inventory step-up resulting from the business combination rules for our acquisitions and other items, including franchise and other taxes, non-cash gains and losses on the disposal of fixed assets and assets held for sale, exchange gains and losses on foreign currency, and non-cash impairment of long-lived assets. Amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers because not all issuers calculate Adjusted EBITDA in the same manner. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same or similar to some of the adjustments set forth below. Neither EBITDA nor Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP.

The following table presents a reconciliation of each of EBITDA and Adjusted EBITDA to net income (loss), determined in accordance with GAAP:

 

In thousands

  

First Quarter
2014

   

First Quarter
2013

   

Fiscal Year
2013

   

Fiscal Year
2012

   

Fiscal Year
2011

 

Net income (loss)

   $ (34,044   $ (16,291   $ (6,376   $ (14,201   $ (132

Depreciation and amortization

     29,323        25,031        105,458        89,167        78,071   

Interest expense

     24,399        17,240        74,316        72,910        67,572   

Income tax provision (benefit)

     (16,606     (7,627     (3,982     (5,965     4,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 3,072      $ 18,353      $ 169,416      $ 141,911      $ 149,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management fee

     608        991        5,753        7,446        4,624   

Non-cash stock compensation

     567        668        2,634        4,349        4,114   

Transaction fees

     4,686        1,023        6,719        5,246        3,946   

Non-cash inventory step-up

     19,183        2,194        5,379        4,074        —     

Other (A)

     894        682        5,585        2,390        1,596   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 29,010      $ 23,911      $ 195,486      $ 165,416      $ 164,255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred compensation and foreign currency exchange gains/losses.

 

(8) Working capital is defined as current assets less current liabilities.

 

(9) Total debt is the sum of current maturities of long-term debt, non-current portion of long-term debt and capital lease obligations.

 

(10) Pro forma EBITDA and pro forma Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We present pro forma EBITDA and pro forma Adjusted EBITDA, in addition to EBITDA and Adjusted EBITDA, to provide a more complete understanding of our results of operations that gives effect to the recent significant acquisitions that we have completed. These amounts have similar limitations to the limitations described in footnote (7) regarding EBITDA and Adjusted EBITDA. In addition, the pro forma financial information we present is based on estimates and assumptions regarding our recent acquisitions that may end up being materially different from our actual experience. Neither pro forma EBITDA nor pro forma Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP or pro forma net income (loss). Moreover, our debt agreements use a measure similar to pro forma Adjusted EBITDA to measure compliance with certain covenants except that, under certain of these debt agreements, the calculation of the measure allows us (subject to certain limitations) to take into account the amount of cost savings and synergies projected in good faith to be realized in the future in connection with cost saving restructuring initiatives as though those cost savings had already been realized in past periods. We have not included such projected cost savings or synergies in our presentation of pro forma Adjusted EBITDA in this prospectus. Therefore, the amount calculated pursuant to our debt agreements may be higher than pro forma Adjusted EBITDA as set forth in this prospectus. For further discussion of our cost savings initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table presents a reconciliation of each of pro forma EBITDA and pro forma Adjusted EBITDA to pro forma net income (loss):

 

     First Quarter     Fiscal Year  

In thousands

   2014     2013  

Pro forma net income (loss)

   $ (52,938   $ (55,200

Depreciation and amortization

     40,178        157,464   

Interest expense

     32,520        128,118   

Income tax provision (benefit)

     (11,563     (35,266
  

 

 

   

 

 

 

Pro forma EBITDA

   $ 8,197      $ 195,116   
  

 

 

   

 

 

 

Management fee

     855        7,353   

Non-cash stock compensation

     567        5,222   

Transaction fees

     1,708        7,764   

Non-cash inventory step-up

     19,183        5,379   

Other (A)

     827        10,977   
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA

   $ 31,337      $ 231,811   
  

 

 

   

 

 

 

 

  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred compensation and foreign currency exchange gains/losses.

For a discussion of pro forma net income (loss), see “Unaudited Pro Forma Combined Condensed Financial Information.”

 

 

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RISK FACTORS

This offering and investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to our Business and Industry

Demand for tire products is lower when general economic conditions are weak and decreases in the availability of consumer credit or consumer spending could adversely affect our business, results of operations or cash flows.

The popularity, supply and demand for tire products changes from year to year based on consumer confidence, the volume of tires reaching the replacement tire market and the level of personal discretionary income, among other factors. Decreases in the availability of consumer credit or decreases in consumer spending as a result of recent economic conditions, including increased unemployment and rising fuel prices, may cause consumers to delay tire purchases, reduce spending on tires or purchase less expensive tires. These changes in consumer behavior could reduce the number of tires we sell, reduce our net sales or cause a change in our product mix toward products with lower per-tire margins, any of which could adversely affect our business, results of operations or cash flows.

Local economic, employment, weather, transportation and other conditions also affect tire sales, on both a wholesale and retail basis. We cannot, as a result of these factors and others, assure you that our business will continue to generate sufficient cash flows to finance or grow our business or that our cash needs will not increase. Historically, we have experienced that rising fuel costs, higher unemployment and credit tightening cause a decrease in miles driven and consumer spending, both of which we believe cause a decrease in unit sales in the U.S. and Canadian replacement tire industries. Our business is adversely affected as a result of such industry-wide events and we may be adversely affected by similar events in the future.

We depend on manufacturers to provide us with the products we sell and disruptions in these relationships or manufacturers’ operations could adversely affect our results of operations, financial condition and cash flows.

There are a limited number of tire manufacturers worldwide. Accordingly, we rely on a limited number of tire manufacturers to supply us with the products we sell, including flag and associate brands and our proprietary brands. Our business depends on developing and maintaining productive relationships with these manufacturers. Outside of our proprietary brands, we do not have long-term contracts with these manufacturers, and we cannot assure you that these manufacturers will continue to supply products to us on favorable terms or at all. Many of our manufacturers are free to terminate their business relationship with us with little or no notice and may elect to do so for any reason or no reason. We believe that part of our value proposition is our ability to distribute the broadest product offering in our industry. As a result, if one or more of our manufacturers were to discontinue business with us, our business could be adversely affected by the negative impact on our reputation and ability to continue to deliver on this value proposition, as well as any decrease in net sales. Further, certain of our key suppliers also compete with us as they distribute and sell tires to certain of our tire retailer customers. A move towards this business model among our manufacturers could adversely affect our results of operations, financial condition and cash flows.

In addition, our growth strategy depends in part on our ability to make selective acquisitions, but manufacturers may not be willing to supply the companies we acquire, which could adversely affect our business and results of operations. Furthermore, we could be adversely affected if any significant manufacturer experiences financial, operational, production, supply, labor, regulatory or quality assurance difficulties that result in a reduction or interruption in our supply, or if they otherwise fail to meet our needs. These risks have

 

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been more pronounced recently in light of commodity price volatility and governmental actions. In addition, our failure to order or promptly pay for sufficient quantities of our products may result in an increase in the unit cost of the products we purchase, a reduction in cooperative advertising and marketing funds, or a manufacturer’s unwillingness or refusal to sell products to us. If we are required to replace one or more of our manufacturers, we could experience cost increases, time delays in deliveries and a loss of customers, any of which would adversely affect us. Finally, although most newly manufactured tires are sold in the replacement tire market, manufacturers pay disproportionate attention to automobile manufacturers that purchase tires for new cars. Increased demand from automobile manufacturers could result in cost increases and time delays in deliveries to us, either of which could adversely affect us.

The failure of our information technology systems could disrupt our business operations, which could have a material adverse effect on our business, financial condition and results of operations.

The operation of our business depends on our information technology systems. The failure of our information technology systems, including our Oracle ERP platform, to perform as we anticipate could disrupt our business substantially and could result in, among other things, transaction errors, processing inefficiencies, loss of data and the loss of sales and customers, all of which could cause our business and results of operations to suffer. While we have made significant investments in our disaster recovery strategies and infrastructure, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, systems failure, system conversions, security breaches, cyber-attacks, viruses and/or human error. In any such event, we could be required to make a significant investment to fix or replace information technology systems, and we could experience interruptions in our ability to service our customers. Additionally, we and our customers could suffer financial and reputational harm if customer or Company proprietary information was compromised by a security breach or cyber-attack. Any such damage or interruption could have a material adverse effect on our business, financial condition and results of operations.

Our business requires a significant amount of cash, and fluctuations in our cash flows may adversely affect our ability to fund our business or acquisitions or satisfy our debt obligations.

Our ability to fund working capital needs, planned capital expenditures and acquisitions and our ability to satisfy our debt obligations depend on our ability to generate cash flows, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. If we are unable to generate sufficient cash flows from operations to meet these needs, we may need to refinance all or a portion of our existing debt, obtain additional financing or reduce expenditures that we deem necessary to our business. Further, our ability to grow our business and market share through acquisitions may be impaired. We cannot assure you that we would be able to obtain refinancing of this kind on favorable terms or at all or that any additional financing could be obtained. The inability to obtain additional financing could materially and adversely affect our business, financial condition and cash flows.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities and the indenture governing our outstanding notes restrict our ability to dispose of assets and use the proceeds from any such disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to

 

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meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our debt service obligations.

As of April 5, 2014, on a pro forma as adjusted basis after giving effect to this offering and the application of the net proceeds therefrom, we would have had total indebtedness of approximately $         , and our substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

We have a substantial amount of debt, which requires significant interest and principal payments. As of April 5, 2014, on a pro forma as adjusted basis after giving effect to this offering and the application of the net proceeds therefrom, at an assumed public offering price per share of $        , the midpoint of the range set forth on the cover of the prospectus, we would have had total indebtedness of approximately $         . Subject to the restrictions contained in our ABL Facility, our Term Loan, the indenture governing our Senior Subordinated Notes, and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. These restrictions will not prevent us from incurring obligations that do not constitute indebtedness, may be waived by certain votes of debt holders and, if we refinance our existing indebtedness, such refinancing indebtedness may contain fewer restrictions on our activities. To the extent new indebtedness or other financial obligations are added to our and our subsidiaries’ currently anticipated indebtedness levels, the related risks that we and our subsidiaries face could intensify.

Our substantial level of indebtedness could adversely affect our financial condition and increase the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other existing and any future financial obligations and contractual commitments, could have important consequences. For example, it could:

 

    make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing such indebtedness;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other purposes;

 

    increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have proportionately less indebtedness;

 

    increase our cost of borrowing and cause us to incur substantial fees from time to time in connection with debt amendments or refinancings;

 

    increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; and

 

    limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other corporate purposes.

For additional risks relating to our substantial indebtedness, see “—Restrictions imposed by our outstanding indebtedness, including the indenture governing our outstanding notes, may limit our ability to operate our business and to finance our future operation or capital needs or to engage in other business activities.”

 

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The industry in which we operate is highly competitive and our failure to effectively compete may adversely affect our results of operations, financial condition and cash flows.

The industry in which we operate is highly competitive. In North America, replacement tires are sold to consumers through several different retail channels, including local independent tire retailers and mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. A number of independent wholesale tire distributors compete with us for the business of tire retailers in the regions in which we do business. Most of our tire retailer customers buy products from both us and our competitors. We cannot assure you that we will be able to compete successfully in our markets in the future. We would also be adversely affected if certain channels in the replacement tire retail market, including mass merchandisers and warehouse clubs, were to gain market share at the expense of the local independent tire retailers, as our market share in those channels is lower. See “Business—Competition.”

We face risks related to the integration of our recent significant acquisitions.

The acquisitions of Hercules and Terry’s Tire constitute significant acquisitions for our business. Our management will be required to devote a significant amount of time and attention to the process of integrating the businesses and operations of Hercules and Terry’s Tire with our business and operations, which may decrease the time management will have to serve existing customers, attract new customers and develop new products, services or strategies, and could adversely affect the performance of the combined company. The size and complexity of both acquired businesses, if not managed successfully by our management, may result in interruptions in our business activities, inconsistencies in our operations, standards, controls, procedures and policies, a decrease in the quality of our services and products, a deterioration in our employee and customer relationships, increased costs of integration and harm to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.

We may not realize the growth opportunities and cost savings synergies that are anticipated from our recent significant acquisitions.

The benefits that we expect to achieve as a result of the recent acquisitions of Hercules and Terry’s Tire will depend in part on our ability to realize anticipated growth opportunities and cost savings synergies. Our success in realizing these opportunities and synergies and the timing of this realization depend on the successful integration of the businesses and operations of Hercules and Terry’s Tire with our business and operations and the adoption of our respective best practices. Even if we are able to integrate these businesses and operations successfully, this integration may not result in the realization of the full benefits of the growth opportunities and synergies we currently expect from this integration within the anticipated time frame or at all. While we anticipate that substantial expenses will be incurred in connection with the integration of Hercules and Terry’s Tire, such expenses are difficult to estimate accurately, and may significantly exceed current estimates. Accordingly, the benefits from these acquisitions may be offset by unanticipated costs or delays in integrating the companies.

Pricing volatility for raw materials acquired by our suppliers could result in increased costs and may affect our profitability.

Costs for certain raw materials used in manufacturing the products we sell, including natural rubber, chemicals, steel reinforcements, carbon black, synthetic rubber and other petroleum-based products, are volatile. Increasing costs for raw materials supplies would result in increased production costs for tire manufacturers. Tire manufacturers typically pass along a portion of their increased costs to us through price increases. While we typically try to pass increased prices and fuel costs through to tire retailers or modify our activities to mitigate the impact of higher prices, we may not be successful. Failure to fully pass these increased prices and costs through to tire retailers or to modify our activities to mitigate the impact would adversely affect our operating margins and results of operations. Further, even if we do successfully pass along these costs, demand for tires may decline as a result of the increased costs, which would adversely affect us.

 

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Attempts to expand our distribution services into new geographic markets may adversely affect our business, results of operations, financial condition or cash flows.

We plan to expand our distribution services into new geographic markets in North America, which will require us to make capital investments to extend and develop our distribution infrastructure. We may not achieve profitability in new regions for a period of time. If we do not successfully add new distribution centers and routes, we experience unanticipated costs or delays or we experience competition in such markets that is greater than we expect, our business, results of operations, financial condition or cash flows may be adversely affected.

We regularly seek to grow our business through acquisitions, and our inability to identify desirable acquisition targets or integrate such acquisitions, including our recent significant acquisitions, could have a material adverse effect on us.

We regularly investigate and acquire strategic businesses or product lines with the potential to be accretive to earnings, increase our market penetration, strengthen our market position or enhance our existing product offering. In executing our business strategy, we routinely conduct discussions, evaluate opportunities and enter into agreements for such acquisitions. Pursuing growth by way of these types of transactions involves significant challenges and risks, including the inability to successfully identify suitable acquisition targets on terms acceptable to us, advance our business strategy, realize a satisfactory return on investment, successfully integrate business activities or resources, or retain key personnel, customers and suppliers. A failure to identify and acquire desirable acquisition targets may slow growth in our annual unit volume, which could adversely affect our existing business, financial condition, results of operations and cash flows. In addition, if we are unable to manage acquisitions or investments, successfully complete transactions or effectively integrate acquired businesses, such as Hercules or Terry’s Tire, we may not realize the cost savings or other financial benefits we anticipated from the transaction relative to the consideration paid in the anticipated time frame or at all, and our business, results of operations and financial condition may be materially and adversely affected.

Further, we may be unsuccessful in identifying and evaluating business, legal or financial risks as part of the due diligence process associated with a particular transaction, and could be held liable for environmental, tax or other risks and liabilities of the acquired business. In addition, some investments may result in the incurrence of debt or may have contingent consideration components that may require us to pay additional amounts in the future in relation to future performance results of the subject business. We may also experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury, management and financial reporting as a result of such transactions. These factors could divert attention from our business and otherwise harm our business, financial condition and operating results.

Future acquisitions could require us to issue additional debt or equity.

A number of our recent acquisitions have been financed primarily through the incurrence of additional debt, either through increases in availability under our ABL Facility, the issuance of additional subordinated notes or through term loans. We have also financed some recent acquisitions by selling additional equity to TPG and certain co-investors. If we were to undertake another substantial acquisition, the acquisition would likely need to be financed in part through further amendments to our ABL Facility, additional financing from banks, public offerings or private placements of debt or equity securities or other arrangements. We cannot assure you that the necessary acquisition financing would be available to us on acceptable terms if and when required, particularly because we are currently highly leveraged, which may make it difficult or impossible for us to secure financing for acquisitions. If we were to undertake an acquisition by issuing equity securities or equity-linked securities, the acquisition may have a dilutive effect on the interests of the holders of our common stock. If we were to undertake an acquisition by incurring additional debt, the risks associated with our already substantial level of indebtedness could intensify.

 

 

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Our business strategy relies increasingly upon online commerce. If our customers were unable to access any of our websites, such as ATDOnline®, our business and operations could be disrupted and our operating results would be adversely affected.

Customers’ access to our websites directly affects the volume of orders we fulfill and our revenues in the United States. Approximately 65% of our U.S. total order volume in fiscal 2013 was placed online using ATDOnline®, up from approximately 56% in fiscal 2007. We expect our Internet-generated business in the United States to continue to grow as a percentage of overall sales. To be successful, we must ensure that ATDOnline® is well supported and functional on a 24/7 basis. If we are not able to continuously make these ordering tools available to our customers, there could be a decline in online orders and a decrease in our net sales.

We may not successfully execute our plan to grow our TireBuyer.com® service or we may not attain the growth we expect from our TireBuyer.com® service.

We continue to invest in TireBuyer.com®, an Internet site which enables our independent tire retailer customers to access the online tire consumer market and sell to consumers over the Internet. In 2012, the TireBuyer.com® site was re-launched on a platform that is faster and more flexible in allowing us to respond to the needs of our customers and enhancing the overall consumer experience. Since its initial launch in 2009, we have generally seen a consistent increase in consumer traffic on the site. We expect that by growing and developing our TireBuyer.com® service, we can leverage our tire retailer customer footprint to capture a greater share of the Internet tire market. For TireBuyer.com® to be successful, however, we must ensure that it is well supported and functional on a 24/7 basis. In addition, TireBuyer.com® faces significant competition from other online participants, some of which have significantly larger Internet market share, longer Internet market presence, greater Internet marketing experience and better name recognition than we enjoy. We may fail to successfully grow, develop or support the TireBuyer.com® service or we may not attain the growth or benefits we expect TireBuyer.com® to provide us due to strong competition or other factors, which may adversely affect our business, financial condition or results of operations.

Because the majority of our inventory is stored in our warehouse distribution centers, a disruption in our warehouse distribution centers could adversely affect our results of operations by increasing our cost and distribution lead times.

We maintain the majority of our inventory in our more than 140 distribution centers in North America. Serious disruptions affecting these distribution centers or the flow of products in or out of these centers, including disruptions from inclement weather, fire, earthquakes or other causes, could damage a significant portion of our inventory and could adversely affect our ability to distribute our products to tire retailers in a timely manner or at a reasonable cost. During the time that it may take us to reopen or replace a distribution center, we could incur significantly higher costs and longer lead times associated with distributing our products to tire retailers, which could adversely affect our reputation, as well as our results of operations and our customer relationships.

If we experience problems with our fleet of trucks or are otherwise unable to make timely deliveries of our products to our customers, our business and reputation could be adversely affected.

We use a fleet of trucks to deliver our products to our customers, most of which are leased from third parties. We are subject to the risks associated with product delivery, including inclement weather, disruptions in the transportation infrastructure, disruptions in our lease arrangements, availability and price of fuel, liabilities arising from accidents to the extent we are not covered by insurance and insurance premium increases. Our failure to deliver tires and other products in a timely and accurate manner could harm our reputation and brand, which could adversely affect our business and reputation.

 

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Our Hercules® brand tires are generally manufactured in various countries in Asia and as a result are subject to risks associated with doing business outside the United States and Canada.

Following our acquisition of Hercules, we distribute a private brand tire marketed under the Hercules® brand. These tires are generally manufactured in various countries in Asia. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, sudden changes in laws and regulations, shortages of trained labor, transportation risks and the uncertainties associated with doing business in foreign countries. These risks may impact our ability to expand our outsourced manufacturing operations and otherwise achieve our objectives relating to private brand marketing, including capitalizing on the expanding import market. In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations, anti-corruption laws such as the Foreign Corrupt Practices Act and exchange controls is burdensome and expensive. Our foreign operations also subject us to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds.

Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.

In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions may impact some of our customers’ ability to pay their accounts payable. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our operating results.

Consolidation among customers may reduce our importance as a holder of sizable inventory, which could adversely affect our business and results of operations.

Our success has been dependent, in part, on the fragmented customer base in our industry. Due to the small size of most tire retailers, they cannot support substantial inventory positions and thus, as our size permits us to maintain a sizable inventory, we fill an important role. However, we do not generally have long-term arrangements with our tire retailer customers and they can cease doing business with us at any time. If a trend towards consolidation among tire retailers develops in the future, it could reduce our importance and reduce our revenues, margins and earnings. While the local independent tire retailer share of the replacement tire market has been relatively stable in the recent past, the share of larger tire retailers has grown at the expense of smaller tire retailers. If that trend continues, the number of tire retailers able to handle sizable inventory could increase, reducing the importance of distributors like us to the local independent tire retailer market.

Participants in our Tire Pros® franchise program are independent operators and we have limited influence over their operations. Our Tire Pros® franchisees could take actions that could harm the value of the Tire Pros® franchise, or could be unwilling or unable to continue to participate in the program, which could materially and adversely affect our business, results of operations, financial condition and cash flows.

Participants in our Tire Pros® franchise program are independent operators and have significant discretion in running their operations. Their employees are not our employees. Franchisees could take actions that subject them to legal and financial liabilities, and we may, regardless of the actual validity of such a claim, be named as a party in an action relating to, or be held liable for, the conduct of our franchisees if it is shown that we exercise a sufficient level of control over a particular franchisee’s operation. In addition, the quality of franchise operations may be diminished by any number of factors beyond our control. We do not offer financial or management services to our franchisees, which may not have sufficient resources or expertise to operate their businesses at the level we would expect. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements, we may not be able to identify problems and take action quickly enough and, as a result, the image and reputation of Tire Pros® may suffer, fewer tire retailers may become Tire Pros® franchisees and existing participants may leave the Tire Pros® program.

 

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In addition, our franchise agreements have limited durations and our franchisees may not be willing or able to renew their franchise agreements with us. For example, a franchisee may decide not to renew due to a lawsuit or disagreement with us, dissatisfaction with the Tire Pros® program or a perception that the Tire Pros® program conflicts with other business interests. Similarly, a franchisee may be unable to renew its franchise agreement with us due to a bankruptcy or restructuring event or the failure to secure a real estate lease renewal, among other factors.

Our business, business prospects, results of operations, financial condition and cash flows could be adversely affected if we are forced to defend claims made against our franchisees, if others seek to hold us accountable for our franchisees’ actions, if the Tire Pros® program does not grow as we expect or if the Tire Pros® franchise program is not otherwise successful.

We could become subject to additional government regulation which could cause us to incur significant liabilities.

We are currently subject to federal, state and foreign laws and regulations that apply to our business, including laws and regulations that affect tire distribution and sale, safety matters and tire specifications. Our costs of complying with these laws and regulations, including our operating expenses and liabilities arising under governmental regulations, may be increased in the future, including due to expansion of our business into new geographic areas, and additional fees and taxes may be imposed by governmental authorities. Future regulatory requirements, such as required disclosure of made-on dates for tires or an expansion of the Transportation Recall Enhancement Accountability and Documentation (TREAD) Act to cover tire distributors, could cause a material increase in our liabilities or operating expenses, which would materially and adversely affect our business, results of operations, financial condition and cash flows.

Loss of key personnel or failure to attract and retain highly qualified personnel could adversely affect our results of operations, financial condition and cash flows.

We are dependent on the continued services of our senior management team. We may not be able to retain our existing senior management, fill new positions or vacancies created by expansion or turnover, or attract additional senior management personnel. We believe the loss of such key personnel could adversely affect our financial performance. In addition, our ability to manage our anticipated growth will depend on our ability to identify, hire and retain qualified management personnel. We cannot assure you that we will attract and retain sufficient qualified personnel to meet our business needs.

We could be subject to product liability, personal injury or other litigation claims that could adversely affect our business, results of operations and financial condition.

Purchasers of our products, or their employees or customers, could be injured or suffer property damage from exposure to, or defects in, products we sell or distribute, or have sold or distributed in the past. We could be subject to claims, including personal injury claims. These claims may not be covered by insurance or tire manufacturers may be unwilling or unable to assume the defense of these claims, as they have in the past. In addition, if any tire manufacturer encounters financial difficulty or ceases to operate, it may not be able to assume the defense of such claims. In addition, we now own the Hercules® tire brand and therefore could be liable for these claims in the future in connection with the manufacture and sale of the Hercules® brand tires. We also may be subject to claims due to injuries caused by our truck drivers which may not be covered by insurance. As a result, the defense, settlement or successful assertion of any future product liability, personal injury or other litigation claims could cause us to incur significant costs and could have an adverse effect on our business, financial condition, results of operations and cash flows.

We could incur costs to comply with environmental regulations and to address liabilities relating to environmental matters, particularly those relating to our distribution centers.

We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These requirements are complex, change frequently and have tended to become more stringent over time. Compliance costs associated with current and future environmental and health and safety laws, particularly

 

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as they relate to our distribution centers, as well as liabilities, including fines, claims or clean-up costs, arising from past or future releases of, or exposure to, hazardous substances, may adversely affect our business, results of operations, financial condition or cash flows.

Failure to maintain effective internal control over financial reporting could materially adversely affect our business, results of operations and financial condition.

Pursuant to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), we provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Changes to our business and the integration of newly-acquired businesses will necessitate ongoing changes to our internal control systems and processes, including to address any internal control issues of the businesses that we acquire from time to time. For example, the Terry’s Tire auditors identified material weaknesses, which were in existence at the time we acquired the business, relating to security administration and access to systems, separation of duties, and external financial reporting. We are in the process of integrating the Terry’s Tire business, including placing them on our information technology and accounting systems, as well as implementing our own internal controls and procedures with respect to the Terry’s Tire business. While we do not expect the issues identified by the Terry’s Tire auditors to continue following the completion of the integration, which we anticipate will be completed during the third quarter of 2014, we face risks like this in the ordinary course of business.

Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain adequate internal controls, including any required new or improved controls, we may be unable to provide financial information in a timely and reliable manner and might be subject to sanctions or investigation by regulatory authorities such as the SEC or the Public Company Accounting Oversight Board. Any such action could adversely affect our financial results or investors’ confidence in us or in the integrity of our financial statements and public filings and could cause the price of our securities to fall.

If we determine that our goodwill and other intangible assets have become impaired, we may record significant impairment charges, which would adversely affect our results of operations.

Goodwill and other intangible assets represent a significant portion of our assets. Goodwill is the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill and intangible assets may increase as a result of future acquisitions. We review our goodwill and indefinite lived intangible assets at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions and adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business. Any impairment of goodwill or other intangible assets would result in a non-cash charge against earnings, which would adversely affect our results of operations.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Borrowings under our ABL Facility, FILO Facility and Term Loan are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.

Currency exchange rate fluctuations may adversely affect our financial results.

The financial position and results of operations for TriCan, our 100% owned subsidiary acquired during 2012, was initially recorded in its functional currency which is the Canadian dollar. Because our consolidated

 

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financial statements are presented in U.S. dollars, we must translate revenues and expenses into U.S. dollars at the weighted-average exchange rate prevailing during the year and assets and liabilities into U.S. dollars at the year-end exchange rate. Therefore, fluctuations in the value of the U.S. dollar versus the Canadian dollar will have an impact on the value of these items in our consolidated financial statements, even if its value has not changed in its original currency.

Restrictions imposed by our outstanding indebtedness, including the indenture governing our outstanding notes, may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

The terms of our outstanding indebtedness restrict us from engaging in specified types of transactions. These covenants restrict our ability, among other things, to:

 

    incur indebtedness or guarantees or engage in sale-leaseback transactions;

 

    incur liens;

 

    engage in mergers, acquisitions and asset sales;

 

    alter the business conducted by ATDI and its restricted subsidiaries;

 

    make investments and loans;

 

    declare dividends or other distributions;

 

    enter into agreements limiting restricted subsidiary distributions; and

 

    engage in certain transactions with affiliates.

In addition, the credit agreement for our ABL Facility requires us to comply with a fixed charge coverage ratio test if certain conditions are triggered. Our ability to comply with this financial covenant can be affected by events beyond our control, and we may not be able to satisfy it. Additionally, the restrictions contained in the indenture governing our outstanding notes could also limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans. See “Description of Indebtedness.” The terms of any future indebtedness we incur could include more restrictive covenants.

A breach of any of these covenants could result in a default under our credit facilities or the indenture governing our outstanding notes, which could trigger acceleration of our indebtedness and may result in the acceleration of or default under any other debt to which a cross-acceleration or cross-default provision applies, which could have a material adverse effect on our business, operations and financial results. In the event of any default under our credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and loans outstanding, together with accrued and unpaid interest and any fees and other obligations, to be due and payable. In addition, or in the alternative, the applicable lenders could exercise their rights under the security documents entered into in connection with our credit facilities. We have pledged a significant portion of our assets as collateral under our credit facilities.

If we were unable to repay or otherwise refinance these borrowings and loans when due, the applicable lenders could proceed against the collateral granted to them to secure that indebtedness, which could force us into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the agreements governing our credit facilities or the exercise by the applicable lenders of their rights under the security documents would likely have a material adverse effect on us.

 

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Because of our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results.

We have acquired a number of businesses in recent years, including TriCan, RTD, Hercules and Terry’s Tire, and we expect that we will engage in acquisitions of other businesses from time to time in the future. The operating results of the acquired businesses are included in our financial statements included in this prospectus only from the date of the completion of such acquisitions. All of our acquisitions have been accounted for using the acquisition method of accounting. Use of this method has resulted in a new valuation of the assets and liabilities of the acquired companies. As a result of these acquisitions and any future acquisitions, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results. In addition, other significant changes may occur in our cost structure, management, financing and business operations as a result of these acquisitions and any future acquisitions.

The pro forma financial information in this prospectus is presented for illustrative purposes only and does not represent what the financial position or results of operations of the Company would have been had the applicable acquisitions and other transactions been completed on the dates assumed for purposes of that pro forma information nor does it represent the actual financial position or results of operations of the Company following such transactions.

The pro forma financial information in this prospectus is derived from the respective historical consolidated financial statements and related notes of the Company, Terry’s Tire, Hercules and RTD included in this prospectus. It is presented for illustrative purposes only and contains certain estimates and assumptions about the acquisitions and other transactions described therein. The preparation of this pro forma financial information is based on certain assumptions and estimates that we believe are reasonable. Our assumptions may prove to be inaccurate over time and may be affected by other factors. Accordingly, the pro forma financial information may not reflect what our results of operations, financial positions and cash flows would have been had the applicable transactions occurred during the periods presented or what our results of operations, financial positions and cash flows will be in the future.

In addition, for purposes of the pro forma financial information, the consideration for the relevant acquisitions has been preliminarily allocated to the assets acquired and liabilities assumed based on the preliminary valuations. The final allocation is dependent upon third-party valuations and other studies that have not been completed. The final allocation could vary materially from the preliminary allocation used in the financial information contained in this prospectus. Additionally, the pro forma financial information does not give effect to any unforeseen costs that could result from the relevant acquisitions, nor does it include any other items not expected to have a continuing impact on the consolidated results of operations.

Risks Related to our Common Stock and this Offering

TPG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by TPG. Upon completion of this offering, investment funds affiliated with TPG will beneficially own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares). As long as TPG owns or controls at least a majority of our outstanding voting power, it will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Even if its ownership falls below 50%, TPG will continue to be able to strongly influence or effectively control our decisions.

 

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Additionally, TPG’s interests may not align with the interests of our other stockholders. TPG is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. TPG may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Upon the listing of our shares, we will be a “controlled company” within the meaning of the rules of              and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements; you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Because TPG will continue to control a majority of the voting power of our outstanding common stock after completion of this offering, we will be a “controlled company” within the meaning of the corporate governance standards of                     . Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

    we have a board that is composed of a majority of “independent directors,” as defined under the rules of             ;

 

    we have a compensation committee that is composed entirely of independent directors; and

 

    we have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize all of these exemptions. Accordingly, in the event TPG’s interests differ from those of other stockholders, and, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of                     . Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

Our directors who have relationships with TPG may have conflicts of interest with respect to matters involving our company.

Following this offering,                     of our                     directors will be affiliated with TPG. Our TPG-affiliated directors have fiduciary duties to us and, in addition, will have duties to TPG. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and TPG, whose interests, in some circumstances, may be adverse to ours.

Provisions of our corporate governance documents could make an acquisition of our company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to TPG’s beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquiror. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board. Because our board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description of Capital Stock.”

 

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If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book deficit per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book deficit per share after this offering. Based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, you will experience immediate dilution of $         per share, representing the difference between our pro forma net tangible book deficit per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed     % of the aggregate price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. We also have a large number of outstanding stock options to purchase common stock with exercise prices that are below the estimated initial public offering price of our common stock. To the extent that these options are exercised, you will experience further dilution. See “Dilution” for more detail.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our certificate of incorporation and bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we intend to list our common stock on                     under the symbol “             ,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management’s attention.

Prior to this offering, although Holdings has filed periodic and current reports with the SEC to satisfy obligations under our debt instruments, we operated our company on a private basis. After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of                     , and other applicable securities laws and regulations. Compliance with these

 

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laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. In particular, we estimate that we will incur incremental costs in connection with the requirements to obtain an attestation report on our internal controls from our independent auditors under Section 404 of the Sarbanes-Oxley Act. In connection with preparation for providing this attestation, our independent auditors may identify deficiencies or weaknesses in our controls. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. We estimate that we will incur between $         million and $         million annually in expenses related to incremental insurance costs and other expenses associated with being a public company, including listing, printer, audit and XBRL fees and investor relations costs. However, the incremental costs that we incur as a result of becoming a public company could exceed our estimate. These factors may therefore strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

    market conditions in the broader stock market;

 

    actual or anticipated fluctuations in our quarterly financial and operating results;

 

    introduction of new products or services by us or our competitors;

 

    issuance of new or changed securities analysts’ reports or recommendations;

 

    results of operations that vary from expectations of securities analysis and investors;

 

    guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

    strategic actions by us or our competitors;

 

    announcement by us, our competitors or our vendors of significant contracts or acquisitions;

 

    sales, or anticipated sales, of large blocks of our stock;

 

    additions or departures of key personnel;

 

    regulatory, legal or political developments;

 

    public response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

    litigation and governmental investigations;

 

    changing economic conditions;

 

    changes in accounting principles;

 

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    default under agreements governing our indebtedness;

 

    exchange rate fluctuations; and

 

    other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding             shares of common stock based on the number of shares outstanding as of                     , 2014. This includes             shares that we are selling in this offering, as well as the             shares that the selling stockholders are selling, which may be resold in the public market immediately, and assumes no exercises of outstanding options. Substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under agreements executed in connection with this offering. These shares will, however, be able to be resold after the expiration of the lock-up agreement as described in the “Shares Eligible for Future Sale” section of this prospectus. We also intend to file a Form S-8 under the Securities Act of 1933, as amended (“Securities Act”), to register all shares of common stock that we may issue under our equity compensation plans. In addition, TPG has certain demand registration rights that could require us in the future to file registration statements in connection with sales of our stock by TPG. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” Such sales by TPG could be significant. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Since we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

Although we have previously declared dividends to our stockholders, we do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

 

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We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.

ATD Corporation is a holding company with nominal net worth. We do not have any material assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our indirect operating subsidiary, ATDI and its subsidiaries. As a result, notwithstanding any restrictions on payment of dividends under our existing indebtedness, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including from ATDI. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

A ratings downgrade or other negative action by a ratings organization could adversely affect the trading price of the shares of our common stock.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our common stock.

Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws, or (iv) any other action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:

 

    plans for future growth and other business development activities;

 

    plans for capital expenditures;

 

    expectations for market and industry growth and trends;

 

    financing sources;

 

    dividends;

 

    the effects of regulation and competition;

 

    synergies and cost savings related to acquisitions;

 

    foreign currency conversion; and

 

    all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, those discussed in the “Risk Factors” section of this prospectus, which include the following:

 

    Demand for tire products is lower when general economic conditions are weak and decreases in the availability of consumer credit or consumer spending could adversely affect our business, results of operations or cash flows.

 

    We depend on manufacturers to provide us with the products we sell and disruptions in these relationships or manufacturers’ operations could adversely affect our results of operations, financial condition and cash flows.

 

    The failure of our information technology systems could disrupt our business operations, which could have a material adverse effect on our business, financial condition and results of operations.

 

    Our business requires a significant amount of cash, and fluctuations in our cash flows may adversely affect our ability to fund our business or acquisitions or satisfy our debt obligations.

 

    Our substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

 

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    The industry in which we operate is highly competitive and our failure to effectively compete may adversely affect our results of operations, financial condition and cash flows.

 

    Pricing volatility for raw materials could result in increased costs and may affect our profitability.

 

    We face risks related to integration of our recent significant acquisitions.

 

    We may not realize the growth opportunities and cost savings synergies that we anticipated from our recent significant acquisitions.

 

    Attempts to expand our distribution services into new geographic markets may adversely affect our business, results of operations, financial condition or cash flows.

 

    We regularly seek to grow our business through acquisitions, and our inability to identify desirable acquisition targets or integrate such acquisitions, including our recent significant acquisitions, could have a material adverse effect on us.

 

    Future acquisitions could require us to issue additional debt or equity.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our issuance and sale of             shares of common stock in this offering will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us (or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus.

We intend to use the net proceeds of this offering to: (i) repay a portion of our long-term indebtedness; and (ii) pay a $12.5 million termination fee to TPG under our transaction and monitoring fee letter. We intend to use the remainder of the net proceeds, if any, for working capital and other general corporate purposes, including supporting our strategic growth opportunities in the future.

We will not receive any proceeds from the sale of shares by the selling stockholders, including if the underwriters exercise their option to purchase additional shares. After deducting the underwriting discounts, the selling stockholders will receive approximately $         million of proceeds from this offering.

A $1.00 increase (decrease) in the assumed public offering price of $        , based upon the midpoint of the estimated price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full), assuming the number of shares we offer, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, own in excess of 10% of our issued and outstanding common stock. Therefore, a “conflict of interest” is deemed to exist under FINRA Rule 5121(f)(5)(B). In addition, because the TPG Funds (as defined below) are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under FINRA Rule 5121(f)(5)(C)(ii). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. However, no “qualified independent underwriter” is required because the underwriters primarily responsible for managing this offering are free of any “conflict of interest,” as that term is defined in the rule. See “Underwriting (Conflicts of Interest).”

 

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DIVIDEND POLICY

Our board of directors does not currently intend to pay dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in our credit facilities and other instruments governing our indebtedness which limit our ability to pay dividends and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our board of directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our board of directors may deem relevant.

Our ability to pay dividends is restricted by certain covenants contained in our ABL Facility (as defined below) and in the indenture that governs our Senior Subordinated Notes and may be further restricted by any future indebtedness that we incur. Our business is conducted through our subsidiaries. Dividends from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. See “Description of Indebtedness.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization at April 5, 2014:

 

    on an actual basis;

 

    on an as adjusted basis to give effect to (1) the issuance of shares of common stock by us in this offering and the receipt of approximately $         million in net proceeds from the sale of such shares, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, and (2) the application of the estimated net proceeds from the offering as described in “Use of Proceeds.”

You should read this table in conjunction with the information contained in “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” Unaudited Pro Forma Combined Condensed Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Indebtedness” as well as our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

   

As of April 5, 2014

 

(dollars in thousands)

 

Actual

   

As Adjusted
(1)(2)

 

Cash and cash equivalents

  $ 37,824     $                
 

 

 

   

 

 

 

Long-term debt, including current portions:

   

U.S. ABL Facility

  $ 595,964     

Canadian ABL Facility

    42,136     

U.S. FILO Facility

    74,111     

Canadian FILO facility

    8,501     

Term Loan

    299,252     

Senior Secured Notes

    248,330     

Senior Subordinated Notes

    421,181     

Capital lease obligations

    12,715     

Other

    7,916     
 

 

 

   

 

 

 

Total debt

    1,710,106     
 

 

 

   

 

 

 

Stockholders’ equity:

   

Common stock, par value $0.01 per share; 2,000,000,000 shares authorized and 767,501,736 shares issued and outstanding on an actual basis,              shares authorized and              shares issued and outstanding on an as adjusted basis

    7,675     

Additional paid-in capital

    801,864     

Accumulated deficit

    (103,862  

Accumulated other comprehensive loss

    (14,329  
 

 

 

   

 

 

 

Total stockholder’s equity

    691,348     
 

 

 

   

 

 

 

Total capitalization

  $ 2,401,454      $     
 

 

 

   

 

 

 

 

(1) As adjusted reflects the application of the estimated proceeds of the offering as described in “Use of Proceeds.”

 

(2) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the as adjusted amount of each of cash and cash equivalents and total stockholders’ equity by approximately $         million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of common stock is substantially in excess of the net tangible book deficit per share of our common stock attributable to the existing stockholders for our presently outstanding shares of common stock. Our net tangible book deficit per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of common stock issued and outstanding.

As of April 5, 2014, we had a historical net tangible book deficit of $         million, or $         per share of common stock, based on              shares of our common stock outstanding as of                     , 2014 (after giving effect to the one-for-                 reverse stock split effected on                     , 2014). Dilution is calculated by subtracting net tangible book deficit per share of our common stock from the assumed initial public offering price per share of our common stock.

Investors participating in this offering will incur immediate and substantial dilution. Without taking into account any other changes in such net tangible book deficit after April 5, 2014, after giving effect to the sale of shares of our common stock in this offering assuming an initial public offering price of $         per share (the midpoint of the offering range shown on the cover of this prospectus), less the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book deficit as of April 5, 2014 would have been approximately $         million, or $         per share of common stock. This amount represents an immediate decrease in net tangible book deficit of $         per share of our common stock to the existing stockholders and immediate dilution in net tangible book deficit of $         per share of our common stock to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $                

Net tangible book deficit per share as of April 5, 2014, before giving effect to this offering

   $        

Decrease in net tangible book deficit per share attributable to investors purchasing shares in this offering

     
  

 

 

    

Pro forma net tangible book value per share, after giving effect to this offering

     

Dilution in as adjusted net tangible book deficit per share to investors in this offering

      $     

If the underwriters exercise their option in full to purchase additional shares, the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering would be $         per share of our common stock. This represents an increase in pro forma as adjusted net tangible book deficit of $         per share of our common stock to existing stockholders and dilution in pro forma as adjusted net tangible book deficit of $         per share of our common stock to new investors.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering by $        , or by $         per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the front cover page of this prospectus and after deducting the estimated underwriting discounts and expenses payable by us.

 

38


The following table summarizes, as of April 5, 2014, on the pro forma basis described above, the total number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share of our common stock paid by purchasers of such shares and by new investors purchasing shares of our common stock in this offering.

 

    

Shares purchased

  

Total consideration

   

Average price
per share

 
    

Number

  

Percent

  

Amount

    

Percent

   

Existing stockholders

         $                                 $                

New investors

         $                             $                
  

 

  

 

  

 

 

    

 

 

   

 

 

 

Total

         $                            
  

 

  

 

  

 

 

    

 

 

   

The number of shares of common stock to be outstanding after this offering is based on              shares of common stock outstanding as of                     , 2014 (after giving effect to the one-for-         reverse stock split effected on                  , 2014) and excludes the following:

 

                 shares of common stock issuable upon exercise of stock options outstanding as of                     , 2014 at a weighted-average exercise price of $         per share; and

 

                 shares of common stock reserved for future issuance under our equity incentive plans as of                     , 2014.

 

39


SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth our selected historical consolidated financial and other data for the periods indicated. The selected historical financial data as of December 28, 2013 and December 29, 2012 and for fiscal years 2013, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical balance sheet data as of December 31, 2011 have been derived from our unaudited consolidated financial statements as of such date, which are not included in this prospectus. The selected historical financial data as of April 5, 2014 and for the first quarters of 2014 and 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The selected historical balance sheet data as of March 30, 2013 have been derived from our unaudited consolidated financial statements for such quarter, which are not included in this prospectus. On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, we were acquired by TPG and certain co-investors (the “Merger”). In the following table, periods prior to May 28, 2010 reflect our financial position, results of operations and changes in financial position prior to the Merger (the “Predecessor”). Periods after May 28, 2010 reflect our financial position, results of operations, and changes in financial position after the Merger (the “Successor”). The selected historical financial data for the fiscal year 2009 and the five months ended through May 28, 2010 which are under the Predecessor ownership and for the seven months ended January 1, 2011 which are under Successor ownership have been derived from unaudited consolidated financial statements for such periods, which have not been included in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods, and operating results for the first quarter of 2014 are not necessarily indicative of the results that may be expected for the year ending January 3, 2015. The pro forma data for fiscal year 2013 and the first quarter of 2014 have been derived from our unaudited pro forma condensed combined financial data included elsewhere in this prospectus.

Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to 52-week fiscal years, and the associated quarters having only 13 weeks. The 2009 fiscal year, which ended January 2, 2010, the 2011 fiscal year, which ended December 31, 2011, the 2012 fiscal year, which ended December 29, 2012, and the 2013 fiscal year, which ended December 28, 2013, each contain operating results for 52 weeks. The five months ended May 28, 2010 contains operating results for 21 weeks. The seven months ended January 1, 2011 contains operating results for 31 weeks. The quarter ended April 5, 2014 contains operating results for 14 weeks while the quarter ended March 30, 2013 contains operating results for 13 weeks. It should be noted that the Company’s recently acquired subsidiaries, Hercules and Terry’s Tire have different quarter-end reporting dates than that of the Company for the first quarter of 2014, with their quarters ending March 31. Prior to the acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end and RTD had a January 31 fiscal year end, but each such subsidiary changed its year end to be the same as that of the Company, effective with their respective acquisition dates. It should also be noted that, prior to fiscal 2013, our year-end reporting date was different from that of our TriCan subsidiary. For fiscal 2012, TriCan had a calendar year-end reporting date. TriCan converted to our fiscal year-end reporting date during fiscal 2013. The impact from these differences on the consolidated financial statements was not material. This selected historical consolidated financial and other data should be read in conjunction with the disclosures set forth under “Unaudited Pro Forma Combined Condensed Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. Due to our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting future results. See “Risk Factors—Risks Related to our Business and Industry—Because of our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results.”

 

40


   

Successor

        

Predecessor

 
Dollars in thousands
(except for per share
data)
 

First Quarter
2014 (1)

   

First Quarter
2013

   

Fiscal

Year

2013 (2)

   

Fiscal

Year

2012 (3)

   

Fiscal

Year

2011 (4)

   

Seven
Months
Ended
January 1,
2011 (5)

        

Five
Months
Ended
May 28,
2010

   

Fiscal

Year

2009

 

Statements of Operations Data:

                   

Net sales

  $ 1,075,469      $ 839,978      $ 3,839,269      $ 3,455,864      $ 3,050,240      $ 1,525,249          $ 934,925      $ 2,171,787   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    917,314        708,156        3,188,409        2,887,421        2,535,020        1,316,679            775,678        1,797,905   

Selling, general and administrative expenses

    177,918        136,504        574,987        506,558        437,260        228,663            135,146        306,189   

Transaction expenses

    4,686        1,023        6,719        5,246        3,946        18,500            42,608        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Operating income (loss)

    (24,449     (5,705     69,154        56,639        74,014        (38,593         (18,507     67,693   
 

Other income (expense)

                   

Interest expense

    (24,399     (17,240     (74,316     (72,910     (67,572     (37,387         (32,669     (54,415

Other, net (6)

    (1,802     (973     (5,196     (3,895     (2,110     (958         (127     (1,020
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income (loss) from operations before income taxes

    (50,650     (23,918     (10,358     (20,166     4,332        (76,938         (51,303     12,258   

Income tax provision (benefit)

    (16,606     (7,627     (3,982     (5,965     4,464        (27,829         (15,227     7,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss)

  $ (34,044   $ (16,291   $ (6,376   $ (14,201   $ (132   $ (49,109       $ (36,076   $ 4,932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Basic net income (loss) per common share (7)(8)

  $ (0.05   $ (0.02   $ (0.01   $ (0.02   $ (0.00   $ (0.07        

Diluted net income (loss) per share (7)(8)

  $ (0.05   $ (0.02   $ (0.01   $ (0.02   $ (0.00   $ (0.07        

Weighted average shares (7)(8)

                   

Basic

    756,390,625        734,168,402        734,168,402        688,300,235        684,172,402        682,830,902           

Diluted

    756,390,625        734,168,402        734,168,402        688,300,235        684,172,402        682,830,902           

Other Financial Data:

                   

Cash flows provided by (used in):

                   

Operating activities

  $ (72,625   $ 2,132      $ 100,982      $ 10,072      $ (90,699   $ (15,043       $ 28,106      $ 131,105   

Investing activities

    (689,243     (16,697     (118,435     (167,821     (92,249     (17,237         (7,523     (4,620

Financing activities

    765,613        4,210        22,998        168,824        186,263        40,405            (15,631     (127,690

Depreciation and amortization

    29,323        25,031        105,458        89,167        78,071        40,905            14,707        32,078   

Capital expenditures

    14,402        11,873        47,127        52,388        31,044        12,381            6,424        12,757   

EBITDA (9)

    3,072        18,353        169,416        141,911        149,975        1,354            (3,927     98,751   

Adjusted EBITDA (9)

    29,010        23,911        195,486        165,416        164,255        87,974            45,696        101,035   
 

Balance Sheet Data:

                   

Cash and cash equivalents

  $ 37,824      $ 23,832      $ 35,760      $ 34,700      $ 23,682      $ 20,367            $ 7,290   

Working capital (10)

    799,264        558,179        541,051        556,646        457,443        278,673              197,317   

Total assets

    3,520,902        2,453,692        2,541,655        2,486,837        2,285,364        2,040,076              1,300,624   

Total debt (11)

    1,710,106        964,262        967,000        951,204        835,808        652,544              549,576   

Total redeemable preferred stock

           —          —          —          —          —                26,600   

Total stockholders’ equity

    691,348        675,386        680,054        692,753        642,773        638,649              230,647   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

41


   

First Quarter
2014

   

 

 

Fiscal Year
2013

 

Pro Forma Data:

     

Pro forma net sales

  $ 1,219,939        $ 4,954,939   

Pro forma Adjusted EBITDA (12)

    31,337          231,811   

Pro forma net income (loss)

    (52,938       (55,200

 

(1) Reflects the acquisition of Terry’s Tire in March 2014 and the acquisition of Hercules and Kipling Tire Co. LTD in January 2014.

 

(2) Reflects the acquisition of Wholesale Tire Distributors Inc. in December 2013, the acquisition of Tire Distributors, Inc. in August 2013 and the acquisition of RTD in April 2013.

 

(3) Reflects the acquisition of Triwest Trading (Canada) Ltd. d/b/a TriCan Tire Distributors in November 2012 and the acquisition of Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil in May 2012.

 

(4) Reflects the acquisition of Bowlus Service Company d/b/a North Central Tire in April 2011.

 

(5) Reflects the acquisition of Lisac’s of Washington, Inc. and Tire Wholesalers, Inc. in December 2010. Additionally, includes certain costs related to the start-up and development of ATD Corporation.

 

(6) Other, net primarily includes bank fees, credit card charges and gains and losses on foreign currency, net of service charges to our customers.

 

(7) As a result of the Merger, our capital structures for periods before and after the Merger are not comparable, and therefore we are presenting our net income (loss) per share and weighted-average share information only for periods subsequent to the Merger.

 

(8) Does not reflect the one-for-                 reverse stock split effected on                 , 2014.

 

(9) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA as further adjusted to reflect the items set forth in the table below. The presentation of EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our GAAP results and the following reconciliation, we believe provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We also believe that such measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies similar to ours. Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing items that we do not believe are indicative of our core operating performance. In addition, the indenture governing our senior notes use a measure similar to Adjusted EBITDA to measure our compliance with certain covenants. Our board of directors also uses Adjusted EBITDA in determining compensation for our management. The adjustments from EBITDA to Adjusted EBITDA include management and advisory fees paid to our Sponsor, non-cash stock compensation expense, transaction expenses related to our acquisitions, non-cash amortization of inventory step-up resulting from the business combination rules for our acquisitions and other items, including franchise and other taxes, non-cash gains and losses on the disposal of fixed assets and assets held for sale, exchange gains and losses on foreign currency, and non-cash impairment of long-lived assets. Amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers because not all issuers calculate Adjusted EBITDA in the same manner. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same or similar to some of the adjustments set forth below. Neither EBITDA nor Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP.

 

42


The following table presents a reconciliation of each of EBITDA and Adjusted EBITDA to net income (loss), determined in accordance with GAAP:

 

   

Successor

        

Predecessor

 
In thousands  

First

Quarter

2014

   

First
Quarter
2013

   

Fiscal
Year

2013 (1)

   

Fiscal
Year

2012 (2)

   

Fiscal
Year

2011 (3)

   

Seven
Months
Ended
January 1,
2011 (4)

        

Five
Months
Ended
May 28,
2010

   

Fiscal
Year

2009

 

Net income (loss)

  $ (34,044   $ (16,291   $ (6,376   $ (14,201   $ (132   $ (49,109       $ (36,076   $ 4,932   

Depreciation and amortization

    29,323        25,031        105,458        89,167        78,071        40,905            14,707        32,078   

Interest expense

    24,399        17,240        74,316        72,910        67,572        37,387            32,669        54,415   

Income tax provision (benefit)

    (16,606     (7,627     (3,982     (5,965     4,464        (27,829         (15,227     7,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA

  $ 3,072      $ 18,353      $ 169,416      $ 141,911      $ 149,975      $ 1,354          $ (3,927   $ 98,751   

Management fee

    608        991        5,753        7,446        4,624        2,352            125        500   

Non-cash stock compensation

    567        668        2,634        4,349        4,114        3,706            5,892        326   

Transaction fees

    4,686        1,023        6,719        5,246        3,946        18,500            42,608        —     

Non-cash inventory step-up

    19,183        2,194        5,379        4,074        —          58,797            —          —     

Other (A)

    894        682        5,585        2,390        1,596        3,265            998        1,458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $ 29,010      $ 23,911      $ 195,486      $ 165,416      $ 164,255      $ 87,974          $ 45,696      $ 101,035   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred comp. and foreign currency exchange gains/losses.

 

(10) Working capital is defined as current assets less current liabilities.

 

(11) Total debt is the sum of current maturities of long-term debt, non-current portion of long-term debt and capital lease obligations.

 

(12) Pro forma EBITDA and pro forma Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We present pro forma EBITDA and pro forma Adjusted EBITDA, in addition to EBITDA and Adjusted EBITDA, to provide a more complete understanding of our results of operations that gives effect to the recent significant acquisitions that we have completed. These amounts have similar limitations to the limitations described in footnote (9) regarding EBITDA and Adjusted EBITDA. In addition, the pro forma financial information we present is based on estimates and assumptions regarding our recent acquisitions that may end up being materially different from our actual experience. Neither pro forma EBITDA nor pro forma Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP or pro forma net income (loss). Moreover, our debt agreements use a measure similar to pro forma Adjusted EBITDA to measure compliance with certain covenants except that, under certain of these debt agreements, the calculation of the measure allows us (subject to certain limitations) to take into account the amount of cost savings and synergies projected in good faith to be realized in the future in connection with cost saving restructuring initiatives as though those cost savings had already been realized in past periods. We have not included such projected cost savings or synergies in our presentation of pro forma Adjusted EBITDA in this prospectus. Therefore, the amount calculated pursuant to our debt agreements may be higher than pro forma Adjusted EBITDA as set forth in this prospectus. For further discussion of our cost savings initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

43


The following table presents a reconciliation of each of pro forma EBITDA and pro forma Adjusted EBITDA to pro forma net income (loss):

 

     First Quarter     Fiscal Year  

In thousands

   2014     2013  

Pro forma net income (loss)

   $ (52,938   $ (55,200

Depreciation and amortization

     40,178        157,464   

Interest expense

     32,520        128,118   

Income tax provision (benefit)

     (11,563     (35,266
  

 

 

   

 

 

 

Pro forma EBITDA

   $ 8,197      $ 195,116   
  

 

 

   

 

 

 

Management fee

     855        7,353   

Non-cash stock compensation

     567        5,222   

Transaction fees

     1,708        7,764   

Non-cash inventory step-up

     19,183        5,379   

Other (A)

     827        10,977   
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA

   $ 31,337      $ 231,811   
  

 

 

   

 

 

 

 

  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred compensation and foreign currency exchange gains/losses.

For a discussion of pro forma net income (loss), see “Unaudited Pro Forma Combined Condensed Financial Information.”

 

44


UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

On March 28, 2014, we completed the acquisition of Terry’s Tire. The Terry’s Tire acquisition was completed pursuant to a Stock Purchase Agreement between us and TTT Holdings, Inc. (“TTT Holdings”). TTT Holdings owned all of the capital stock of Terry’s Tire. TTT Holdings had no significant assets or operations other than its ownership of Terry’s Tire. The operations of Terry’s Tire and its subsidiaries constituted the operations of TTT Holdings. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the Internet. The Terry’s Tire acquisition was completed for an aggregate purchase price of approximately $378.1 million, consisting of cash consideration of approximately $363.4 million, contingent consideration of $12.5 million and non-cash consideration for debt assumed of $2.2 million. The cash consideration paid for the Terry’s Tire acquisition included estimated working capital adjustments and a portion of consideration contingent on certain events which were achieved prior to closing. The closing purchase price is subject to certain post-closing adjustments, including but not limited to, working capital adjustments.

On January 31, 2014, we completed the acquisition of Hercules Holdings, the parent company of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling replacement tires for passenger cars, trucks and certain off-road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. The acquisition was completed for an aggregate purchase price of approximately $319.3 million, consisting of net cash consideration of $310.4 million, contingent consideration of $3.5 million and non-cash consideration for debt assumed of $5.4 million. The merger agreement provides for the payment of up to $6.5 million in additional consideration contingent upon the occurrence of certain post-closing events. The closing purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On April 30, 2013, we completed the acquisition of RTD Holdco, the parent company of RTD. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and the Atlantic provinces of Canada. The acquisition was completed for an aggregate cash consideration of $65.9 million which includes post-closing working capital adjustments. The operations of RTD constitute the operations of RTD Holdco. RTD Holdco has no significant assets or operations other than its ownership of RTD.

The following presents unaudited pro forma combined condensed financial information for the quarter ended April 5, 2014 and the year ended December 28, 2013. Since the most recent balance sheet presented in this prospectus as of April 5, 2014 includes the impact of all completed acquisitions, a pro forma balance sheet as of April 5, 2014 has not been presented. The unaudited pro forma combined condensed financial information has been prepared from, and should be read in conjunction with, the respective historical consolidated financial statements and related notes of the Company, Terry’s Tire, Hercules and RTD included in this prospectus. The Company’s fiscal year is based on either a 52- or 53 week period ending on the Saturday closest to each December 31 while prior to the respective acquisition dates, Terry’s Tire fiscal year ended on December 31, Hercules’ fiscal year ended on October 31 and RTD’s fiscal year ended on January 31. Accordingly, the unaudited pro forma condensed combined statements of operations for the quarter ended April 5, 2014 and the year ended December 28, 2013 give effect to the acquisition of Terry’s Tire, Hercules and RTD as if these transactions had occurred on December 30, 2012 (the first day of the Company’s 2013 fiscal year), and includes only factually supportable adjustments that are directly attributable to the acquisitions and expected to have a continuing effect.

The RTD, Terry’s Tire and Hercules acquisitions have been accounted for using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interests. As a result, the total purchase price for each acquisition has been preliminarily allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed is recognized as goodwill. The preliminary allocation reflects management’s best estimates of fair value, which are based on key

 

45


assumptions of the acquisitions, including prior acquisition experience, benchmarking of similar acquisitions and historical data. In addition, portions of the preliminary allocation are dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Upon completion of detail valuation studies and the final determination of fair value, we may make additional adjustments to the fair value allocation, which may differ significantly from the valuations set forth in the unaudited pro forma condensed combined financial information. The final allocation of the purchase price will be completed within the required measurement period in accordance with the accounting guidance for business combinations, but in no event later than one year following the completion of the acquisitions.

The unaudited pro forma condensed combined statements of operations are based on estimates and assumptions, which have been made solely for the purposes of developing such pro forma information. Pro forma adjustments arising from the acquisitions are derived from the estimated fair value of the assets acquired and liabilities assumed. The unaudited pro forma condensed combined statements of operations also includes certain purchase accounting adjustments such as increased amortization expense on acquired intangible assets, changes in interest expense on the debt incurred to complete the acquisitions and debt repaid as part of the acquisitions as well as the tax impacts related to these adjustments. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable.

The unaudited condensed consolidated pro forma financial information is not a projection of our results of operations or financial position for any future period or date. The preparation of the unaudited pro forma condensed consolidated financial information requires the use of certain estimates and assumptions, which may be materially different from our actual experience.

 

46


ATD Corporation

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Quarter Ended April 5, 2014

(In Thousands of US Dollars)

 

    Historical     Pro Forma Adjustments  

Pro Forma
Combined

 
    ATD
Corporation
    Hercules
(January 1-
Acquisition
Date,
January 31,
2014)
    Terry’s
Tire
(January 1-
Acquisition
Date,
March 28,
2014)
    Hercules         Terry’s
Tire
        Use of
Offering
Proceeds
(U)
 

Net sales

  $ 1,075,469      $ 42,136      $ 106,372      $ —          $ (4,038   (H)     $ 1,219,939   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    917,314        33,719        91,021        —            (3,138   (H)       1,038,916   

Selling, general and administrative expenses

    177,918        6,796        18,564        1,815      (A)     5,609      (J)    
          58      (B)     (1,089   (H)       209,671   

Transaction expenses

    4,686        29,182        60        (30,996   (C)     (1,224   (K)       1,708   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

 

Operating income (loss)

    (24,449     (27,561     (3,273     29,123          (4,196         (30,356

Other income (expense):

                 

Interest expense, net

    (24,399     (430     (3,374     361      (D)     3,207      (L)    
          (2,347   (E)     (5,538   (M)    
          —            —              (32,520

Other, net

    (1,802     177        —          —            —              (1,625
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

 

Income (loss) from continuing operations before income taxes

    (50,650     (27,814     (6,647     27,137          (6,527         (64,501

Income tax provision (benefit)

    (16,606     (402     1        10,583      (F)     (2,546   (N)    
              (2,593   (O)       (11,563
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

 

Net income (loss) from continuing operations

  $ (34,044   $ (27,412   $ (6,648   $ 16,554        $ (1,388       $ (52,938
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

 

See accompanying notes to unaudited pro forma condensed combined financial information.

 

47


ATD Corporation

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Fiscal Year Ended December 28, 2013

(In Thousands of US Dollars)

 

    Historical     Pro Forma Adjustments  

Pro Forma

Combined

 
   

ATD
Corporation

   

RTD
(January 1 -
Acquisition
Date,
April 30,
2013)

   

Hercules
(November 1,
2012-
October 31,
2013)

   

Terry’s Tire
(January 1-
December 31,
2013)

   

RTD

       

Hercules

       

Terry’s
Tire

       

Use of
Offering
Proceeds
(U)

 

Net sales

  $ 3,839,269      $ 34,200      $ 602,921      $ 502,194      $ —          $ —          $ (23,645   (H)     $ 4,954,939   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    3,188,409        27,684        496,068        420,952        —            —            (18,641   (H)    
                    4,374      (I)       4,118,846   

Selling, general and administrative expenses

    574,987        6,785        89,711        83,233        2,569      (Q)     14,906      (A)     15,820      (J)    
            —            (833   (G)     (4,513   (H)    
                697      (B)     (465   (P)       782,897   

Transaction expenses

    6,719        580        —          —          —            —            465      (P)       7,764   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

 

 

Operating income (loss)

    69,154        (849     17,142        (1,991     (2,569       (14,770       (20,685         45,432   

Other income (expense):

                       

Interest expense, net

    (74,316     (82     (6,396     (9,853     82      (R)     5,269      (D)     9,719      (L)    
            (955   (S)     (833   (G)     (22,455   (M)    
            —            (28,298   (E)     —              (128,118

Other, net

    (5,196     (632     (1,952     —          —            —            —              (7,780
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

 

 

Income (loss) from continuing operations before income taxes

    (10,358     (1,563     8,794        (11,844     (3,442       (38,632       (33,421         (90,466

Income tax provision (benefit)

    (3,982     (853     3,209        (15     (919   (T)     (15,067   (F)     (1   (H)    
                    (13,034   (N)    
                    (4,604   (O)       (35,266
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

 

 

Net income (loss) from continuing operations

  $ (6,376   $ (710   $ 5,585      $ (11,829   $ (2,523     $ (23,565     $ (15,782       $ (55,200
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

 

 

 

See accompanying notes to unaudited pro forma condensed combined financial information.

 

48


Notes to Unaudited Pro Forma Condensed Combined Financial Information

1. Basis of Presentation

These unaudited pro forma condensed combined statements of operations were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC Regulation S-X, and present the pro forma results of operations of the combined companies based upon the historical information after giving effect to the acquisitions of Terry’s Tire, Hercules and RTD and adjustments described in these footnotes. The unaudited pro forma condensed combined statements of operations for the quarter ended April 5, 2014 and the year ended December 28, 2013 are presented as if the acquisitions of Terry’s Tire, Hercules and RTD had occurred on December 30, 2012 (the first day of the Company’s 2013 fiscal year). Prior to their respective acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end and RTD had a January 31 fiscal year end. In addition, certain amounts in the Terry’s Tire and Hercules historical consolidated financial statements have been reclassified to conform to the Company’s basis of presentation.

2. Pro Forma Adjustments

Hercules Pro Forma Adjustments

Adjustments included in the “Hercules” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (A) Represents estimated amortization of the finite-lived intangible assets acquired on an accelerated or straight-line basis based upon the preliminary valuation and estimated useful lives of $1.8 million and $15.4 million for the quarter ended April 5, 2014 and the year ended December 28, 2013, respectively. The estimated useful lives (ranging from 15 to 18 years) have been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. The pro forma adjustments for the year ended December 28, 2013 is net of $0.5 million for the reversal of the amortization of identifiable assets as previously recorded by Hercules that has been eliminated.

 

  (B) Represents estimated incremental depreciation expense related to the step-up in fair market value of Hercules’ property and equipment, net of $0.1 million and $0.7 million for the quarter ended April 5, 2014 and the year ended December 28, 2013, respectively.

 

  (C) Represents the reversal of transaction expenses included in the historical results for ATD Corporation and Hercules that are directly related to the acquisition and non-recurring.

 

  (D) Represents the reversal of the interest expense recognized by Hercules, including amortization of deferred financing costs related to Hercules’ debt that was not assumed by ATD Corporation and paid-off in conjunction with the acquisition.

 

  (E) Represents the estimated increase in interest expense associated with the issuance of $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the “Additional Senior Subordinated Notes”) and the incremental borrowings incurred on the Company’s U.S. ABL Facility, both of which were used to finance the Hercules acquisition. In addition, the incremental amortization of deferred financing costs was included to determine the total increase in interest expense.

 

49


The estimated increase in interest expense is calculated as follows:

 

In thousands

  

Quarter
Ended
April 5, 2014

   

Fiscal Year

Ended
December 28, 2013

 

Interest expense on Additional Senior Subordinated Notes (1)

   $ 2,156      $ 25,875   

Increase in interest expense on U.S. ABL Facility (2)

     125        1,510   

Amortization of the original issue discount related to the Additional Senior Subordinated Notes

     65        737   

Change in amortization of deferred financing costs related to the ABL facility

     (12     24   

Incremental amortization of deferred financing costs related to the Additional Senior Subordinated Notes

     13        152   
  

 

 

   

 

 

 

Net adjustment

   $ 2,347      $ 28,298   
  

 

 

   

 

 

 

 

(1) Represents additional interest expense related to the $225.0 million of Additional Senior Subordinated Notes used to finance a portion of the Hercules acquisition, based on a fixed interest rate of 11.5%.

 

(2) Represents additional interest expense related to the incremental borrowings incurred on the Company’s U.S. ABL Facility used to finance a portion of the Hercules acquisition. The Company used the weighted-average interest rate of 3.5% for the quarter ended April 5, 2014 and the fiscal year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the U.S. ABL Facility.

A 0.125% change to interest rates on the Company’s incremental U.S. ABL Facility borrowings would result in a change in pro forma interest expense of approximately $0.1 million for the year ended December 28, 2013.

 

  (F) Represents the income tax effect of the pro forma adjustments using a combined federal and state statutory income tax rate of 39.0%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (G) Reflects the reclassification of certain amounts in Hercules’ historical statement of operations to conform to the Company’s basis of presentation.

Terry’s Tire Pro Forma Adjustments

Adjustments included in the “Terry’s Tire” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (H) Reflects the reclassification of the operating results for Terry’s Tire commercial and retread businesses from continuing operations, as historically presented, to discontinued operations. As part of the acquisition of Terry’s Tire, the Company acquired Terry’s Tire’s commercial and retread businesses. As the Company’s core business does not include commercial and retread operations, the Company decided that it would divest of these businesses. Accordingly, pro forma adjustments have been made to reclassify the historical operating results of both the commercial and retread businesses from continuing operations, as historically presented, to discontinued operations in the accompanying unaudited pro forma condensed combined statement of operations.

 

  (I) Represents an adjustment to Terry’s Tire’s historical consolidated financial statements to conform to the Company’s accounting policy for inventory valuation using the first-in, first-out (“FIFO”) method.

 

50


  (J) Represents estimated amortization of the finite-lived intangible assets acquired on an accelerated basis based upon the preliminary valuation and estimated useful lives of $7.8 million and $26.0 million for the quarter ended April 5, 2014 and the year ended December 28, 2013, respectively. The estimated useful lives (18 years) have been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. The pro forma adjustments for the quarter ended April 5, 2014 and the year ended December 28, 2013 are net of $2.2 million and $10.2 million, respectively, for the reversal of the amortization of identifiable assets as previously recorded by Terry’s Tire that has been eliminated.

 

  (K) Represents the reversal of transaction expenses included in the historical results for ATD Corporation and Terry’s Tire that are directly related to the acquisition and non-recurring.

 

  (L) Represents the reversal of the interest expense recognized by Terry’s Tire, including amortization of deferred financing costs related to Terry’s Tire debt that was not assumed by ATD Corporation and paid-off in conjunction with the acquisition.

 

  (M) Represents the estimated increase in interest expense associated with the issuance of the Additional Senior Subordinated Notes and the incremental borrowings incurred on the Company’s U.S. ABL Facility, both of which were used to finance the Hercules acquisition. In addition, the incremental amortization of deferred financing costs was included to determine the total increase in interest expense.

The estimated increase in interest expense is calculated as follows:

 

In thousands

  

Quarter
Ended
April 5, 2014

    

Fiscal Year

Ended
December 28, 2013

 

Interest expense on Term Loan (1)

   $ 4,269       $ 17,377   

Increase in interest expense on U.S. ABL Facility (2)

     659         2,641   

Amortization of the original issue discount related to the Term Loan

     43         168   

Amortization of deferred financing costs related to the Term Loan

     567         2,269   
  

 

 

    

 

 

 

Net adjustment

   $ 5,538       $ 22,455   
  

 

 

    

 

 

 

 

(1) Represents additional interest expense related to the $300.0 million Term Loan used to finance a portion of the Terry’s Tire acquisition, based on the current variable interest rate of 5.8%.

 

(2) Represents additional interest expense related to the incremental borrowings incurred on the Company’s U.S. ABL Facility used to finance a portion of the Terry’s Tire acquisition. The Company used the weighted-average interest rate of 3.5% for the quarter ended April 5, 2014 and the fiscal year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the U.S. ABL Facility.

A 0.125% change to interest rates on the Company’s incremental U.S. ABL Facility borrowings would result in a change in pro forma interest expense of approximately $0.5 million for the year ended December 28, 2013.

 

  (N) Represents the income tax effect of the pro forma adjustments using a combined federal and state statutory income tax rate of 39.0%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (O) Represents an adjustment to Terry’s Tire historical consolidated financial statements to conform to the Company’s accounting policy for income taxes using a combined federal and state statutory income tax rate of 39.0%. This is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (P) Reflects the reclassification of certain amounts in Terry’s Tire historical statement of operations to conform to the Company’s basis of presentation.

 

51


RTD Pro Forma Adjustments

Adjustments included in the “RTD” column in the accompanying unaudited pro forma condensed combined statement of operations for the year ended December 28, 2013 are as follows:

 

  (Q) Represents estimated amortization of the finite-lived intangible assets acquired on an accelerated or straight-line basis based upon the valuation and estimated useful lives.

 

  (R) Represents the reversal of the interest expense recognized by RTD related to debt that was not assumed by ATD Corporation and paid-off in conjunction with the acquisition.

 

  (S) Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility which was used to finance the RTD acquisition. In addition, the incremental amortization of deferred financing costs was included to determine the total increase in interest expense.

The estimated increase in interest expense is calculated as follows:

 

In thousands

  

Fiscal Year

Ended
December 28, 2013

 

Increase in interest expense on ABL Facility (1)

     778   

Incremental amortization of deferred financing costs related to the ABL Facility

     177   
  

 

 

 

Net adjustment

   $ 955   
  

 

 

 

 

(1) Represents additional interest expense related to the incremental borrowings incurred on the Company’s ABL Facility used to finance the RTD acquisition. The Company used the weighted-average interest rate of 3.5% for the fiscal year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility.

A 0.125% change to interest rates on the Company’s incremental U.S. ABL Facility borrowings would result in a change in pro forma interest expense of approximately $0.1 million for the year ended December 28, 2013.

 

  (T) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

Use of Offering Proceeds

 

  (U) Reflects the shares to be sold in this offering and the application of the net proceeds therefrom to be received by us as described in “Use of Proceeds.”

 

52


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The terms “Company,” “we,” “our” or “us,” as used herein, refer to ATD Corporation and its consolidated subsidiaries unless otherwise stated or indicated by context. Amounts presented may not add due to rounding.

Company Overview

We are the largest distributor of replacement tires in North America. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 SKUs, to approximately 80,000 customers. In 2013, we distributed more than 40 million replacement tires after giving effect to recent acquisitions. We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 18% in Canada.

We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 11.3%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.

We believe we distribute one of the broadest product offerings in our industry, supplying our customers with nine of the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of Hercules we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.

Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand organically in existing markets as well as in new geographic areas. We also expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. In addition, we are investing in technology and each sales channel to fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above-market growth in all market environments and to continue to enhance our profitability and cash flows.

 

53


Industry Overview

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brands during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.

From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008 for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The RMA projects that replacement tire shipments will increase by approximately 2% in the United States 2014 as compared to 2013, as demand drivers continue to strengthen.

Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets will continue to be driven by favorable underlying dynamics, including:

 

    increases in the number and average age of passenger cars and light trucks;

 

    increases in the number of miles driven;

 

    increases in the number of licensed drivers as the U.S. and Canadian population continues to grow;

 

    increases in the number of replacement tire SKUs;

 

    growth of the high-performance tire market; and

 

    shortening of tire replacement cycles due to changes in product mix that increasingly favor high- performance tires, which have shorter average lives.

Recent Developments

Acquisitions and Expansion

As part of our ongoing business strategy, we intend to expand in existing markets as well as enter into previously underserved markets and new geographic areas. Since the second half of 2010, we opened new distribution centers in 23 locations throughout the contiguous United States. We expect to continue to evaluate additional geographic markets during the remainder of 2014 and beyond.

On March 28, 2014, we completed the acquisition of Terry’s Tire. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the Internet. Terry’s Tire operated ten distribution centers spanning from Virginia to Maine and in Ohio. We believe the acquisition of Terry’s Tire will enhance our market position in these areas and aligns very well with our distribution centers, especially our new distribution centers that we opened over the past two years in the Northeast and Ohio. In its most recent fiscal year ended December 31, 2013, Terry’s Tire generated revenues and Adjusted EBITDA of approximately $502 million and $14 million, respectively and we expect the acquisition to generate annual operational synergies between $40 million and $45 million starting in 2015. For 2014, we expect to realize a portion of those synergies as we have begun the integration process.

 

54


On January 31, 2014, we completed the acquisition of Hercules Holdings pursuant to an Agreement and Plan of Merger, dated January 24, 2014. Hercules Holdings owns all of the capital stock of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing, and selling replacement tires for passenger cars, trucks, and certain off-road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, six distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules® brand, which is one of the most sought-after proprietary tire brands in the industry. We believe the acquisition of Hercules will strengthen our presence in major markets such as California, Texas and Florida in addition to increasing our presence in Canada. Additionally, Hercules’ strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow us to capitalize on the growing import market, as well as provide the ability to expand the international sales of the Hercules® brand. Finally, this acquisition will allow us to be a brand marketer of the Hercules® brand, which in 2013 had a 2% market share of the passenger and light truck market in North America and a 3% market share of highway truck tires in North America. In its most recent fiscal year ended October 31, 2013, Hercules generated revenues and Adjusted EBITDA of approximately $600 million and $27 million, respectively and we expect the acquisition to generate annual operational synergies between $30 million and $35 million starting in 2015. For 2014, we expect to realize a portion of those synergies as we have begun the integration process.

The following table shows the calculation of Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss), for Hercules’ fiscal year ended October 31, 2013 and Terry’s Tire’s fiscal year ended December 31, 2013:

 

In millions

  

Hercules

    

Terry’s Tire

 

Net income (loss)

   $ 6       $ (12

Depreciation and amortization

     6         12   

Interest expense

     7         10   

Income tax provision (benefit)

     3         —     

Non-cash stock compensation

     2         —     

Other(1)

     3         4   
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 27       $ 14   

 

 

  (1) Other includes management fees, restructuring initiatives, non-cash gains and losses on the disposal of fixed assets and exchange gains and losses on foreign currency.

On January 17, 2014, TriCan entered into and closed an Asset Purchase Agreement with Kipling Tire Co. LTD (“Kipling”) pursuant to which TriCan agreed to acquire the wholesale distribution business of Kipling. Kipling has operated as a retail-wholesale business since 1982. Kipling’s wholesale business distributes tires from its Etobicoke facilities to approximately 400 retail customers in Southern Ontario. Kipling’s retail operations were not acquired by TriCan and will continue to operate under its current ownership. This acquisition is expected to further strengthen TriCan’s presence in the Southern Ontario region of Canada.

On April 30, 2013, we completed the acquisition of RTD Holdco pursuant to a Share Purchase Agreement dated as of March 22, 2013, among TriCan, ATDI, RTD Holdco and RTD. RTD Holdco has no significant assets or operations other than its ownership of RTD. The operations of RTD constitute the operations of RTD Holdco. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada.

Credit Agreement Amendment

In addition, on June 16, 2014, we amended our credit agreement relating to our senior secured term loan facility to borrow an additional $340 million on the same terms as our existing Term Loan (as defined below). Pursuant to the amendment, until August 15, 2014, we also have the right to borrow up to an additional $80 million on the same terms as our existing Term Loan. The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under our Senior Secured Notes (as defined below) and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.

 

55


Results of Operations

Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to each December 31. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The 2011 fiscal year, which ended December 31, 2011, the 2012 fiscal year, which ended December 29, 2012, and the 2013 fiscal year, which ended December 28, 2013, each contain operating results for 52 weeks. The quarter ended April 5, 2014 contains operating results for 14 weeks while the quarter ended March 30, 2013 contains operating results for 13 weeks. It should be noted that the Company and its recently acquired subsidiaries, Hercules and Terry’s Tire, have different quarter-end reporting dates than that of the Company for the first quarter of 2014, with their quarters ending on March 31. Prior to the acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end and RTD had a January 31 fiscal year end but each such subsidiary changed its year end to be the same as that of the Company, effective as of their respective acquisition dates. It should also be noted that, prior to fiscal 2013, our year-end reporting date was different from that of our TriCan subsidiary. For fiscal 2012, TriCan had a calendar year-end reporting date. TriCan converted to our fiscal year-end reporting date during fiscal 2013. The impact from these differences on the consolidated financial statements was not material.

Quarter Ended April 5, 2014 Compared to the Quarter Ended March 30, 2013

The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:

 

   

Quarter

Ended

   

Quarter
Ended

   

Period Over
Period Change

   

Period Over
Period

% Change

   

Percentage of Net Sales
For the Respective

Period Ended

 

In thousands

 

April 5,

2014

   

March 30,
2013

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

April 5,

2014

   

March 30,
2013

 

Net sales

  $ 1,075,469      $ 839,978      $ 235,491        28.0     100.0     100.0

Cost of goods sold

    917,314        708,156        (209,158     (29.5 %)      85.3     84.3

Selling, general and administrative expenses

    177,918        136,504        (41,414     (30.3 %)      16.5     16.3

Transaction expenses

    4,686        1,023        (3,663     (358.1 %)      0.4     0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (24,449     (5,705     (18,744     (328.6 %)      (2.3 %)      (0.7 %) 

Other income (expense):

           

Interest expense

    (24,399     (17,240     (7,159     (41.5 %)      (2.3 %)      (2.1 %) 

Other, net

    (1,802     (973     (829     (85.2 %)      (0.2 %)      (0.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    (50,650     (23,918     (26,732     (111.8 %)      (4.7 %)      (2.8 %) 

Income tax provision (benefit)

    (16,606     (7,627     8,979        117.7     (1.5 %)      (0.9 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (34,044   $ (16,291   $ (17,753     (109.0 %)      (3.2 %)      (1.9 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Net sales for the quarter ended April 5, 2014 were $1,075.5 million, a $235.5 million, or 28.0%, increase, as compared with the quarter ended March 30, 2013. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisitions of Hercules and Terry’s Tire and our 2013 acquisitions of Wholesale Tire Distributors (“WTD”), TDI and RTD. These growth initiatives added $167.5 million of incremental sales in the first quarter of 2014. In addition, we experienced an increase in comparable tire unit sales (which excludes sales from greenfield and acquisition locations) of $98.9 million primarily driven by an overall stronger sales unit environment and the inclusion of five additional selling days in our first quarter of 2014 which contributed approximately $47.0 million to the unit increase. However, these increases were partially offset by lower net tire pricing of $30.2 million, primarily driven by manufacturer marketing specials, competitive pricing positions in certain U.S. markets, as well as a shift in product mix in our lower priced point offerings.

 

56


Cost of Goods Sold

Cost of goods sold for the quarter ended April 5, 2014 were $917.3 million, a $209.2 million, or 29.5%, increase, as compared with the quarter ended March 30, 2013. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers as well as the acquisitions of Hercules, Terry’s Tire, RTD, WTD and TDI. These growth initiatives added $138.6 million of incremental costs in the first quarter of 2014. Cost of goods sold for the quarter ended April 5, 2014 also includes $19.2 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisition of Hercules and WTD as compared to $2.2 million during the quarter ended March 30, 2013 recorded in connection with the acquisition of Trican. In addition, the inclusion of five additional selling days in our first quarter of 2014 and an overall stronger sales unit environment increased cost of goods sold by $83.7 million (of which approximately $41.0 million was due to the five additional selling days). These increases were partially offset by lower net tire pricing of $27.5 million.

Cost of goods sold as a percentage of net sales was 85.3% for the quarter ended April 5, 2014, an increase compared with 84.3% for the quarter ended March 30, 2013. The increase in cost of goods sold as a percentage of net sales was primarily driven by the $19.2 million non-cash amortization of the inventory step-up recorded in connection with the Hercules and WTD acquisitions. This increase had a 2.0% impact on cost of goods sold as a percentage of net sales. Adjusting for the non-cash amortization of the inventory step-up, the decrease in cost of goods sold as a percentage of net sales was primarily driven by the margin contribution of the Hercules® brand, a lower level of manufacturer price repositioning this year as compared to the prior year, and an incremental benefit from manufacturer programs during the current year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended April 5, 2014 were $177.9 million, a $41.4 million, or 30.3%, increase as compared with the quarter ended March 30, 2013. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisitions of Hercules, Terry’s Tire, RTD, WTD and TDI. Combined, these factors added $32.8 million of incremental costs to the first quarter of 2014. In addition, we also experienced an $8.1 million increase in salaries and wage expense primarily related to higher incentive and commission compensation and the inclusion of five additional selling days in our first quarter of 2014, which contributed approximately $3.8 million to the year-over-year increase. Additionally, occupancy expense increased $0.8 million due to higher cost as we expanded several of our distribution centers to better service our existing customers.

Selling, general and administrative expenses as a percentage of net sales was 16.5% for the quarter ended April 5, 2014, an increase compared with 16.3% for the quarter ended March 30, 2013. The increase in selling, general and administrative expenses as a percentage of net sales were primarily driven by an increase in costs associated with our growth expansion of recently opened and acquired distribution centers, as our consolidation of some of the Hercules distribution centers only commenced during the latter part of the first quarter.

Transaction Expenses

Transaction expenses for the quarter ended April 5, 2014 were $4.7 million and were primarily related to costs associated with our acquisitions of Hercules and Terry’s Tire, as well as with expenses related to potential future acquisitions and other corporate initiatives. During the quarter ended March 30, 2013, transaction expenses of $1.0 million primarily related to costs associated with our acquisition of TriCan in November 2012, as well as with expenses related to potential future acquisitions and other corporate initiatives.

Interest Expense

Interest expense for the quarter ended April 5, 2014 was $24.4 million, a $7.2 million, or 41.5%, increase, compared with the quarter ended March 30, 2013. This increase was due to higher debt levels associated with our

 

57


ABL Facility, FILO Facility, Additional Senior Subordinated Notes and Term Loan, all as described under “Liquidity and Capital Resources,” which were driven by our acquisitions of Hercules and Terry’s Tire and which occurred during the quarter. In addition, changes in the fair value of our interest rate swaps resulted in a $0.4 million increase in interest expense.

Provision (Benefit) for Income Taxes

Our income tax benefit for the quarter ended April 5, 2014 was $16.6 million, based on pre-tax loss of $50.7 million; our effective tax rate under the discrete method was 32.8%. For the quarter ended March 30, 2013, our income tax benefit was $7.6 million, based on a pre-tax loss of $23.9 million; our effective tax rate was 31.9%. The effective rate of the year-to-date tax provision is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower than the statutory U.S. federal rate and the impact of several non-deductible tax items as well as our state effective tax rate, a result based on our legal entity tax structure and individual state tax filing requirements.

Fiscal 2013 Compared to Fiscal 2012

The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:

 

    Fiscal Year
Ended
    Fiscal Year
Ended
   

Period Over
Period
Change

   

Period Over
Period %
Change

   

Percentage of Net Sales For
the Respective Period Ended

 

In thousands

 

December 28,
2013

   

December 29,
2012

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

December 28,
2013

   

December 29,
2012

 

Net sales

  $ 3,839,269     $ 3,455,864     $ 383,405       11.1 %     100.0     100.0

Cost of goods sold

    3,188,409       2,887,421       (300,988 )     (10.4 %)      83.0     83.6

Selling, general and administrative expenses

    574,987       506,558       (68,429 )     (13.5 %)      15.0     14.7

Transaction expenses

    6,719       5,246       (1,473 )     (28.1 %)      0.2     0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    69,154       56,639       12,515       22.1 %     1.8     1.6

Other income (expense):

           

Interest expense

    (74,316 )     (72,910     (1,406 )     (1.9 %)      (1.9 %)      (2.1 %) 

Other, net

    (5,196 )     (3,895     (1,301 )     (33.4 %)      (0.1 %)      (0.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    (10,358 )     (20,166     9,808       48.6 %     (0.3 %)      (0.6 %) 

Income tax provision (benefit)

    (3,982 )     (5,965     (1,983 )     (33.2 %)      (0.1 %)      (0.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (6,376 )   $ (14,201   $ 7,825       55.1 %     (0.2 %)      (0.4 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Net sales for fiscal 2013 were $3,839.3 million, a $383.4 million or 11.1% increase compared with fiscal 2012. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisition of TriCan and Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (“CTO”) in fiscal 2012 and RTD, TDI and WTD in fiscal 2013. These growth initiatives added $464.4 million of incremental sales during fiscal 2013. In addition, despite one less selling day in fiscal 2013 as compared to fiscal 2012, we experienced an increase in comparable tire unit sales of $3.6 million primarily driven by an overall stronger sales unit environment particularly during the fourth quarter of 2013. However, these increases were partially offset by lower net tire pricing of $92.0 million, which included $68.8 million related to passenger and light truck tires and $15.5 million related to medium truck tires, primarily driven by manufacturer price repositioning, as well as a slight shift in product mix in our lower priced point offerings specifically our entry level imported products.

 

58


Cost of Goods Sold

Cost of goods sold for fiscal 2013 were $3,188.4 million, a $301.0 million or a 10.4% increase compared with fiscal 2012. The increase in cost of goods sold was primarily driven by the combined results of new distributions centers as well as the acquisition of TriCan and CTO in fiscal 2012 and RTD, TDI and WTD in fiscal 2013. These growth initiatives added $379.1 million of incremental costs during fiscal 2013. In addition, despite one less selling day in fiscal 2013 as compared to fiscal 2012, we experienced an overall stronger sales unit environment, particularly during fourth quarter of 2013, which increased cost of goods sold by $0.9 million. Cost of goods sold for fiscal 2013 also includes $5.4 million related to non-cash amortization of the inventory step-up recorded in connection with the acquisitions of TriCan, RTD, TDI and WTD as compared to $4.1 million during fiscal 2012. These increases were partially offset by lower net tire pricing of $78.6 million.

Cost of goods sold as a percentage of net sales was 83.0% for fiscal 2013, a decrease compared with 83.6% from fiscal 2012. The decrease in cost of goods sold as a percentage of net sales was primarily driven by a higher level of manufacturer program benefits in the current year, which was driven by an approximate 4% unit growth in the U.S., but was partially offset by a higher level of negative FIFO layers in 2013 as compared to 2012, which resulted from manufacturer price reductions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2013 were $575.0 million, a $68.4 million or 13.5% increase compared with fiscal 2012. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisition of TriCan and CTO in fiscal 2012 and RTD, TDI and WTD in fiscal 2013. Combined, these factors added $69.6 million of incremental costs to fiscal 2013, including increased amortization expense of $12.1 million from newly established intangible assets. In addition, we experienced a $5.3 million increase to vehicle and occupancy expenses due to a higher overall consumption of fuel and other vehicle related expenses as well as increases in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation expense added an additional $4.7 million of costs to fiscal 2013 as we increased our capital expenditure costs for information system technologies. These increases were partially offset by a decrease in salaries and wage expense of $9.0 million, which related to lower commission compensation, as well as, improved operating efficiencies and headcount leverage in most of our distribution centers.

Selling, general and administrative expenses as a percentage of net sales was 15.0% for fiscal 2013; an increase compared with 14.7% during fiscal 2012. The increase in selling, general and administrative expenses as a percentage of net sales was substantially driven by an increase in non-cash depreciation and amortization expense.

Transaction Expenses

Transaction expenses for fiscal 2013 were $6.7 million and were primarily related to costs associated with our acquisitions of RTD, TDI and WTD as well as expenses related to potential future acquisitions and other corporate initiatives. Transaction expenses for fiscal 2012 were $5.2 million, which primarily related to acquisition costs associated with our acquisition of TriCan in November 2012 and CTO in May 2012 as well as with expenses related to potential future acquisitions and corporate initiatives. In addition, we incurred $1.3 million for exit costs associated with our decision to relocate an existing distribution center into an expanded distribution center during fiscal 2012.

Interest Expense

Interest expense for fiscal 2013 was $74.3 million, a $1.4 million or 1.9% increase compared with fiscal 2012. The increase is primarily due to higher average debt levels on our ABL Facility as well as our FILO

 

59


Facility, resulting from our acquisitions of TriCan at the end of fiscal 2012 as well as RTD, TDI and WTD during fiscal 2013. In addition, interest expense for fiscal 2012 included $2.8 million relating to the write-off of deferred financing costs associated with the amendment of our ABL Facility in November 2012 that did not repeat in fiscal 2013. During fiscal 2013, we also recorded $0.7 million associated with the fair value changes of our interest rate swaps. The comparable amount recorded associated with these swaps during fiscal 2012 was $1.3 million.

Provision (Benefit) for Income Taxes

Our income tax benefit for fiscal 2013 was $4.0 million. The benefit, which was based on a pre-tax loss of $10.4 million, includes $66.2 million of amortization expense that is not deductible for income tax purposes. Our income tax benefit for 2012 was $6.0 million, which was based on pre-tax loss of $20.2 million, primarily resulting from a higher state effective tax rate as well as additional amortization expense related to the valuation of intangible assets acquired, which were recorded in connection with the Merger. Our effective tax rate for fiscal years 2013 and 2012 was 38.4% and 29.5%, respectively. The effective tax rate for fiscal 2013 was higher than the statutory tax rate primarily due to the adjustment to the transaction costs related to 2013 acquisitions, the release of the valuation allowance related to various state net operating losses, and the rate differences between U.S. and Canada. The effective tax rate for fiscal 2012 was lower than the statutory tax rate primarily due to the adjustment to the transaction costs related to the acquisition of TriCan, the impact from certain amortization expense that is non-deductible for tax purposes, and the rate differences between U.S. and Canada.

Fiscal 2012 Compared to Fiscal 2011

The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:

 

    Fiscal Year
Ended
    Fiscal Year
Ended
   

Period Over
Period
Change

   

Period Over
Period
% Change

    Percentage of Net Sales
For the Respective
Period Ended
 

In thousands

 

December 29,
2012

   

December 31,
2011

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

December 29,
2012

   

December 31,
2011

 

Net sales

  $ 3,455,864      $ 3,050,240      $ 405,624        13.3     100.0     100.0

Cost of goods sold

    2,887,421        2,535,020        (352,401     (13.9 %)      83.6     83.1

Selling, general and administrative expenses

    506,558        437,260        (69,298     (15.8 %)      14.7     14.3

Transaction expenses

    5,246        3,946        (1,300     (32.9 %)      0.2     0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    56,639        74,014        (17,375     (23.5 %)      1.6     2.4

Other income (expense):

           

Interest expense

    (72,910     (67,572     (5,338     (7.9 %)      (2.1 %)      (2.2 %) 

Other, net

    (3,895     (2,110     (1,785     (84.6 %)      (0.1 %)      (0.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    (20,166     4,332        (24,498     (565.5 %)      (0.6 %)      0.1

Income tax provision (benefit)

    (5,965     4,464        10,429        233.6     (0.2 %)      0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (14,201   $ (132   $ (14,069     (10,658.3 %)      (0.4 %)      0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Net sales for fiscal 2012 were $3,455.9 million, a $405.6 million or 13.3% increase compared with fiscal 2011. The increase in net sales was partially driven by higher net tire pricing of $167.1 million. The pricing increase, which included $127.0 million related to passenger and light truck tires and $28.1 million related to medium truck tires, resulted from our passing through tire manufacturer price increases predominately established during 2011, as well as selling a higher mix of flag brand product and a lower mix of Chinese manufactured

 

60


product. The combined results of new distribution centers opened since the beginning of 2011 as well as the acquisitions of TriCan, CTO and Bowlus Service Company d/b/a North Central Tire (“NCT”) added $181.5 million of incremental sales during fiscal 2012. In addition, an increase in comparable tire unit sales across all tire categories contributed $40.4 million, primarily driven by passenger and light truck tires. However, the increase in comparable tire unit sales was slightly impacted by destocking of lower price point inventories throughout the marketplace in anticipation of the expiration of tariffs imposed on Chinese tire imports that ceased at the end of September 2012. As a result, comparable net sales of the Chinese tire imports decreased by $34.1 million.

Cost of Goods Sold

Cost of goods sold for fiscal 2012 were $2,887.4 million, a $352.4 million or a 13.9% increase compared with fiscal 2011. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers opening since the beginning of 2011, as well as the acquisitions of TriCan, CTO, and NCT. These growth initiatives added $159.2 million of incremental costs during fiscal 2012. In addition, higher net tire pricing of $126.3 million contributed to the increase. The pricing increase, which included $103.6 million related to passenger and light truck tires and $23.6 million related to medium truck tires, resulted from tire manufacturer price increases predominately established during 2011, as well as selling a higher mix of flag brand product and a lower mix of Chinese manufactured product. In addition, an increase in comparable tire unit sales contributed $22.8 million, primarily driven by passenger and light truck tires. Fiscal 2012 also includes $4.1 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisition of TriCan.

Cost of goods sold as a percentage of net sales was 83.6% for fiscal 2012, an increase compared with 83.1% from fiscal 2011. The increase in the cost of goods sold as a percentage of net sales was primarily driven by a lower level of manufacturer price increases implemented during 2012 as compared to 2011, coupled with selective discounting by certain tire manufacturers during 2012 for the intention of spurring unit sales. These price increases generate favorable inventory cost layers that are passed through to our customers in the period instituted. In addition, competitive pricing pressures have increased as distributors vie for customers in a sluggish market.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2012 were $506.6 million, a $69.3 million or 15.8% increase compared with fiscal 2011. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers opened since the beginning of 2011 as well as the acquisitions of TriCan, CTO and NCT. Combined, these factors added $28.0 million of incremental costs to fiscal 2012, including increased amortization expense of $5.0 million from newly established intangible assets. In addition, we experienced an increase to salaries and wage expense of $14.1 million, primarily due to higher sales volume and related headcount; a $9.8 million increase to vehicle expense due to a higher price per gallon of fuel, higher overall consumption of fuel and other vehicle related expenses; as well as a $6.0 million increase in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation expense added an additional $5.7 million of costs to fiscal 2012 as we increased our capital expenditure costs primarily for information system technologies.

Selling, general and administrative expenses as a percentage of net sales was 14.7% for fiscal 2012; an increase compared with 14.3% during fiscal 2011. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened distribution centers as well as an increase in non-cash depreciation and amortization expense.

Transaction Expenses

Transaction expenses for fiscal 2012 were $5.2 million, which primarily related to acquisition costs associated with our acquisition of TriCan in November 2012 and CTO in May 2012 as well as with expenses

 

61


related to potential future acquisitions and corporate initiatives. In addition, we incurred $1.3 million for exit costs associated with our decision to relocate an existing distribution center into an expanded distribution center during fiscal 2012. Transaction expenses for fiscal 2011 were $3.9 million, which primarily related to acquisition fees as well as costs incurred in connection with both the amendment of our ABL Facility and the registration of our Senior Secured Notes with the SEC. Additionally, we incurred $1.1 million for exit costs associated with our decision to relocate two existing distribution centers into two expanded distribution centers during fiscal 2011.

Interest Expense

Interest expense for fiscal 2012 was $72.9 million, a $5.3 million or 7.9% increase compared with fiscal 2011. The increase is primarily due to higher average debt levels on our ABL Facility partially offset by lower average interest rates on the outstanding debt. In addition, $2.8 million of the year-over-year increase relates to the write-off of deferred financing costs associated with the amendment of our ABL Facility in November 2012 due to a change in lenders in the syndication group for the amended ABL Facility. During fiscal 2012, we also recorded $1.3 million associated with the fair value changes of our interest rate swaps. The comparable amount recorded associated with these swaps during fiscal 2011 was $0.9 million.

Provision (Benefit) for Income Taxes

Our income tax benefit for fiscal 2012 was $6.0 million. The benefit, which was based on a pre-tax loss of $20.2 million, includes $58.6 million of amortization expense that is not deductible for income tax purposes. Our income tax provision for 2011 was $4.5 million, which was based on pre-tax income of $4.3 million, primarily resulting from a higher state effective tax rate as well as additional amortization expense related to the valuation of intangible assets acquired, which were recorded in connection with the Merger. Our effective tax rate for fiscal years 2012 and 2011 was 29.5% and 103.1%, respectively. The effective tax rate for fiscal 2012 was lower than the statutory tax rate primarily due to the unfavorable adjustment to the transaction costs related to the acquisition of TriCan, the impact from certain amortization expense that is non-deductible for tax purposes, and the rate differences between U.S. and Canada. The effective tax rate for fiscal 2011 was higher than the statutory tax rate primarily due to a 0.5% increase in our state effective tax rate, a result based on our growing presence in jurisdictions with higher than average tax rates, and the impact from certain amortization expense that is non-deductible for tax purposes.

Liquidity and Capital Resources

Overview

The following table contains several key measures to gauge our financial condition and liquidity:

 

In thousands

  

April 5,

2014

   

December 28,
2013

   

December 29,
2012

   

December 31,
2011

 

Cash and cash equivalents

   $ 37,824      $ 35,760      $ 34,700      $ 23,682   

Working capital

     799,264        541,051        556,646        457,443   

Total debt

     1,710,106        967,000        951,204        835,808   

Total stockholder’s equity

     691,348        680,054        692,753        642,773   

Debt-to-capital ratio (1)

     71.2     58.7     57.9     56.5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Debt-to-capital ratio = total debt / (total debt plus total stockholder’s equity)

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments and income tax rates. Our cash requirements consist primarily of the following:

 

    Debt service requirements

 

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    Funding of working capital

 

    Funding of capital expenditures

Our primary sources of liquidity include cash flows from operations and our availability under our ABL Facility and FILO Facility. We currently do not intend nor foresee a need to repatriate funds from our Canadian subsidiaries to the U.S., and no provision for U.S. income taxes has been made with respect to such earnings. We expect our cash flow from U.S. operations, combined with availability under our U.S. ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending in the U.S. during the next twelve month period. In addition, we expect our cash flow from U.S. operations and our availability under our U.S. ABL Facility to continue to provide sufficient liquidity to fund our ongoing obligations, projected working capital requirements, restructuring obligations and capital spending in the U.S. during the foreseeable future. We expect cash flows from our Canadian operations, combined with availability under our Canadian ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending in Canada during the next twelve month period and thereafter for the foreseeable future.

We are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of April 5, 2014, our total indebtedness was $1,710.1 million with a debt-to-capital ratio of 71.2%. The increase in cash interest payments is primarily related to higher levels of indebtedness incurred in connection with our acquisitions. As of April 5, 2014, we have an additional $209.9 million of availability under our U.S. ABL Facility and an additional $38.0 million of availability under our Canadian ABL Facility. The availability under our U.S. and Canadian ABL Facilities is determined in accordance with our borrowing base.

Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under “Risk Factors.” If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our U.S. and Canadian ABL Facilities or through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.

Cash Flows

The following table sets forth the major categories of cash flows:

 

In thousands

 

Quarter
ended

April 5,

2014

   

Quarter

ended

March 30,

2013

   

Year ended
December 28,
2013

   

Year ended
December 29,
2012

   

Year ended
December 31,
2011

 

Cash provided by (used in) operating activities

  $ (72,625   $ 2,132      $ 100,982      $ 10,072      $ (90,699

Cash provided by (used in) investing activities

    (689,243     (16,697     (118,435     (167,821     (92,249

Cash provided by (used in) financing activities

    765,613        4,210        22,998        168,824        186,263   

Effect of exchange rate changes on cash

    (1,681     (513     (4,485     (57     —     

Net increase (decrease) in cash and cash equivalents

    2,064        (10,868     1,060        11,018        3,315   

Cash and cash equivalents—beginning of period

    35,760        34,700        34,700        23,682        20,367   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents—end of period

  $ 37,824      $ 23,832      $ 35,760      $ 34,700      $ 23,682   

Cash payments for interest

  $ 10,464      $ 3,733      $ 68,179      $ 64,324      $ 61,732   

Cash payments (receipts) for taxes, net

  $ 1,586      $ 1,239      $ 23,740      $ 6,510      $ (8,101

Capital expenditures financed by debt

  $ —        $ —        $ 128      $ 515      $ —     

 

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Operating Activities

Net cash used in operating activities for the quarter ended April 5, 2014 was $72.6 million compared with cash provided by operating activities of $2.1 million during the quarter ended March 30, 2013. During the current period, working capital requirements resulted in a cash outflow of $85.4 million, primarily driven by an increase in customer accounts receivable of $32.3 million and an increase in inventory levels as a result of stocking new distribution centers opened and as a result of building out the product offering provided through the Hercules acquisition. Additionally, changes in accounts payable associated with the timing of vendor payments, including payments associated with winter product purchases, resulted in a cash outflow during the period of $34.4 million. These cash outflows were partially offset by cash earnings during the current period and changes in accrued expenses associated with accrued interest on our Senior Secured Notes.

Net cash provided by operating activities for the quarter ended March 30, 2013 was $2.1 million. During the quarter, working capital requirements resulted in a cash outflow of $5.3 million, primarily driven by a $14.4 million cash outflow in accounts payable and accrued expenses that was associated with the timing of vendor payments related to winter tire programs. This cash outflow was offset by cash earnings during the period.

Net cash provided by operating activities for fiscal 2013 was $101.0 million compared with $10.1 million for fiscal 2012. The increase is primarily driven by cash earnings during the year. In addition, working capital requirements resulted in a net cash inflow of $9.6 million during fiscal 2013, primarily driven by a change in accounts payable associated with the timing of vendor payments which resulted in a cash inflow of $29.5 million partially offset by a cash outflow of $27.6 million related to changes in inventory levels as a result of stocking new distribution centers opened and acquired during the year as well as seasonal changes in inventory stocking levels (including the Canadian winter business).

Net cash provided by operating activities for fiscal 2012 was $10.1 million compared with net cash used in operating activities of $90.7 million for fiscal 2011. During fiscal 2012, working capital requirements resulted in a cash outflow of $73.2 million, primarily driven by the continued expansion of our distribution centers into new domestic geographic markets. In addition, inventory resulted in a cash outflow of $32.2 million as a result of stocking seven new distribution centers opened during 2012 and our recent acquisitions. Accounts payable and accrued expenses changes also resulted in a cash outflow of $38.1 million primarily associated with the earlier timing of vendor payments and changes in accrued incentive compensation.

Net cash used in operating activities for fiscal 2011 was $90.7 million. During fiscal 2011, working capital requirements resulted in a cash outflow of $174.5 million, primarily driven by the continued expansion of our distribution centers into new domestic geographic markets. Cash outflows of $151.9 million related to inventory reflected our decision to increase manufacturer safety stock amounts as a result of tight supply levels with most of our manufacturers, the impact of manufacturer price increases on the replenishment of our inventory as well as the impact of new, acquired or expanded distribution centers. In addition, the combined impact of stocking new distribution centers and our recent acquisitions also contributed to the inventory increase. As well, higher sales volumes led to a $47.4 million increase to accounts receivable. However, these amounts were partially offset by a $19.1 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor payments and accrued interest on our Senior Secured Notes.

Investing Activities

Net cash used in investing activities for the quarter ended April 5, 2014 was $689.2 million, compared with $16.7 million during the quarter ended March 30, 2013. The change was primarily associated with cash paid for acquisitions, which resulted in a $671.1 million increase in the current period. In addition, we invested $14.4 million and $11.9 million in property and equipment purchases during the quarters ended April 5, 2014 and March 30, 2013, respectively, which included information technology upgrades, information technology application development and warehouse racking.

 

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Net cash used in investing activities for fiscal 2013 was $118.4 million compared to $167.8 million during fiscal 2012. The change was primarily associated with cash paid for acquisitions, which resulted in a $38.3 million decrease during fiscal 2013. In addition, we invested $47.1 million and $52.4 million in property and equipment purchases during fiscal 2013 and fiscal 2012, respectively, which included information technology upgrades, IT application development and warehouse racking relating to existing and new distribution centers. During fiscal 2013 we received proceeds from the sale of assets held for sale of $7.8 million compared to $3.7 million during fiscal 2012.

Net cash used in investing activities for fiscal 2012 was $167.8 million compared to $92.2 million during fiscal 2011. The change was primarily associated with cash paid for acquisitions, which resulted in a $55.6 million increase. In addition, we invested $52.4 million and $31.0 million in property and equipment purchases during fiscal 2012 and fiscal 2011, respectively, which included information technology upgrades, IT application development and warehouse racking.

Financing Activities

Net cash provided by financing activities for the quarter ended April 5, 2014 was $765.6 million, compared with $4.2 million during the quarter ended March 30, 2013. The change was primarily related to proceeds received from the issuance of our Additional Senior Subordinated Notes and Term Loan during the quarter ended April 5, 2014. These proceeds were used to finance a portion of the Hercules and Terry’s Tire acquisitions. In addition, higher net borrowings from our ABL Facility and FILO Facility, specifically our U.S. ABL Facility, contributed to the period-over-period increase. The higher net borrowings under our ABL Facility and FILO Facility were due to the increase in cash outflow for working capital requirements between periods and cash paid for acquisitions. Also, the Company received an equity contribution of $50.0 million from TPG and certain co-investors during the quarter ended April 5, 2014.

Net cash provided by financing activities for fiscal 2013 was $23.0 million compared with $168.8 million during fiscal 2012. The decrease was primarily related to lower net borrowings from our ABL Facility, specifically our U.S. ABL Facility due to the reduction in cash outflow for working capital requirements between periods and favorable cash earnings partially offset by cash paid for acquisition. In addition, cash provided by financing activities for fiscal 2012 included a $60.0 million equity contribution received from TPG and certain co-investors that did not repeat during fiscal 2013.

Net cash provided by financing activities for fiscal 2012 was $168.8 million compared with $186.3 million during fiscal 2011. The decrease was primarily related to lower net borrowings from our ABL Facility due to the reduction in cash outflow for working capital requirements between periods as well as the change in outstanding checks between periods. These decreases were partially offset by a $60.0 million equity contribution received from TPG and certain co-investors during 2012.

Supplemental Disclosures of Cash Flow Information

Cash payments for interest during the quarter ended April 5, 2014 were $10.5 million, compared with $3.7 million paid during the quarter ended March 30, 2013. The increase is primarily due to the timing of our quarter end on April 5, 2014, and as such, included an additional quarterly interest payment on our ABL Facility and FILO Facility as compared to the prior year. Additionally, higher levels of indebtedness incurred in connection with our acquisitions also contributed to the year-over-year increase.

Net cash payments for taxes during the quarter ended April 5, 2014 were $1.6 million, compared with $1.2 million during the quarter ended March 30, 2013. The difference between the periods primarily relates to the balance and timing of income tax extension payments and income tax payments due with returns.

Cash payments for interest for fiscal 2013 were $68.2 million compared with $64.3 million during fiscal 2012. The increase is primarily due to higher average debt levels during fiscal 2013. In addition, we paid an additional $0.4 million during fiscal 2013 related to our interest rate swaps.

 

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Cash payments for interest for fiscal 2012 were $64.3 million compared with cash payments for interest for fiscal 2011 of $61.7 million. The increase is primarily due to higher average debt levels during fiscal 2012 partially offset by lower average interest rates on the outstanding debt during the year. We also paid an additional $0.7 million during fiscal 2012 related to our interest rate swaps.

Cash payments for taxes during fiscal 2013 were $23.7 million compared with $6.5 million during fiscal 2012. The difference between periods primarily relates to the balance and timing of estimated income tax payments and income tax payments due with returns.

Cash payments for taxes during fiscal 2012 were $6.5 million, net of a receipt of $1.2 million related to a federal income tax refund. The remaining balance included payments for 2012 estimated tax payments and 2011 tax return payments. Cash receipts for taxes for fiscal 2011 were $8.1 million. During fiscal 2011, we utilized a federal net operating loss to recover a portion of our prior federal income tax paid. As a result, we received a $9.1 million tax refund in the fourth quarter of 2011 based on the use of this net operating loss carryback.

Indebtedness

The following table summarizes our outstanding debt at April 5, 2014:

 

In thousands

  

Matures

  

Interest
Rate (1)

 

Outstanding
Balance

 

U.S. ABL Facility

   2017    3.4%   $ 595,964   

Canadian ABL Facility

   2017    4.3     42,136   

U.S. FILO Facility

   2017    5.8     74,111   

Canadian FILO Facility

   2017    6.0     8,501   

Term Loan (2)

   2018    5.8     299,252   

Senior Secured Notes (3)

   2017    9.75     248,330   

Senior Subordinated Notes

   2018    11.50     421,181   

Capital lease obligations

   2014—2027    2.7—13.9     12,715   

Other

   2014—2021    2.3—10.6     7,916   
       

 

 

 

Total debt

          1,710,106   

Less—Current maturities

          (5,502
       

 

 

 

Long-term debt

        $ 1,704,604   
       

 

 

 

 

(1) Interest rates for each of the U.S. ABL Facility and the Canadian ABL Facility are the weighted-average interest rate at April 5, 2014.

 

(2) Does not include an additional $340 million borrowed on June 16, 2014 in connection with an amendment to the credit agreement governing our Term Loan. See “—Senior Secured Term Loan.”

 

(3) The proceeds from the additional Term Loan borrowings were used in part to redeem our Senior Secured Notes. See “—Senior Secured Notes.”

ABL Facility

On January 31, 2014, in connection with the Hercules acquisition, we entered into the Second Amendment to Sixth Amended and Restated Credit Agreement (“Credit Agreement”) which provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the “U.S. ABL Facility”) and (ii) Canadian revolving credit commitments of $125.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the

 

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“Canadian ABL Facility” and, collectively with the U.S. ABL Facility, the “ABL Facility”). In addition, the Credit Agreement provides the U.S. borrowers under the agreement with a first-in last-out facility (the “U.S. FILO Facility”) in an aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and the Canadian borrowers under the agreement with a first-in last-out facility (the “Canadian FILO Facility” and collectively with the U.S. FILO Facility, the “FILO Facility”) in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility provides for revolving loans available to ATDI, its 100% owned subsidiary Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that we designate in the future in accordance with the terms of the agreement. The Canadian ABL Facility provides for revolving loans available to TriCan, RTD and WTD and any other Canadian subsidiaries that we designate in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists or would arise therefrom, we have the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million (up to $50.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The maturity date for the ABL Facility is November 16, 2017, provided that if on March 1, 2017, either (i) more than $50.0 million in aggregate principal amount of ATDI’s Senior Secured Notes remains outstanding with a scheduled maturity date which is earlier than 91 days after November 16, 2017 or (ii) any principal amount of ATDI’s Senior Secured Notes remains outstanding with a scheduled maturity date which is earlier than 91 days after November 16, 2017 and excess availability under the ABL Facility is less than 12.5% of the aggregate revolving commitments, then the maturity date will be March 1, 2017. The maturity date for the FILO Facility is the date that is 36 months from January 31, 2014.

As of April 5, 2014, we had $596.0 million outstanding under the U.S. ABL Facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $8.4 million, leaving $209.9 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at April 5, 2014 was $42.1 million, leaving $38.0 million available for additional borrowings. As of April 5, 2014, the outstanding balance of the U.S. FILO Facility was $74.1 million and the outstanding balance of the Canadian FILO Facility was $8.5 million.

Borrowings under the U.S. ABL Facility bear interest at a rate per annum equal to, at our option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of April 5, 2014 or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of April 5, 2014. The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate,” (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of April 5, 2014, (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate,” (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 1.0% as of April 5, 2014, (c) a rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount displayed and identified as such on the display referred to as the “CDOR Page” of Reuters Monitor Money Rates Service as at approximately 10:00 a.m. Toronto time on such day, plus an applicable margin of 2.0% as of April 5, 2014 or (d) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of April 5, 2014. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

 

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Borrowings under the U.S. FILO Facility bear interest at a rate per annum equal to, at our option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 3.5% as of April 5, 2014 or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus 1/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 2.5% as of April 5, 2014. The applicable margins under the U.S. FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian FILO Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate,” (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 2.5% as of April 5, 2014, (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate,” (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 2.5% as of April 5, 2014, (c) a rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount displayed and identified as such on the display referred to as the “CDOR Page” of Reuters Monitor Money Rates Service as at approximately 10:00 a.m. Toronto time on such day, plus an applicable margin of 3.5% as of April 5, 2014 or (d) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 3.5% as of April 5, 2014. The applicable margins under the Canadian FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

The U.S. and Canadian borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:

 

    85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, applicable.

The U.S. FILO and the Canadian FILO borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:

 

    5% of eligible accounts receivable of the U.S or Canadian. loan parties, as applicable; plus

 

    10.0% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable.

All obligations under the U.S. ABL Facility and the U.S. FILO Facility are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. The Canadian ABL Facility and the Canadian FILO Facility are unconditionally guaranteed by the U.S. loan parties, TriCan, RTD, WTD and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the U.S. FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets

 

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and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility and the Canadian FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.

The ABL Facility and the FILO Facility contain customary covenants, including covenants that restrict our ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates or change our fiscal year. If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate borrowing base and (b) $25.0 million, then we would be subject to an additional covenant requiring us to meet a fixed charge coverage ratio of 1.0 to 1.0. As of April 5, 2014, our additional borrowing availability under the ABL Facility was above the required amount and we were therefore not subject to the additional covenants.

Senior Secured Term Loan

In connection with the acquisition of Terry’s Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for a senior secured term loan facility in the aggregate principal amount of $300.0 million (the “Term Loan”). The Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Term Loan were used to finance a portion of the Terry’s Tire purchase price. The maturity date for the Term Loan is June 1, 2018.

Borrowings under the Term Loan bear interest at a rate per annum equal to, at our option, initially, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 4.75% at April 5, 2014 or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 1/2 of 1%, (2) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans and (3) the one month Eurodollar rate plus 1.0%, plus an applicable margin of 3.75% as of April 5, 2014. The Eurodollar rate is subject to an interest rate floor of 1.0%. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the credit agreement for the Term Loan.

All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.

The Term Loan contains customary covenants, including covenants that restrict our ability to incur additional debt, create liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates, change the nature of our business or change our fiscal year.

Subject to certain exceptions, we are required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of our annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayment provisions related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the credit agreement or incurred to refinance all or any portion of the Term Loan.

On June 16, 2014, we amended our credit agreement relating to our senior secured term loan facility to borrow an additional $340 million on the same terms as our existing Term Loan. Pursuant to the amendment,

 

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until August 15, 2014, we also have the right to borrow up to an additional $80 million on the same terms as our existing Term Loan. The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under our Senior Secured Notes and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.

Senior Secured Notes

On May 28, 2010, ATDI issued Senior Secured Notes (“Senior Secured Notes”) due June 1, 2017 in an aggregate principal amount at maturity of $250.0 million. The Senior Secured Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $240.7 million after debt issuance costs (which represents a non-cash financing activity of $9.3 million). The Senior Secured Notes will accrete based on an effective interest rate of 10% to an aggregate accreted value of $250.0 million, the full principal amount at maturity. The Senior Secured Notes bear interest at a fixed rate of 9.75%. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Secured Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days’ notice at a redemption price of 107.313% of the principal amount being redeemed if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount being redeemed if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount being redeemed if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount being redeemed if the redemption date occurs thereafter.

The Senior Secured Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp and TDI, subject to certain exceptions. The Senior Secured Notes are also collateralized by a second-priority lien on accounts receivable and related assets and a first-priority lien on substantially all other assets (other than inventory), in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.

The indenture governing the Senior Secured Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s capital stock or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of certain of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; transfer or sell certain assets; guarantee indebtedness or incur certain other contingent obligations; incur certain liens; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.

On June 16, 2014, all outstanding amounts under our Senior Secured Notes were redeemed as described above.

Senior Subordinated Notes

In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of the Additional Senior Subordinated Notes. The net proceeds to ATDI from the sale of the Additional Senior Subordinated Notes were approximately $221.1 million.

The Additional Senior Subordinated Notes were issued pursuant to the Seventh Supplemental Indenture, dated as of January 31, 2014, among ATDI, the Guarantors and the Trustee (the “Seventh Supplemental Indenture”) to the Senior Subordinated Indenture. The Additional Senior Subordinated Notes have identical terms to the Initial Subordinated Notes, except the Additional Senior Subordinated Notes accrue interest from January 31, 2014. The Additional Senior Subordinated Notes and the Initial Subordinated Notes, as defined below, are treated as a single class of securities for all purposes under the Subordinated Indenture. However, the

 

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Additional Senior Subordinated Notes were issued with separate CUSIP numbers from the Initial Subordinated Notes and are not fungible for U.S. federal income tax purposes with the Initial Subordinated Notes. Interest on the Additional Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2014. The Additional Senior Subordinated Notes will mature on June 1, 2018.

On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due June 1, 2018, (the “Initial Subordinated Notes” and, collectively with the Additional Senior Subordinated Notes, the “Senior Subordinated Notes”). Interest on the Initial Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010.

The Senior Subordinated Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days’ notice at a redemption price of 104.0% of the principal amount being redeemed if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount being redeemed if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount being redeemed if the redemption date occurs thereafter.

The Senior Subordinated Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions. The indenture governing the Senior Subordinated Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s capital stock or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of certain of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; transfer or sell certain assets; guarantee indebtedness or incur certain other contingent obligations; incur certain liens without securing the Senior Subordinated Notes; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.

Contractual Commitments

As of December 28, 2013, we had certain cash obligations associated with contractual commitments. The amounts due under these commitments are as follows:

 

In millions

   Total      Less than 1
year
     1 – 3
years
    4 – 5
years
     After 5
years
 

Long-term debt (variable rate) (2)

   $ 505.4       $ —         $ —        $ 505.4       $ —     

Long-term debt (fixed rate) (3)

     449.4         0.3         0.4        448.5         0.2   

Estimated interest payments (1)

     265.0         68.0         129.9        59.4         7.7   

Operating leases, net of sublease income

     524.3         88.9         147.7        112.6         175.1   

Capital leases

     12.3         0.3         0.7        0.9         10.4   

Uncertain tax positions

     0.7         0.4         (0.2     0.8         (0.3

Deferred compensation obligation

     3.4         —           —          —           3.4   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total contractual cash obligations

   $ 1,760.5       $ 157.9       $ 278.5      $ 1,127.6       $ 196.5   

 

(1) Represents the annual interest on fixed and variable rate debt. Projections of interest expense for the U.S. ABL Facility, the Canadian ABL Facility and the U.S. FILO Facility are based on the weighted-average interest rate of 3.5%, 4.2% and 5.8%, respectively, as of December 28, 2013. Based on the combined outstanding balance of the U.S. ABL Facility, the Canadian ABL Facility and the U.S. FILO Facility as of December 28, 2013, a hypothetical increase of 1% in such interest rate percentage would result in an increase to our annual interest payments of $5.1 million.
(2) Includes U.S. ABL Facility ($417.1), FILO Facility ($36.4), and Canadian FILO Facility ($51.9).
(3) Includes Senior Secured Notes ($248.3), Senior Subordinated Notes ($200.0) and Other debt ($1.1).

 

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Off-Balance Sheet Arrangements

We have no significant off balance sheet arrangements other than liabilities related to certain leases of the Winston Tire Company (“Winston”). These leases were guaranteed when we sold Winston in 2001. As of April 5, 2014, our total obligations as guarantor on these leases are approximately $1.8 million extending over five years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $1.6 million as of April 5, 2014. A provision has been made for the net present value of the estimated shortfall. The accrual for lease liabilities could be materially affected by factors such as the credit worthiness of lessors, assignees and sublessees and our success at negotiating early termination agreements with lessors. These factors are significantly dependent on general economic conditions. While we believe that our current estimates of these liabilities are adequate, it is possible that future events could require significant adjustments to those estimates.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates. The following is a summary of certain accounting estimates and assumptions made by management that we consider critical.

Allowance for Doubtful Accounts

The allowance for doubtful accounts represents the best estimate of probable loss inherent within our accounts receivable balance. Estimates are based upon both the creditworthiness of specific customers and the overall probability of losses based upon an analysis of the overall aging of receivables as well as past collection trends and general economic conditions. Estimating losses from doubtful accounts is inherently uncertain because the amount of such losses depends substantially on the financial condition of our customers. If the financial condition of our customers were to deteriorate beyond estimates, and impair their ability to make payments, we would be required to write off additional accounts receivable balances, which would adversely impact our financial position.

Inventories

Inventories are stated at the lower of cost, determined on the FIFO method, or fair market value and consist primarily of automotive tires, custom wheels, and related tire supplies and tools. We perform periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and record necessary provisions to reduce such inventories to net realizable value. If actual market conditions are less favorable than those projected by management, we could be required to reduce the value of our inventory or record additional reserves, which would adversely impact our financial position.

Goodwill and Indefinite-Lived Intangible Assets

We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets with indefinite useful lives are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.

 

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Recoverability of goodwill is determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized. We have only one reporting segment which encompasses all operations including new acquisitions.

Recoverability of other intangible assets with indefinite useful lives is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.

The determination of estimated fair value requires management to make assumptions about estimated cash flows, including profit margins, long-term forecasts, discount rates, royalty rates and terminal growth rates. Management developed these assumptions based on the best information available as of the date of the assessment. We completed our assessment of goodwill and intangible assets with indefinite useful lives as of November 30, 2013 and determined that no impairment existed at that date. Although no impairment has been recorded to date, there can be no assurances that future impairments will not occur. Future adverse developments in market conditions or our current or projected operating results could cause the fair value of our goodwill and intangible assets with indefinite useful lives to fall below carrying value, which would result in an impairment charge that would adversely affect our financial position.

Long-Lived Assets

Management reviews long-lived assets, which consist of property, leasehold improvements, equipment and definite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. For long-lived assets to be held and used, management evaluates recoverability by comparing the carrying value of the asset to future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. For long-lived assets for which we have committed to a disposal plan, we report such assets at the lower of the carrying value or fair value less the cost to sell.

In determining the fair value of long-lived assets, we make judgments relating to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets. Factors that impact these judgments include the ongoing maintenance and improvements of the assets, changes in the expected use of the assets, changes in economic conditions, changes in operating performance and anticipated future cash flows. If actual fair value is less than our estimates, long-lived assets may be overstated on the balance sheet, which would adversely impact our financial position.

Self-Insured Reserves

We are self-insured for automobile liability, workers’ compensation and the health care claims of our team members, although we maintain stop-loss coverage with third-party insurers to limit our total liability exposure. We establish reserves for losses associated with claims filed, as well as claims incurred but not yet reported, using actuarial methods followed in the insurance industry and our historical claims experience. If amounts ultimately paid differ significantly from our estimates, it could adversely impact our financial position.

Exit Cost Reserves

During the normal course of business, we continually assess the location and size of our distribution centers in order to determine our optimal geographic footprint and overall structure. As a result, we have certain facilities that we have closed or intend to close and we record reserves for certain exit costs associated with these facilities. These exit cost reserves are recorded in an amount equal to future minimum lease payments and related

 

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ancillary costs from the date of closure to the end of the lease term, net of estimated sublease rentals we reasonably expect to obtain for the property. We estimate future cash flows based on contractual lease terms, the geographic market in which the facility is located, inflation, the ability to sublease the property and other economic conditions. We estimate sublease rentals based on the geographic market in which the property is located, our experience subleasing similar properties and other economic conditions. If actual exit costs associated with closing these facilities differ from our estimates, it could adversely impact our financial position.

Income Taxes and Valuation Allowances

We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision is computed using the asset and liability method of accounting, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, we recognize future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in our judgment to be more likely than not. Deferred tax assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which those tax items are expected to be realized or settled. We regularly review the recoverability of our deferred tax assets considering historic profitability, projected future taxable income, and timing of the reversals of existing temporary differences as well as the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance if available evidence suggests that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Changes to valuation allowances are recognized in earnings in the period such determination is made.

The application of income tax law is inherently complex and involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdiction in which we operate. In addition, we are required to make certain assumptions regarding our income tax positions and the likelihood that such tax positions will be sustained if challenged. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on amounts we recognize in our consolidated balance sheets and adversely impact our financial position.

Revenue Recognition

Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. We recognize revenue when the title and the risk and rewards of ownership have substantially transferred to the customer, which is upon delivery under free-on-board destination terms.

We permit customers from time to time to return certain products but there is no contractual right of return. We continuously monitor and track such returns and record an estimate of such future returns, based on historical experience and recent trends. While such returns have historically been within management’s expectations and the provisions established have been adequate, we cannot guarantee that we will continue to experience the same return rates that we have in the past. If future returns increase significantly, it could adversely impact our results of operations.

Manufacturer Rebates

We receive rebates from tire manufacturers pursuant to a variety of rebate programs. These rebates are recorded in accordance with accounting standards applicable to cash consideration received from vendors. Many of the tire manufacturer programs provide that we receive rebates when certain measures are achieved, generally related to the volume of our purchases. We account for these rebates as a reduction to the price of the product, which reduces the carrying value of our inventory, and our cost of goods sold when product is sold. During the

 

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year, we record amounts earned for annual rebates based on purchases management considers probable for the full year. These estimates are periodically revised to reflect rebates actually earned based on actual purchase levels. Tire manufacturers may change the terms of some or all of these programs, which could increase our cost of goods sold and decrease our net income, particularly if these changes are not passed along to the customer.

Customer Rebates

We offer rebates to our customers under a number of different programs. These rebates are recorded in accordance with authoritative guidance related to accounting for consideration given by a vendor to a customer. These programs typically provide customers with rebates, generally in the form of a reduction to the amount they owe us, when certain measures are achieved, generally related to the volume of product purchased from us. We record these rebates through a reduction in the related price of the product, which decreases our net sales. During the year, we estimate rebate amounts based on the rebate rates we expect customers will achieve for the full year. These estimates are periodically revised to reflect rebates actually earned by customers.

Cooperative Advertising and Marketing Programs

We participate in cooperative advertising and marketing programs, or co-op advertising, with our vendors. Co-op advertising funds are provided to us generally based on the volume of purchases made with vendors that offer such programs. A portion of the funds received must be used for specific advertising and marketing expenditures incurred by us or our customers. The co-op advertising funds received by us from our vendors are accounted for in accordance with authoritative guidance related to accounting for cash consideration received from a vendor, which requires that we record the funds received as a reduction of cost of sales or as an offset to specific costs incurred in selling the vendor’s products. The co-op advertising funds that are provided to our customers are accounted for in accordance with authoritative guidance related to accounting for cash consideration given by a vendor to a customer, which requires that we record the funds paid as a reduction of revenue since no separate identifiable benefit is received by us.

Stock Based Compensation

We account for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. Our stock-based compensation plans include programs for stock options and restricted stock units.

We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. We used the simplified method to determine the expected term, which is calculated as the average of the time-to-vesting and the contractual life of the options.

Expected Volatility—Since we are currently privately held and do not have any trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded peer companies over a period equal to the expected term of the stock option grants. When selecting comparable publicly traded peer companies on which we based our expected stock price volatility, we selected companies with comparable characteristics to us, including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-

 

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based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.

In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods. These assumptions represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.

The following table provides, by grant date, the number of stock options awarded from May 28, 2010, the date of the Merger, through the date of this prospectus and the exercise price for each set of grants, as well as the estimated fair value of the underlying common shares on the grant date:

 

Grant Date

   Options
Granted
     Exercise
Price
     Fair Value
At
Issuance
 

August 30, 2010

     40,824,000       $ 1.00       $ 1.00   

October 14, 2010

     1,248,000       $ 1.00       $ 1.00   

March 24, 2011

     200,000       $ 1.00       $ 1.00   

June 6, 2011

     1,500,000       $ 1.00       $ 1.00   

January 1, 2012

     777,600       $ 1.14       $ 1.14   

January 23, 2012

     1,500,000       $ 1.14       $ 1.14   

February 15, 2013

     3,466,903       $ 1.20       $ 1.20   

April 28, 2014

     4,528,833       $ 1.50       $ 1.50   

In the absence of a public trading market, our board of directors, with input from management, determined a reasonable estimate of the then-current fair value of our common stock for purposes of determining fair value of our stock options on the date of grant. We determined the fair value of our common stock utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” Our approach considered contemporaneous common stock valuations in determining the equity value of our company using a weighted combination of various methodologies, each of which can be categorized under either of the following two valuation approaches: the income approach and the market approach.

In addition, we exercised judgment in evaluating and assessing the foregoing based on several factors including:

 

    the nature and history of our business;
    our current and historical operating performance;
    our expected future operating performance;
    our financial condition at the grant date;
    the lack of marketability of our common stock;
    the value of companies we consider peers based on a number of factors, including, but not limited to, similarity to us with respect to industry, business model, stage of growth, intangible value, company size, geographic diversification, profitability, financial risk and other factors;

 

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    likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;
    industry information such as market size and growth; and
    macroeconomic conditions.

The board of directors and management intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. We generally grant options to participants with an exercise price equal to the then current fair value of the common stock.

Foreign Currency Translation

All foreign currency denominated balance sheet accounts are translated at year end exchange rates and revenue and expense accounts are translated at weighted-average rates of exchange prevailing during the year. Gains and losses resulting from the translation of foreign currency are recorded in the accumulated other comprehensive income (loss) component of stockholder’s equity. Transactional foreign currency gains and losses are included in other expense, net in the accompanying consolidated statements of comprehensive income (loss).

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this guidance on December 30, 2012 (the first day of our 2013 fiscal year); however, we performed our annual impairment test in the fourth quarter of 2013.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which amended the guidance for reporting reclassifications out of accumulated other comprehensive income. The amended guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is entirely reclassified to net income, as required by U.S. GAAP. For other amounts, that are not required by U.S. GAAP to be entirely reclassified to net income, an entity is required to cross-reference other disclosures that will provide additional detail concerning these amounts. The amendments are effective for reporting periods beginning after December 15, 2012. We adopted this guidance on December 30, 2012 and its adoption did not have an effect on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits.” ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. We are currently assessing the impact, if any, on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on a company’s operations and financial results should be

 

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presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statement previously issued. We are currently assessing the impact, if any on our consolidated financial statements.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction—Type and Production—Type Contracts.” The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us beginning in fiscal year 2018 and, at that time we may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. We are currently evaluating the method and impact the adoption of ASU 2014-09 will have on our condensed consolidated financial statements and disclosures.

Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

Our ABL Facility, FILO Facility and Term Loan are exposed to fluctuations in interest rates which could impact our results of operations and financial condition. Interest on the ABL Facility, FILO Facility and Term Loan are tied to, at our option, either a base rate, or a prime rate, or LIBOR. At April 5, 2014, the total amount outstanding under our ABL Facility, FILO Facility and Term Loan that was subject to interest rate changes was $1,020.0 million.

To manage this exposure, we use interest rate swap agreements in order to hedge the changes in our variable interest rate debt. Interest rate swap agreements utilized by us in our hedging programs are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To minimize the risk of counterparty non-performance, interest rate swap agreements are made only through major financial institutions with significant experience in such instruments.

At April 5, 2014, $620.0 million of the total outstanding balance of our ABL Facility, FILO Facility and Term Loan that was not hedged by an interest rate swap agreement and thus subject to interest rate changes. Based on this amount, a hypothetical increase of 1% in such interest rate percentages would result in an increase to our annual interest expense by $6.2 million.

Foreign Currency Exchange Rate Risk

The financial position and results of operations for TriCan, our 100% owned subsidiary acquired during 2012 are impacted by movements in the exchange rates between the Canadian dollar and the U.S. dollar. As of April 5, 2014, we did not have any foreign currency derivatives in place.

 

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BUSINESS

Our Company

We are the largest distributor of replacement tires in North America. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 SKUs, to approximately 80,000 customers. In 2013, we distributed more than 40 million replacement tires after giving effect to recent acquisitions. We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 18% in Canada.

Geographic Footprint

 

LOGO

We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 11.3%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.

We believe we distribute one of the broadest product offerings in our industry, supplying our customers with nine of the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of Hercules we also own and

 

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market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.

Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand organically in existing markets as well as in new geographic areas. We also expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. In addition, we are investing in technology and each sales channel to fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above-market growth in all market environments and to continue to enhance our profitability and cash flows.

From fiscal 2009 to fiscal 2013, our net sales increased from $2.2 billion to $3.8 billion, reflecting a compound annual growth rate of 15.3%, and Adjusted EBITDA increased from $101.0 million to $195.5 million, reflecting a compound annual growth rate of 17.9%. Over the same period, according to the RMA, unit volume in the U.S. replacement tire market grew at a compound annual growth rate of 1.2%. Our superior growth was driven by our organic initiatives and our acquisitions. In fiscal 2009, our net income was $4.9 million and in fiscal 2013 our net loss was $6.4 million. This decrease in net income was primarily the result of increased interest expense related to our acquisition by TPG in 2010, as well as interest associated with our eight acquisitions from 2010 through 2013, and non-cash amortization expense related to our intangible assets.

For the quarter ended April 5, 2014 and the year ended December 28, 2013 our net sales were $1.2 billion and $5.0 billion, respectively, our Adjusted EBITDA was $31.3 million and $231.8 million, respectively, and our net loss was $52.9 million and $55.2 million, respectively, in each case including the pro forma effects of our recent acquisitions. Additional information regarding Adjusted EBITDA and pro forma Adjusted EBITDA, including a reconciliation of Adjusted EBITDA to net income (loss) and a reconciliation of pro forma Adjusted EBITDA to pro forma net income (loss), is included in “—Summary Consolidated Financial and Other Data.” Additional information regarding the pro forma effects of our recent acquisitions is included in “—Summary Consolidated Financial and Other Data” and “Unaudited Pro Forma Combined Condensed Financial Information.”

Our Industry

According to Modern Tire Dealer, the U.S. replacement tire market generated annual retail sales of approximately $37.3 billion in 2013. Passenger tires, medium truck tires and light truck tires accounted for 66.9%, 16.9% and 13.1%, respectively, of the total U.S. market. Farm, specialty and other types of tires accounted for the remaining 3.1% of the total U.S. market. The Canadian replacement tire market generated annual retail sales of approximately $3.7 billion in 2012. Passenger and light truck tires accounted for 53% while commercial tires accounted for 20% of the total Canadian replacement tire market. Farm, specialty and other types of tires accounted for the remaining 27% of the total Canadian replacement tire market. According to a Tire Review survey conducted in 2013, U.S. tire dealers buy 55.4% of their consumer tires from wholesale distributors like us and 27.7% direct from tire manufacturers, with the remaining volume coming from various other sources.

In the United States and Canada, replacement tires are sold to consumers through several different channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. Between 1990 and 2013, independent tire retailers and automotive dealerships have enjoyed the largest increase in U.S. replacement tire market share, according to Modern Tire Dealer, moving from 54% to 60.5% and 1% to 7.5% of the market, respectively. In 2012, replacement tire sales to independent tire retailers and automotive dealerships represented approximately 44% and 18%, respectively, of Canadian replacement tire market share. Mass merchandisers, warehouse clubs, manufacturer-owned stores and web-based marketers comprise the remaining market share in both the United States and Canada.

 

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Since 2000, the number of specific tire sizes in the market has increased by 61%. One driver of this increase was above-market growth in high-performance tires, which experienced a compound annual growth rate of approximately 9% between 2000 and 2008. The increase in the number of tire sizes coupled with the large number of brands in the market place has driven SKU proliferation in the replacement tire market. As a result of the SKU proliferation and due to their capital and physical space constraints, many tire retailers are unable to carry sufficient inventory to meet the demands of their customers. This trend has helped increase the need for distributors in the replacement tire market.

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brands during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.

From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008 for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The RMA projects that replacement tire shipments will increase by approximately 2% in the United States in 2014 as compared to 2013, as demand drivers continue to strengthen.

Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets will continue to be driven by favorable underlying dynamics, including:

 

    increases in the number and average age of passenger cars and light trucks;

 

    increases in the number of miles driven;

 

    increases in the number of licensed drivers as the U.S. and Canadian population continues to grow;

 

    increases in the number of replacement tire SKUs;

 

    growth of the high-performance tire market; and

 

    shortening of tire replacement cycles due to changes in product mix that increasingly favor high- performance tires, which have shorter average lives.

Our Competitive Strengths

We believe the following key strengths have enabled us to become the largest distributor of replacement tires in North America and position us to achieve future revenue growth in excess of the long-term growth rates of the U.S. and Canadian replacement tire industry:

Leading Position in a Large and Highly Fragmented Marketplace. We are the largest distributor of replacement tires in North America with an estimated market share in 2013 of approximately 14%, after giving effect to our recently completed acquisitions, in a $37.3 billion market in the United States. Our estimated market share in 2013 of the replacement passenger and light truck tire market in Canada was approximately 18%, after giving effect to our recently completed acquisitions. We believe our scale provides us key competitive advantages relative to our smaller, and generally regionally-focused, competitors. These include the ability to: efficiently stock and deliver a wide variety of tires; invest in services, including sales tools and technologies, to support our customers; and realize operating efficiencies from our scalable infrastructure. We believe our leading market position and presence in each of the key market channels, combined with our commitment to distribution, as opposed to the retail operations engaged in by our customers, enhances our ability to expand our sales footprint cost effectively both in our existing markets and in new domestic geographic markets.

 

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Scale Advantage from Extensive and Efficient Distribution Network. We believe we have the largest independent replacement tire distribution network in North America with more than 140 distribution centers (excluding distribution centers acquired in our recent acquisitions that are expected to be closed as part of the integration process) and approximately 1,000 delivery vehicles. Our distribution footprint services geographic regions in the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013, and we believe our geographic coverage in Canada is also very extensive. Our extensive distribution footprint, combined with sophisticated inventory management and logistics technologies, enable us to deliver the vast majority of orders on a same or next day basis, which is critical for tire retailers who are typically limited by physical inventory capacity and working capital constraints. Our delivery technologies allow us to more effectively and efficiently organize and optimize our route systems to provide timely product delivery. Our distribution systems are integrated with our proprietary business-to-business ATDOnline® order fulfillment system that captures more than 65% of our orders electronically, and our Oracle ERP system provides a scalable platform that can support future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit.

Broad Product Offering from Diverse Supplier Base. We believe we offer the most comprehensive selection of passenger and light truck tires in the industry through a diverse group of suppliers. We supply nine of the top ten leading passenger and light truck tire brands, and we carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. Our tire product line includes a full suite of flag, associate and proprietary brand tires, allowing us to service a broad range of price points from entry-level imported products to the faster-growing high-performance category. Through our acquisition of Hercules, we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition to tires, we also offer custom wheels and accessories and related tire supplies and tools. We believe that our broad product offering drives increased sales among existing customers, attracts new customers and increases customer retention.

Broad Range of Value-Added Services. We provide a wide range of services that enable our tire retailer customers to operate their businesses more profitably. These services include convenient access to and timely delivery of the broadest product offerings available in the industry, as well as fundamental business support services, such as administration of tire manufacturer affiliate programs and credit, training and access to consumer market data, which enable our tire retailer customers to better service their individual markets. We provide our U.S. customers with convenient 24/7 access to our extensive product offerings through our innovative and proprietary business-to-business web portal, ATDOnline®. Our online services also include TireBuyer.com®, which allows our U.S. independent tire retailers the ability to participate in the Internet marketing of tires to consumers. We also provide select, qualified U.S. independent tire retailers with the opportunity to participate in our Tire Pros® franchise program through which they receive advertising and marketing support and the benefits of a national brand identity. We believe our value-added services as well as the integration between our infrastructure and our customers’ operations enable us to maintain high rates of customer retention and build strong customer loyalty.

Diversified Customer Base and Longstanding Customer Relationships Across Multiple Channels. We serve a highly diversified customer base in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We believe we are the only distributor of replacement tires in North America that services each of these key market channels. Our business is diversified across the key market channels and reflects the evolving complexity of the North American replacement tire market, with independent tire retailers accounting for 76% of our net sales in 2013 as compared to 85% of our net sales in 2009. We believe we are a top supplier to many of our customers and maintain relationships with our top 20 customers that exceed a decade on average. We believe the diversity of our customer base and the strength of our customer relationships present an opportunity to grow market share regardless of macroeconomic and replacement tire market conditions.

 

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Consistent Financial Performance and Strong Cash Flow Generation. Our financial performance has benefited from substantial growth that has been achieved through a combination of organic initiatives and acquisitions. Over the ten-year period from fiscal 2003 to fiscal 2013, our net sales grew at a compound annual rate of 13.2%, reflecting our strong revenue base, evolving business mix, scalable operating model and successful growth strategies. In addition, we believe the low capital intensity of our business combined with the efficient management of our working capital, due in part to our advanced inventory management systems in the United States that we are also in the process of implementing in Canada, and close vendor relationships, will enable us to generate strong cash flows. In addition, as a result of our presence in each major channel within the replacement tire market and based upon our ability to rationalize our operating costs, as necessary, we experienced only moderate margin contraction during the recent economic downturn.

Experienced Management Team Supported by Strong Equity Sponsorship. Our senior management team, led by our President and Chief Executive Officer William E. Berry, has an average of over 20 years of experience in the replacement tire distribution industry. Management has a proven track record of implementing successful initiatives in a leveraged environment, including the execution of a disciplined acquisition strategy, which has contributed to our gross profit expansion and above-market net sales growth. In addition, we have reduced costs through the integration of operating systems and introduction of standard operating practices, particularly in the United States, resulting in improved operating efficiencies, reduced headcount and improved operating profit at existing and acquired locations. We also benefit from the extensive management and business experience provided by our Sponsor, TPG.

Our Business Strategy

Our objective is to further expand our position as the largest distributor of replacement tires in North America and establish our company as the leading distributor in each of the key market channels that we serve, while continuing to provide our customers with a range of value-added services such as frequent and timely delivery of inventory, the broadest and deepest range of products, and other business support services. We intend to accomplish this objective, drive above-market growth and further enhance our profitability and cash flows by executing on the following key operating strategies:

Grow Organically in Excess of Market. It is at the core of our strategy to grow our profits and cash flows organically through further penetration of all of our key market channels, through greenfield expansion, through further penetration of our Hercules® brand, the number one private brand in North America in 2013 based on unit sales, through further establishment and expansion of TireBuyer.com®, and through further expansion and development of our value-added services.

Expand Penetration in Each of the Key Market Channels. We have a significant presence in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We regularly seek opportunities to grow our market share in each channel by customizing our sales strategies to suit the particular needs of that channel, and are focused on training and deploying sales personnel to help build our sales, particularly in the faster-growing automotive dealership channel, and strengthen and expand our relationships with retailers. We have observed an increase in sales through web-based marketers and seek to grow our presence in that channel through our Internet site, TireBuyer.com.

Continue Greenfield Expansion in Existing and New Geographic Markets. While we already have the largest distribution footprint in the North American replacement tire market, servicing geographic regions of the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013 and with geographic coverage in Canada that we believe is also very extensive, we believe there are numerous further underserved areas in both our existing geographic markets as well as in areas not currently serviced by us that are favorably situated to support and grow additional distribution centers. Since 2010, we have successfully opened 23 greenfield distribution centers, and we intend to continue to expand our existing footprint in the United States and Canada in areas where we see opportunities.

 

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Expand Our Hercules® Brand. Through our recently completed acquisition of Hercules, we now market the proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. We believe our expansive distribution network in the United States and Canada, combined with our greater access to capital, will allow us to both expand product availability and increase market share of the Hercules® brand. Further, we expect that Hercules’ multi-decade Asian sourcing experience, including its 250,000 square foot warehouse in northern China, will enhance our supply and distribution capabilities.

Grow TireBuyer.com® into a Premier Internet Tire Provider. TireBuyer.com® is our Internet site that enables our U.S. independent tire retailer customers to connect with consumers and sell to them over the Internet. TireBuyer.com® allows our broad base of independent tire retailers to participate in a greater share of the growing Internet tire market. We believe that TireBuyer.com® complements and services our participating U.S. independent tire retailers by providing them access to a sales and marketing channel previously unavailable to them. In 2012, the TireBuyer.com® site was re-launched on a newer, faster and more flexible platform, which has enhanced the overall consumer experience and resulted in increased traffic to the site.

Continue to Develop and Expand our Value-Added Services. Our Tire Pros® franchise program enables us to deliver advertising and marketing support to tire retailers operating as Tire Pros® franchisees. The Tire Pros® franchise program allows participating local tire retailers to enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identities. In return, we benefit from increasing volume penetration among, and further aligning ourselves with, our franchisees. We are focused on continuing to upgrade and improve the Tire Pros® franchise program and seek opportunities to develop similar programs in the future. In addition, individual manufacturers offer a variety of relatively complex programs for tire retailers that sell their products, providing cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist them in managing the administration of these programs through dedicated staff. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.

Selectively Pursue Acquisitions. We expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. Over the past six years we have successfully acquired and integrated nine businesses representing, in the aggregate, over $850 million in annual revenue through 2013, and on a pro forma basis, including our recently completed acquisitions of Hercules and Terry’s Tire, the 2013 annual revenue of businesses acquired is over $2 billion in the aggregate. We believe our position as the largest distributor of replacement tires in North America, combined with our access to capital and our scalable platform, has allowed us to make acquisitions at very attractive post-synergy valuations.

Leverage Our Infrastructure in Existing Markets. Through infrastructure expansions over the past several years in the United States, we have developed a scalable platform with available incremental distribution capacity. Our distribution infrastructure enables us to efficiently add new customers, such as corporate accounts, and service growing channels, such as automotive dealerships, thereby increasing profitability by leveraging the utilization of our existing assets. We expect to complete the implementation of a similar platform in Canada near the beginning of 2015. We believe our relative penetration in existing markets is largely a function of the services we offer and the length of time we have operated locally. Specifically, in new geographic markets, we have experienced growth in market share over time, and in markets that we have served the longest, we generally have market share well in excess of our national average.

Utilize Technology Platform to Continue to Increase Distribution Efficiency. We intend to continue to invest in our inventory and warehouse management systems and logistics technology in order to further increase our efficiency and profit margins and improve customer service. For example, we operate on our Oracle ERP platform in the United States and are in the process of implementing it in Canada. We continue to evaluate and

 

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incorporate technical solutions including utilization of handheld scanning for receiving, picking and delivery of products to our customers. We believe these increased efficiencies will continue to enhance our reputation with our customers for providing timely service, while also reducing costs. Additionally, we continue to roll out customized electronic solutions and POS system integration for our larger customers.

Maintain a Comprehensive and Deep Tire Portfolio to Meet Our Customers’ Needs. We provide a wide range of products covering a broad range of price points, from entry-level imported products to offerings in the faster-growing high-performance tire market, through a full suite of flag, associate and proprietary brand tires. We acquired the Hercules® brand in January 2014 and intend to further expand its market presence throughout North America. We intend to continue to focus on high-performance tires, given the growth in demand for such tires, while maintaining our emphasis on providing broad and entry level tire offerings. Our comprehensive tire portfolio is designed to satisfy all of our customers’ needs and allow us to become the supplier of choice, thereby increasing customer penetration and retention across all channels.

Products

We provide our customers with a comprehensive portfolio of tires, tire supplies and tools as well as custom wheels and accessories. During 2013, tire sales accounted for 97.4% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 2.6% of our net sales.

Tires

We sell a broad selection of replacement tires, from well-known flag brands, which typically carry a premium price and profit per tire, to entry-level imported brands. We believe our ability to offer tires across multiple industry tiers provides us with a competitive advantage by enabling us to service a broad range of price points in the replacement tire market. Sales of passenger and light truck tires accounted for 82.3% of our net sales in fiscal 2013. The remainder of our tire sales was for medium trucks, farm vehicles and other specialty tires.

Flag brands. Flag brands, which have the greatest brand recognition as a result of both strong sales and strong marketing support from tire manufacturers, are generally premium-quality and premium-priced offerings. The flag brands we sell have high consumer recognition and generate higher per-tire profit than associate or proprietary brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. Within our flag brand product portfolio, we also carry high-performance tires.

Associate brands. Associate brands are primarily lower-priced tires manufactured by well-known manufacturers offered under different brand names. Our associate brands, such as Fuzion®, allow us to offer tires in a wider price range. In addition, associate brands are attractive to our tire retailer customers as they are regularly subject to incentive programs offered by tire manufacturers.

Proprietary and exclusive brands. Through our acquisition of Hercules, we own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. The Hercules® brand includes a full line of tires for passenger cars as well as light and medium trucks. Additionally, our Capitol® and Ironman® brands are lower-priced tires made by tire manufacturers exclusively for, and marketed by, us. These brands, in which we hold or control the trademark, strengthen our entry-level priced product offering and allow us to sell value-oriented tires to tire retailers, increasing our overall market penetration.

Entry level imported brands. Entry level imported brands are exclusively lower-priced tires manufactured offshore, and predominately by Asia-based manufacturers. Our entry level imported brands allow us to offer tires in a wider price range including opening price point products.

 

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Custom Wheels and Accessories

Custom wheels directly complement our tire products as many custom wheel consumers purchase tires when purchasing wheels. Customers can order custom wheels and accessories from us separately or in addition to their regular tire orders without the added complexity of being serviced by an additional vendor. We offer over 25 different wheel brands, along with installation and service accessories. Of these brands, five are proprietary: ICW® Racing, Pacer®, Drifz®, Cruiser Alloy® and O.E. Performance®. Other nationally available brands that complement our offering include: Gear Alloy, Motiv LuxuryAlloys, TIS (Twenty Inches Strong) and Dropstars, which also includes Monster Energy Edition wheel styles, Advanti Racing, Black Rock, BMF, Cragar, Dick Cepek, Fondmetal, Focal, Platinum, Lexani, Mickey Thompson, Mamba, Konig and Ultra Wheel. Collectively, these brands represent one of the most comprehensive wheel offerings in the industry. Sourcing of product is worldwide through a number of manufacturers.

Tire Supplies and Tools

We supply our customers with a wide array of tire supplies and tools which enable them to better service their customers as well as help them become more profitable businesses. Our tire supplies and tools are the most popular brand names from leading manufacturers. These products broaden our portfolio and leverage our customer relationships.

Customers

We serve a highly diversified customer base comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We sell to approximately 80,000 customers (approximately 73,000 in the U.S. and 7,000 in Canada). In fiscal 2013, our largest customer and our top ten customers accounted for less than 3.1% and 11.3%, respectively, of our net sales. We believe we are a top supplier to many of our customers and maintain relationships with our top 20 customers that exceed a decade on average.

Suppliers

We purchase our tires from several sources, including the four largest tire manufacturers, Bridgestone, Continental, Goodyear and Michelin, from whom we bought 58.6% of our tire products in fiscal 2013. In general, we do not have long-term supply agreements with tire manufacturers, instead relying on oral arrangements or written agreements that are renegotiated annually and can be terminated on short notice. However, we have conducted business with our major tire suppliers for an average of over 20 years, and we believe that we have good relationships with all of our major suppliers. In recent years, tire manufacturers have reduced the number of tire retailers they service directly. As a result of this change, tire retailers have increasingly relied on us, and we have become a more critical link between manufacturers and tire retailers.

There are a number of worldwide manufacturers of wheels and other automotive products. Most of the wheels we purchase are proprietary brands, namely, Pacer®, Cruiser Alloy®, Drifz®, O.E. Performance® and ICW® Racing, and are produced by a variety of manufacturers.

Distribution System

We have designed our distribution system to deliver products from a wide variety of tire manufacturers to our tire retailer customers. In recent years, we believe tire manufacturers have reduced the number of tire retailers they service directly and tire retailers have reduced the inventory they hold. At the same time, the depth and breadth of replacement SKUs has continued to expand. As a result of these changes, tire retailers have increasingly relied on us and we have become a more critical link in enabling tire retailers to more efficiently manage their business.

 

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We utilize a sophisticated inventory and delivery system to distribute our products to most customers on a same or next day basis. In our U.S. distribution centers, we use sophisticated bin locator systems, material handling equipment and routing software that link customer orders to our inventory and delivery routes. We believe this distribution system, which is integrated with our innovative and proprietary business-to-business ATDOnline® ordering and reporting system, provides us a competitive advantage by allowing us to ship customer orders quickly and efficiently while also reducing labor costs. Our logistics and routing technology uses third-party software packages and GPS systems, including dynamic routing and Roadnet 5000, to optimize route design and delivery capacity. Coupled with our fleet of approximately 1,000 delivery vehicles, this technology enables us to cost effectively make multiple daily or weekly shipments to customers as necessary.

Approximately 80% of our U.S. tire purchases are shipped directly by tire manufacturers to our U.S. distribution centers. The remainder is shipped by manufacturers to our redistribution centers located in Maiden, North Carolina and Bakersfield, California and we have begun to roll out these technologies in Findley, Ohio. These redistribution centers warehouse slower-moving and foreign-manufactured products, which are forwarded to our U.S. distribution centers as needed.

Information Systems

Through infrastructure expansions over the past several years, we have developed a scalable platform with incremental capacity available. We are currently completing the U.S. implementation of an Oracle ERP system that supports future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit. The ERP implementation, which is nearing completion in the United States, has largely replaced our legacy computer system. We continue to implement technical solutions across the United States including handheld scanning for receiving, picking and delivery of product to our customers. In addition, we are preparing to implement a similar Oracle ERP platform in Canada near the beginning of 2015. Additionally, we continue to roll out customized electronic solutions and POS system integration for our larger customers.

Inventory Control

We believe that we maintain levels of inventory that are adequate to meet our customers’ needs on a same day or next day basis. Since customers look to us to fulfill their needs on short notice, inventory levels are a primary focus of our business model. As a result, backlog of orders is not considered material to, or a significant factor in, evaluating and understanding our business. Our inventory levels are determined using sales data derived from distribution centers (on a combined basis, an individual basis or by geographic region) as well as from vendors who supply the distribution centers and retail customer stores that are served by the distribution centers. All distribution centers stock a base inventory and may expand beyond preset inventory levels as deemed appropriate by their general managers. Computer systems monitor inventory levels for all stock items and quantities are periodically re-balanced from center-to-center.

Marketing and Customer Service

Our marketing efforts are focused on driving growth through customer service, additional product placement and market expansion. We provide a range of services which enable our tire retailer customers to operate their businesses more profitably. These services include frequent and timely delivery of inventory, as well as fundamental business support services, such as administration of tire manufacturer affiliate programs and credit, training and access to consumer market data, which enable our tire retailer customers to better service their individual markets. In addition, we provide our U.S. customers with an online web portal with convenient 24/7 access to our inventory, an Internet site that allows our U.S. tire retailer customers to participate in the Internet marketing of tires to customers as well as a franchise program in the United States where we deliver advertising and marketing support to our tire retailer customers.

 

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Sales Force

We have structured our sales organization to best serve our existing customers and develop new prospective customers such as automotive dealerships. As the manufacturers have reduced their own sales staffs, our sales force has assumed the consultative role manufacturers previously provided to tire retailers. Our tire sales force consists of sales personnel at each distribution center plus a sales administrative team located at our field support center in Huntersville, North Carolina.

Sales teams, consisting of salespeople and customer service representatives, focus on tire retailers located within the service area of the distribution center and include a combination of tire-, wheel- and supplies-focused sales personnel. Some sales personnel visit targeted customers to advance our business opportunities and those of our customers, while other sales personnel remain at our facility, making client contact by telephone to advance specific products or programs. Customer service representatives manage incoming calls from customers and provide assistance with order placement, inventory inquiries and general customer support.

The Huntersville-based sales administrative team directs sales personnel at the distribution centers and manages our corporate account customers, including large national and regional retail tire and service companies. This team also manages our Huntersville-based call center, which provides call management assistance to the U.S. distribution centers during peak times of the day, thereby minimizing customer wait time, and also provides support upon any disruption in a distribution center’s local telephone service. They also serve as the primary point of contact for product and technical inquiries from TireBuyer.com® shoppers.

Automotive dealerships are focused on growing their service business in an effort to expand profitability, and we believe they view having replacement tire capabilities as an important service element. Between 1990 and 2013, U.S. automotive dealerships enjoyed a large increase in market share according to Modern Tire Dealer, moving from 1% of the U.S. replacement tire market to 7.5% of the market. Over the past few years we have steadily trained and deployed sales personnel to help build our sales at these accounts. We continue to invest and focus resources in this channel to strengthen and expand our relationships with the automobile manufacturers and further grow our share of tire sales to their dealerships.

Our aftermarket wheel sales group employs sales and technical support personnel in the field and performance specialists in each region. The responsibilities of this sales group include cultivating new prospective wheel and supplies customers as well as coordinating with tire sales professionals to cover existing accounts. The technical support professionals provide answers to customer questions regarding wheel style and fitment and supplies.

Tire Retailer Programs

Through our Tire Pros® franchise program we deliver advertising and marketing support to U.S. tire retailer customers operating as Tire Pros® franchisees. U.S. independent tire retailers participating in this franchise program enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identity. We anticipate increasing volume penetration among, and further aligning ourselves with, franchisees.

Individual manufacturers offer a variety of programs for tire retailers that sell their products, such as Bridgestone’s Affiliated Retailer Network, Continental’s Gold, Goodyear’s G3X, Kumho’s Fuel and Michelin’s Alliance. These programs, which are relatively complex, provide cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist in the administration of these programs for the manufacturers and enhance these programs through dedicated staff to assist tire retailers in managing their participation. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.

We also offer our U.S. tire retailer customers ATDServiceBAY®, which makes available a comprehensive suite of benefits including nationwide tire and service warranties (through third-party warranty

 

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providers), a nationally accepted, private-label credit card (through GE Money), access to consumer market data and training and marketing programs to provide our tire retailer customers with the support and service that are critical to succeed in today’s increasingly competitive marketplace.

Order Fulfillment

ATDOnline® provides our U.S. customers with web-based online ordering and 24/7 access to our inventory availability and pricing. Orders are processed automatically and printed in the appropriate distribution center within minutes of entry through ATDOnline®. Our customers are able to track expected deliveries and retrieve copies of their signed delivery receipts. ATDOnline® also allows customers to track account balances and participate in tire manufacturer incentive programs. As a key element of our order fulfillment strategy, ATDOnline provides an a robust solution for order-tracking, logistics management, distribution, installation and payment services. We encourage our customers to use this system because it represents a more efficient method of order entry and information access than traditional order systems. In fiscal 2013, approximately 65% of our total order volume was ordered through ATDOnline®, up from 56% in fiscal 2007. In 2014, we updated this site to provide a more modern platform with many upgrades and capabilities.

TireBuyer.com® is our Internet site that enables our U.S. independent tire retailer customers to connect with consumers and sell to them over the Internet. Consumers using TireBuyer.com® choose to buy from a select, qualified independent tire retailer participating in our TireBuyer.com® program. We then distribute the purchased products to the selected tire retailer for local installation. The tire retailer receives the full revenue of the transaction, less any applicable processing fees, upon product installation. We employ a third-party provider to handle the online billing and payment process. We do not handle customers’ credit card or other sensitive information.

We account for revenues from TireBuyer.com® in the same manner as other orders received from tire retailer customers. The TireBuyer.com® transaction structure allows us to retain our distribution focus, while strengthening our relationship with our tire retailer customers by providing them access to a sales and marketing channel previously unavailable to them. In 2012, the TireBuyer.com® site was re-launched on a newer, faster and more flexible platform, which has enhanced the overall consumer experience and resulted in increased traffic to the site.

Trademarks

The proprietary brand names under which we market our products are trademarks of our company. We value our brand names because they help develop brand identification. All of our trademarks are of perpetual duration as long as they are periodically renewed. We currently intend to maintain all of them in force. The principal proprietary brand names under which we market our products are: HERCULES® tires, IRONMAN® tires, CAPITOL® tires, NEGOTIATOR® tires, REGUL® tires, DYNATRAC® tires, CRUISERALLOY® custom wheels, DRIFZ® custom wheels, ICW® custom wheels, PACER® custom wheels and O.E. PERFORMANCE® custom wheels. Our other trademarks include: AMERICAN TIRE DISTRIBUTORS®, ATD®, TRICAN TIRE DISTRIBUTORS INC®, REGIONAL TIRE DISTRIBUTORS®, ATDONLINE®, ATDSERVICEBAY®, TIREBUYER.COM® and TIRE PROS®.

Competition

The U.S. and Canadian tire distribution industry is highly competitive and fragmented. In these markets, replacement tires are sold to consumers through several different market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We compete with a number of tire distributors on a regional basis.

Our main competitors include TBC/Treadways Wholesale (owned by Sumitomo), which has retail operations that compete with its distribution customers, and TCI Tire Centers (owned by Michelin). In the

 

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automotive dealership channel, our principal competitor is Dealer Tire, which is focused principally on administering replacement tire programs for selected automobile manufacturers’ dealerships. In the online channel, our principal competitor is Tire Rack, which is principally focused on high-performance offerings, acting as both a retailer and a wholesaler.

Seasonality

Although the effects of seasonality in the United States are not significant to our business, we have historically experienced an increase in net sales in the second and third fiscal quarters and an increase in working capital in the first fiscal quarter. In Canada, however, as a result of the winter driving season we recognize a larger percentage of sales and EBITDA during the second half of the year.

Environmental Matters

Our operations and properties are subject to federal, state, foreign and local laws and regulations relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and waste as well as relating to the investigation and clean-up of contaminated properties, including off-site disposal locations. We do not incur significant costs complying with environmental laws and regulations. However, we could be subject to material environmental costs, liabilities or claims in the future, especially in the event of the adoption of new environmental laws or changes in existing laws and regulations or in their interpretation.

Employees

As of December 28, 2013, our operations employed approximately 3,800 people, approximately 3,400 of which are located in the United States and the balance located within our Canadian distribution centers. None of our employees are represented by a union. We believe our employee relations are satisfactory.

Properties

Our principal properties are geographically situated to meet sales and operating requirements. We believe that our properties have been well maintained, are generally in good condition and are suitable for the conduct of our business. As of April 5, 2014, we operated 136 distribution centers located in 43 states in the United States and 28 distribution centers in Canada, aggregating approximately 17.0 million square feet. We expect some of the distribution centers acquired in our recent acquisitions to be closed as part of the integration process. Of these centers, two are owned by us and the remaining properties are leased. We also lease our principal executive office, located in Huntersville, North Carolina. This lease is scheduled to expire in 2022. In addition, we have some non-essential properties which we are attempting to sell or sublease.

Several of our property leases contain provisions prohibiting a change of control of the lessee or permitting the landlord to terminate the lease or increase rent upon a change of control of the lessee. Based primarily upon our belief that (i) we maintain good relations with the substantial majority of our landlords, (ii) most of our leases are at market rates and (iii) we have historically been able to secure suitable leased property at market rates when needed, we believe that these provisions will not have a material adverse effect on our business or financial position.

Legal Proceedings

We are involved from time to time in various lawsuits, including class action lawsuits arising out of the ordinary conduct of our business. Although no assurances can be given, we do not expect that any of these matters will have a material adverse effect on our business or financial condition. We are also involved in various litigation proceedings incidental to the ordinary course of our business. We believe, based on consultation with legal counsel, that none of these will have a material adverse effect on our financial condition or results of operations.

 

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MANAGEMENT

Executive Officers and Directors

Below is a list of the names, ages as of April 5, 2014, positions and a brief account of the business experience of the individuals who serve as our executive officers and directors as of the date of this prospectus.

 

Name

  

Age

  

Position

William E. Berry

   59    President, Chief Executive Officer and Director

Jason T. Yaudes

   40    Executive Vice President and Chief Financial Officer

David L. Dyckman

   49    Executive Vice President and Chief Operating Officer

J. Michael Gaither

   61    Executive Vice President, General Counsel and Secretary

William P. Trimarco

   55    Executive Vice President, Product Strategy and Supply

James M. Micali

   65    Director

Kevin Burns

   49    Director

Peter McGoohan

   32    Director

W. James Farrell

   71    Director

Gary M. Kusin

   62    Director

David Krantz

   44    Director

We anticipate that an additional director who is not affiliated with us or any of our stockholders and is independent under the rules of                      will be appointed to the board of directors prior to the effectiveness of the registration statement of which this prospectus forms a part.

William E. Berry, President and Chief Executive Officer, Director.

Mr. Berry has served on the Board of Directors since May 2010 and as our Chief Executive Officer since April 2009 and has been our President since May 2003. He was our Chief Operating Officer from May 2003 to April 2009, Executive Vice President and Chief Financial Officer from January 2002 to May 2003, and Senior Vice President of Finance for the Southeast Division from May 1998 to January 2002. Mr. Berry joined us in May 1998 as a result of our merger with Itco, where he served as Controller from 1984 to 1998, Executive Vice President in charge of business development and sales and marketing from 1996 to 1998 and prior to that was Senior Vice President of Finance. Prior to that, Mr. Berry held a variety of financial management positions for a subsidiary of the Dr. Pepper Company and also spent three years in a public accounting firm. He holds a bachelor’s degree in business administration from Virginia Tech. As our President and Chief Executive Officer, Mr. Berry brings to the Board leadership, industry, operations, risk management, financial and accounting and strategic planning experience, as well as in-depth knowledge of our business.

Jason T. Yaudes, Executive Vice President and Chief Financial Officer

Mr. Yaudes has been our Executive Vice President and Chief Financial Officer since January 2012. Mr. Yaudes joined us in September 2006 as Vice President and Controller and has been Senior Vice President and Controller since December 2011. Prior to joining us, Mr. Yaudes worked with Timco Aviation Services, Inc. holding several positions ranging from Senior Financial Reporting Manager to Chief Accounting Officer. Between 1996 and 2002, Mr. Yaudes worked with the accounting firm of Arthur Andersen as a Manager in the Audit and Business Advisory Services group. Mr. Yaudes holds a bachelor’s degree from Appalachian State University.

David L. Dyckman, Executive Vice President and Chief Operating Officer

Mr. Dyckman has been our Executive Vice President and Chief Operating Officer since January 2012. He was our Executive Vice President and Chief Financial Officer from January 2006 to January 2012. Prior to joining us, Mr. Dyckman was Executive Vice President and Chief Financial Officer of Thermadyne Holdings Corporation from January 2005 to December 2005, and Chief Financial Officer and Vice President of Corporate Development for NN, Inc. from April 1998 to December 2004. Mr. Dyckman holds a bachelor’s degree and an M.B.A. from Cornell University. Mr. Dyckman also serves on the Board of Directors for PetroChoice Holdings, Inc.

 

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J. Michael Gaither, Executive Vice President, General Counsel and Secretary

Mr. Gaither has been our General Counsel and Secretary since 1991 and has been an Executive Vice President since May 1999. He was our Treasurer from February 2001 to June 2003 and Senior Vice President from 1991 to May 1999. Prior to joining us, he was a lawyer in private practice. He holds a bachelor’s degree from Duke University and a J.D. from the University of North Carolina-Chapel Hill. Mr. Gaither also serves as a member of the Board of Advisers for the Duke University Divinity School.

William P. Trimarco, Executive Vice President, Product Strategy and Supply

Mr. Trimarco has been Executive Vice President, Product Strategy and Supply since June 2014. Mr. Trimarco joined the company in February 2014 as a result of the acquisition of Hercules, where he had been President and Chief Executive Officer since March 2009. Prior to joining Hercules, Mr. Trimarco worked at Larson-Juhl for 27 years. Larson-Juhl, a Berkshire-Hathaway company, is the global leader in manufacturing and distributing of custom picture framing products. Mr. Trimarco started as Operations Manager of Larson-Juhl in 1982 and held numerous positions including President of U.S. Operations and President-International. Mr. Trimarco holds a Bachelor of Science degree in Finance from the University of Illinois.

James M. Micali, Director

Mr. Micali has served on the Board of Directors since May 2010. Mr. Micali has been Senior Advisor to, and limited partner of, Azalea Fund III of the private equity firm Azalea Capital LLC since 2008. He served as “Of Counsel” with the law firm Ogletree Deakins LLC in Greenville, SC, from 2008 to 2011. He was Chairman and President of Michelin North America, Inc. from 1996 until his retirement in August 2008 and was a member of Michelin Group’s Executive Council from 2001 to 2008. Prior to that time, he was Executive Vice President, Legal and Finance, of Michelin North America from 1990 to 1996 and General Counsel and Secretary from 1985 to 1990. Mr. Micali is a director of SCANA Corporation and lead Independent Director of Sonoco Products Company. Mr. Micali holds a bachelor’s degree from Lake Forest College and a J.D. from Boston College Law School. Through his executive positions, including as Chairman and President of Michelin North America and his work as a lawyer, Mr. Micali brings to the Board leadership, industry, legal, risk management, financial and strategic planning experience. Mr. Micali also possesses board experience, having previously served on the board of Lafarge North America from 2004 to 2007 and Ritchie Bros., Inc. from 2008 to 2012.

Kevin Burns, Director

Mr. Burns has served on the Board of Directors since May 2010. Mr. Burns joined TPG in 2003. Since March 2008, he has led TPG’s Manufacturing and Industrial Sector and in 2013 he became leader of TPG’s Global Operations. Prior to joining TPG, from 1998 to 2003 he served as Executive Vice President and Chief Materials Officer of Solectron Corporation. Prior to joining Solectron, Mr. Burns served as Vice President of Worldwide Operations of the Power Generation Business Unit of Westinghouse Corporation, and President of Westinghouse Security Systems. Prior to Westinghouse, Mr. Burns was a consultant at McKinsey & Co., Inc. and spent three years at the General Electric Corporation in various operating roles. Mr. Burns holds a B.S. in Mechanical and Metallurgical Engineering (cum laude) from the University of Connecticut and an M.B.A from the Wharton School of Business. He currently serves as Chairman of the Board of Isola Group, and is on the Boards of Armstrong World Industries, Nexeo Solutions, FleetPride, Inc. and Chobani. Mr. Burns brings to the Board leadership, operations, financial and strategic planning experience. Mr. Burns also possesses board experience.

Peter McGoohan, Director

Mr. McGoohan has served on the Board of Directors since January 2013. Mr. McGoohan is a TPG Vice President. He is focused on the firm’s industrials/manufacturing, energy and financial services investing efforts. Prior to joining TPG Capital in 2007, Mr. McGoohan was an investment banker at Goldman Sachs.

 

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Mr. McGoohan received his M.B.A. from the Stanford Graduate School of Business and is a summa cum laude graduate of Vanderbilt University. Mr. McGoohan brings to the Board risk management, financial and strategic planning experience.

W. James Farrell, Director

Mr. Farrell has served on the Board of Directors since October 2010. Mr. Farrell also serves as a Senior Advisor to TPG. Mr. Farrell retired as Chairman and CEO of Illinois Tool Works Inc. (ITW), based in Glenview, Illinois on May 5, 2006. ITW is a multi-national manufacturer of highly engineered fasteners, components, assemblies and systems. ITW is comprised of approximately 875 decentralized operations in 54 countries with more than 65,000 employees and 2008 Revenues of approximately $16 billion. Mr. Farrell currently serves on the board of directors of Abbott Laboratories. Mr. Farrell holds a bachelor’s degree in Electrical Engineering from the University of Detroit. Mr. Farrell brings to the Board leadership, risk management, operations, financial and strategic planning experience. Mr. Farrell also possesses board experience.

Gary M. Kusin, Director

Mr. Kusin has served on the Board of Directors since October 2010. Mr. Kusin has been a Senior Advisor to TPG since 2006. Mr. Kusin previously served as a President and Chief Executive Officer of FedEx Kinko’s Office and Print Services from 2001 to 2006. Mr. Kusin was responsible for the strategic growth and transformation of Kinko’s and oversaw the ultimate sale to FedEx. Mr. Kusin then assisted FedEx in the transition of Kinko’s into FedEx Kinko’s. During that two year transition Mr. Kusin served on the nine person Strategic Management Committee for FedEx Corporation worldwide. Prior to joining Kinko’s in 2001, Mr. Kusin was chief executive officer of HQ Global Workplaces, the world leader in serviced offices, now a part of Regus. In 1995, Mr. Kusin co-founded Laura Mercier Cosmetics, a makeup line now sold through leading specialty and department stores worldwide, which he sold to Neiman-Marcus in 1998. Prior to co-founding Laura Mercier Cosmetics, starting in 1983, Mr. Kusin was president and co-founder of Babbage’s Inc., the leading consumer software specialty store chain in the United States, which now operates under the name GameStop. Earlier in his career, he was vice president and general merchandise manager for the Sanger-Harris division of Federated Department Stores, today operating as Macy’s. Mr. Kusin currently serves on the board of directors of Petco, Sabre Corporation, Savers and Fleetpride. Mr. Kusin served as a Director of Electronic Arts Inc. from 1995 to 2011 and as a Director of RadioShack Corporation from 2004 to 2005. Mr. Kusin holds a bachelor’s degree from the University of Texas and an M.B.A. from the Harvard Business School. Mr. Kusin brings to the Board leadership, risk management, operations, financial and strategic planning experience. Mr. Kusin also possesses company board experience.

David Krantz, Director

Mr. Krantz has served on the Board of Directors since March 2011. He is CEO of YP Holdings LLC. Prior to YP Holdings LLC, Mr. Krantz was President and CEO of AT&T Interactive. In addition to AT&T Interactive, Mr. Krantz has held several other senior leadership positions with AT&T. Prior to joining AT&T, Mr. Krantz held senior leadership positions at GoDigital Networks, a telecommunications equipment company, AOL/Netscape, Pacific Bell, and Sprint. Mr. Krantz holds a bachelor’s degree in Finance and Management from the University of Virginia’s McIntire School of Commerce and earned an M.B.A. from Harvard University. Mr. Krantz brings to the Board leadership, industry, financial and strategic planning experience.

Board Composition and Director Independence

Our business and affairs are managed under the direction of the board of directors. Our board currently consists of seven directors and TPG has the right to nominate, and has nominated, all of the directors that serve on the board. In connection with this offering, we expect to amend the provisions of our stockholders’ agreement

 

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with respect to these nomination rights. We anticipate that an additional director who is not affiliated with us or any of our stockholders and is independent under the rules of                      will be appointed to the board of directors prior to the effectiveness of the registration statement of which this prospectus forms a part.

Following the completion of this offering, we expect to be a “controlled company” under the rules of             because more than 50% of our outstanding voting power will be held by TPG. See “Principal and Selling Stockholders.” We intend to rely upon the “controlled company” exception relating to the board of directors and committee independence requirements under the rules of             . Pursuant to this exception, we will be exempt from the rules that would otherwise require that our board of directors consist of a majority of independent directors and that our leadership development and compensation committee and nominating and governance committee be composed entirely of independent directors. The “controlled company” exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Exchange Act and the rules of             , which require that our audit committee have at least one independent director upon consummation of this offering, consist of a majority of independent directors within 90 days following the effective date of the registration statement of which this prospectus forms a part and exclusively of independent directors within one year following the effective date of the registration statement of which this prospectus forms a part.

Our board of directors has determined that             is an independent director under the rules of             . In making this determination, the board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances that the board of directors deemed relevant in determining their independence, including beneficial ownership of our common stock.

Board Committees

Upon the completion of this offering, our board of directors will have three standing committees: the audit committee; the compensation committee; and the nominating and corporate governance committee. Each of the committees operates under its own written charter adopted by the board of directors, each of which will be available on our website upon closing of this offering.

Audit Committee

Following this offering, our audit committee will be composed of             , with             serving as chairman of the committee. We anticipate that, prior to the completion of this offering, our audit committee will determine that             meets the definition of “independent director” under the rules of             and under Rule 10A-3 under the Exchange Act. Within 90 days following the effective date of the registration statement of which this prospectus forms a part, we anticipate that the audit committee will consist of a majority of independent directors, and within one year following the effective date of the registration statement of which this prospectus forms a part, the audit committee will consist exclusively of independent directors. None of our audit committee members simultaneously serves on the audit committees of more than three public companies, including ours. Our board of directors has determined that             is an “audit committee financial expert” within the meaning of the SEC’s regulations and applicable listing standards of             . The audit committee’s responsibilities upon completion of this offering will include:

 

    appointing, approving the compensation of, and assessing the qualifications, performance and independence of our independent registered public accounting firm;

 

    pre-approving audit and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

    reviewing the internal audit plan with the independent registered public accounting firm and members of management responsible for preparing our financial statements;

 

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    reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us;

 

    reviewing the adequacy of our internal control over financial reporting;

 

    reviewing all related person transactions for potential conflict of interest situations and approving all such transactions;

 

    establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns;

 

    recommending, based upon the audit committee’s review and discussions with management and the independent registered public accounting firm, the inclusion of our audited financial statements in our Annual Report on Form 10-K;

 

    reviewing and assessing the adequacy of the committee charter and submitting any changes to the board of directors for approval;

 

    monitoring our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters;

 

    preparing the audit committee report required by the rules of the SEC to be included in our annual proxy statement; and

 

    reviewing and discussing with management and our independent registered public accounting firm our earnings releases.

Compensation Committee

Following this offering, our compensation committee will be composed of             , with             serving as chairman of the committee. The leadership development and compensation committee’s responsibilities upon completion of this offering will include:

 

    annually reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and our other executive officers;

 

    evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining and approving the compensation of our chief executive officer;

 

    reviewing and approving the compensation of our other executive officers;

 

    appointing, compensating and overseeing the work of any compensation consultant, legal counsel or other advisor retained by the leadership development and compensation committee;

 

    conducting the independence assessment outlined in the rules of             with respect to any compensation consultant, legal counsel or other advisor retained by the leadership development and compensation committee;

 

    reviewing and assessing the adequacy of the committee charter and submitting any changes to the board of directors for approval;

 

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    reviewing and establishing our overall management compensation philosophy and policy;

 

    overseeing and administering our equity compensation and similar plans;

 

    reviewing and approving our policies and procedures for the grant of equity-based awards;

 

    reviewing and making recommendations to the board of directors with respect to director compensation; and

 

    reviewing and discussing with management the compensation discussion and analysis to be included in our annual proxy statement or Annual Report on Form 10-K.

Nominating and Corporate Governance Committee

Following this offering, our nominating and corporate governance committee will be composed of                     , with                      serving as chairman of the committee. The nominating and corporate governance committee’s responsibilities upon completion of this offering will include:

 

    developing and recommending to the board of directors criteria for board and committee membership;

 

    establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;

 

    identifying individuals qualified to become members of the board of directors;

 

    recommending to the board of directors the persons to be nominated for election as directors and to each of the board’s committees;

 

    developing and recommending to the board of directors a set of corporate governance principles;

 

    articulating to each director what is expected, including reference to the corporate governance principles and directors’ duties and responsibilities;

 

    reviewing and recommending to the board of directors practices and policies with respect to directors;

 

    reviewing and recommending to the board of directors the functions, duties and compositions of the committees of the board of directors;

 

    reviewing and assessing the adequacy of the committee charter and submitting any changes to the board of directors for approval;

 

    provide for new director orientation and continuing education for existing directors on a periodic basis;

 

    performing an evaluation of the performance of the committee; and

 

    overseeing the evaluation of the board of directors and management.

 

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Director Experience and Qualifications

The Board of Directors believes that each director should possess a combination of skills, professional experience, and diversity of viewpoints necessary to oversee our business. In addition, it believes that there are certain attributes that every director should possess, as reflected in its membership criteria. Accordingly, the Board of Directors considers the qualifications of directors and director candidates individually and in the broader context of its overall composition and our current and future needs.

Among other things, the Board of Directors has determined that it is important to have individuals with the following skills and experiences:

 

    leadership experience, as directors with experience in significant leadership positions possess strong abilities to motivate and manage others and to identify and develop leadership qualities in others;

 

    knowledge of our industry, particularly distribution strategy and vendor and customer relations, which is relevant to understanding our business and strategy;

 

    operations experience, as it gives directors a practical understanding of developing, implementing and assessing our business strategy and operating plan;

 

    risk management experience, which is relevant to oversight of the risks facing our business;

 

    financial/accounting experience, particularly knowledge of finance and financial reporting processes, which is relevant to understanding and evaluating our capital structure, financial statements and reporting requirements; and

 

    strategic planning experience, which is relevant to the Board of Director’s review of our strategies and monitoring their implementation and results.

Board Oversight of Risk Management

While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit committee oversees management of enterprise risks as well as financial risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Our nominating and corporate governance committee oversees risks associated with corporate governance, business conduct and ethics, and is responsible for overseeing the review and approval of related party transactions. Pursuant to the board of directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by the board of directors and its committees.

Code of Conduct

We have adopted a code of conduct that applies to all of our employees, including our principal executive officer and principal financial officer. In connection with this offering, we will make our code of conduct available on our website. We intend to disclose any amendments to our codes, or any waivers of their requirements, on our website.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This discussion and analysis of our compensation program for our named executive officers should be read in conjunction with the accompanying tables below and text disclosing the compensation awarded to, earned by or paid to our named executive officers.

This section provides an analysis of our executive compensation program, the material compensation decisions made under this program during fiscal 2013, and the material factors considered in making those decisions during fiscal 2013. This section is followed by a series of tables containing specific information about the compensation earned in fiscal 2013 by the following individuals, referred to as our named executive officers:

William E. Berry, President and Chief Executive Officer;

Jason T. Yaudes, Executive Vice President and Chief Financial Officer;

J. Michael Gaither, Executive Vice President and General Counsel;

David L. Dyckman, Executive Vice President and Chief Operating Officer; and

Phillip E. Marrett, Executive Vice President, Product Planning and Positioning(1).

 

  (1) Mr. Marrett will cease to be our Executive Vice President, Product Planning and Positioning as of July 31, 2014 and will serve as a consultant to us through the end of 2014.

Decision-making Responsibility

Decisions regarding the compensation of our named executive officers are made by our board of directors, after taking into account recommendations from management regarding compensation opportunities for the fiscal year, as further described below.

Compensation Philosophy and Objectives

The overall goal of our board of directors in compensating our executive officers is to attract, retain and motivate key executives of superior ability who are critical to our future success. Our board of directors believes that both the short-term and long-term incentive compensation paid to our named executive officers should be directly aligned with our performance, and that compensation should be structured to ensure that a significant portion of our named executive officers’ compensation opportunities is directly related to the achievement of financial and operational goals and other factors that impact stockholder value.

The compensation decisions of our board of directors with respect to our named executive officers’ salaries, annual incentives and long-term incentive compensation awards are influenced by the executive’s level of responsibility and function, our overall performance and profitability and our board’s assessment of the competitive marketplace (as determined based on our board members’ business experience). Our board of directors also takes into account each named executive officer’s tenure and individual performance, our overall annual budget, and changes in the cost of living.

Our executive compensation package consists of base salary, target annual bonus, and long-term incentives, as well as additional benefits and perquisites. We have no set policy for allocating pay between the various elements of compensation and instead evaluate our named executive officers’ compensation opportunities on a case-by-case basis after taking into account the factors described above. To achieve competitive positioning for the annual cash compensation component of our executive compensation program,

 

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our board of directors sets base salaries at a level it believes to be competitive but places more emphasis on annual bonus opportunities because they are more directly linked to our performance. Thus, our compensation is focused less on fixed pay and more on performance-based opportunities, while still intending to remain competitive overall. Targeted annual cash bonus opportunities are based on, among other things, our budgeted financial goals and other factors, which may fluctuate from year to year.

Our board of directors also believes that the best way to directly align the interests of our executives with the interests of our stockholders is to provide opportunities for our executives to maintain an appropriate level of equity ownership throughout their tenure with us. Our compensation program achieves this objective through our use of equity-based long-term incentive awards.

Our executive compensation program is continually evaluated for effectiveness in achieving the stated objectives of our board of directors as well as to reflect the economic environment within which we operate.

Overview of Executive Compensation Components

In fiscal 2013, our executive compensation program consisted of several compensation elements, as noted in the table below and further described below.

 

Pay Element

 

What the Pay Element Rewards

 

Purpose of the Pay Element

Base Salary

  Core competence of the executive relative to skills, experience and contributions to us.   Provides fixed compensation based on competitive market practice.

Annual Cash Incentive

  Contributions toward our achievement of specified financial targets and other key performance criteria.   Provides focus on meeting annual goals that lead to our short- and long-term success.

Stock Options

 

Appreciation in the value of our shares after the stock options were granted.

 

Achievement of specified financial targets.

 

Retention and continued contributions to our success.

 

Provides focus on our performance as follows:

 

•   aligns the interests of our executives with the interests of our stockholders;

 

•   rewards the achievement of performance goals (for performance-based options); and

 

•   encourages retention of our named executive officers with vesting schedules that apply to our time- and performance-based options.

Retirement Benefits

  Participation in our 401(k) plan and our nonqualified deferred compensation plan incentivizes employee retirement savings and continued service to the Company.   Provides attractive tax-deferred retirement savings vehicles for eligible executives and promotes retention of our executives over a longer-term time horizon.

 

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Pay Element

 

What the Pay Element Rewards

 

Purpose of the Pay Element

Welfare Benefits

  Executives participate in employee benefit plans generally available to our employees, including medical, health, life insurance and disability plans.   These benefits are part of our broad-based total compensation program.
  Certain named executive officers are also provided with supplemental health benefits, which reward executives for their service in leadership roles.   We believe we benefit from these perquisites by encouraging our executive officers to protect their health.

Additional Benefits and Perquisites

  Certain named executive officers are reimbursed for club memberships and all our named executive officers are provided with a vehicle allowance. These benefits reward executives for their service in leadership roles.   Consistent with offering our executives a competitive compensation program.

Termination Benefits

  Our named executive officers are parties to employment agreements that provide them with severance benefits if the named executive officer’s employment is terminated without cause or the officer leaves for good reason, each as defined in the agreements. These arrangements reward executives for their continued service to the Company and subject them to restrictive covenants that protect the Company’s interests.   Termination benefits are designed to retain executives and provide security for our named executive officers so their focus remains on driving the Company’s performance.

The use of these programs enables us to reinforce our pay for performance philosophy, as well as strengthen our ability to attract and retain highly qualified executives. We believe that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term stockholder value, and encourages executive recruitment and retention.

Elements of Compensation and Determination of Pay Levels

Base Salary

Historically, base salary levels have reflected a combination of factors including the executive’s experience and tenure, our overall annual budget, the executive’s individual performance, and changes in responsibility. Our board of directors does not target base salary at any particular percent of total compensation. Our board of directors reviews salary levels annually using the factors described above and takes into account salary recommendations made by our Chief Executive Officer and other senior members of management. In fiscal 2013, there were no base pay increases granted to our named executive officers that took effect in fiscal 2013. In December 2013, our board of directors approved an increase in Mr. Yaudes’ base salary from $350,000 to $400,000 that took effect on January 1, 2014 in recognition of Mr. Yaudes’ increased responsibilities and success in his role as our Chief Financial Officer.

 

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Annual Incentive Plan

Our annual incentive plan provides our named executive officers with an opportunity to earn annual cash bonuses based on our achievement of certain pre-established performance goals.

As in setting base salaries, our board of directors, after taking into account recommendations from the Chief Executive Officer and other senior members of management, considers a combination of the factors described above in establishing the annual target bonus opportunities for our named executive officers, which vary from year to year. Budgeted EBITDA (as defined below) is the primary factor considered, as target bonus opportunities are adjusted annually when our board of directors sets our annual budget, which includes our Budgeted EBITDA goals, for the year. Budgeted EBITDA is a non-GAAP financial measure that refers to our net income or loss from our consolidated statements of comprehensive income before interest income and expense, income taxes, depreciation and amortization, which is then further adjusted to exclude certain non-cash, non-recurring, cost reduction and other adjustment items. Target bonus opportunities are defined as a percentage of the overall bonus pool, which is set as described below. We do not target annual bonus opportunities at any particular percentage of base salary or total compensation.

In December of each year, our board of directors sets a bonus pool for the following year for all executives covered by our annual incentive plan, the size of which is equal to a designated percentage of Budgeted EBITDA actually achieved by us. Budgeted EBITDA was selected as the performance metric for our annual incentive plan because we believe it is an important measure of our financial performance and our ability to create free cash flow. No bonus pool is funded if actual performance falls below 90% of the Budgeted EBITDA goal. The pool grows pro-rata for actual performance between 90% and 100% of the Budgeted EBITDA goal. Above 100% of the Budgeted EBITDA goal, the pool grows by approximately 20% of each incremental dollar. The bonus pool is divided among participants in our annual incentive plan based on each participant’s designated percentage of the bonus pool, as described above.

We set the Budgeted EBITDA goal for fiscal 2013 bonus opportunities at a level that was intended to reflect improvement in performance over the prior fiscal year, specific market conditions and better-than-average growth within our competitive industry. For fiscal 2013, the targeted bonus pool was $10.1 million, subject to adjustment, based upon a Budgeted EBITDA target of $214.8 million. The percentage of the targeted bonus pool designa