News Column

AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

May 16, 2014

Unless the context otherwise requires, the terms "American Tire Distributors," "ATD," "the Company," "we," "us," "our" and similar terms in this report refer to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries, the term "Holdings" refers only to American Tire Distributors Holdings, Inc., a Delaware Corporation, and the term "ATDI" refers only to American Tire Distributors, Inc., a Delaware corporation. The terms "TPG" and "Sponsor" relate to TPG Capital, L.P. and/or certain funds affiliated with TPG Capital, L.P. The following discussion and analysis of our consolidated results of operations, financial condition and liquidity should be read in conjunction with our consolidated financial statements and the related notes included in Item 1 of this report. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecasts and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See "Cautionary Statements on Forward-Looking Information."



Company Overview

We are the leading replacement tire distributor in North America. We provide a full range of products and 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 164 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 80,000 customers (approximately 73,000 in the Unites States. and 7,000 in Canada). The critical range of services that we make available includes frequent and timely delivery of inventory as well as business support services such as credit, training, access to consumer market data and the administration of tire manufacturer affiliate programs. In addition, our United States customers have access to a leading online ordering and reporting system as well as a website that enables our tire retailer customers to participate in the Internet marketing of tires to consumers. We estimate that as of our year-ending December 28, 2013, our share of the replacement passenger and light truck tire market in the U.S. is approximately 10%, up from approximately 1% in 1996. Our estimated share of the replacement passenger and light truck tire market in Canada as of our year-ending December 28, 2013, is approximately 12%. During fiscal 2013, our largest customer and top ten customers accounted for less than 3.1% and 11.3%, respectively, of our net sales. We believe we distribute the broadest product offering in our industry, supplying our customers with the top ten leading passenger and light truck tire brands. We carry the flagship brands from each of the four largest tire manufacturers - Bridgestone, Continental, Goodyear and Michelin - as well as the 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 & Rubber Company we also own and market our proprietary Hercules brand. In addition, we sell custom wheels and accessories and related tire supplies and tools. Our revenues are primarily generated from sales of passenger car and light truck tires, which represented 83.2% of our net sales for the quarter ended April 5, 2014. The remainder of our net sales is derived from other tire sales (14.6%), custom wheels (1.8%) and tire supplies, tools and other products (0.4%). We believe our large, diverse product offering allows us to better penetrate the replacement tire market across a broad range of price points.



Industry Overview

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are susceptible to changes in consumer confidence and the economic conditions that impact tire customers. As a result, our customers may opt to defer replacement tire purchases or purchase less costly brand tires during challenging economic periods where macro-economic factors such as unemployment, persistently 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 2.7% per year. The recession led to negative growth during 2008 and 2009. The economic environment showed signs of stabilization during 2010 and 2011, although slow economic growth, persistently high fuel cost and a decrease in miles driven continued to impact the market. Despite an increase in miles driven during 2012, the U.S. and Canadian replacement tire markets continued their negative growth trend as replacement tire unit shipments decreased 1.8% and 5.5%, respectively, from 2011. During 2013, replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada 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 market favorably. Substantially all of the industry unit growth in 2013 was driven by an increased level of shipments of lower priced import product, predominately from China, as most domestic tire manufacturers reported continued replacement tire unit shipment reductions in 2013 as compared to 2012. Our market outlook for 2014 reflects nominal market improvement, particularly in the value tire segment of the replacement market for which we believe we are well positioned to gain market share and we expect to continue to follow our historic trend and outperform market expectations. 31



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Going forward, we believe that 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. population continues to grow; • increases in the number of replacement tire SKUs; • growth of the high performance tire segment; and • shortening tire replacement cycles due to changes in product mix that increasingly favor high performance tires, which have shorter average lives. We have a solid infrastructure, an extensive and efficient distribution network and a broad product offering. Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand in existing markets as well as in new geographic areas. In addition, we are investing in technology and new sales channels which we expect will help fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above market results in both contracting and expanding market demand cycles. Recent Developments 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. From the second half of 2010 through December 2013, we opened new distribution centers in 22 locations throughout the contiguous United States. During the first three months of 2014, we continued to execute our plan of expansion by opening a new distribution center in Columbus, OH. On March 28, 2014, we completed the acquisition of Terry's Tire Town Holdings, Inc., an Ohio corporation ("Terry's Tire" and such acquisition, the "Terry's Tire Acquisition"). 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 owned and operated 10 distribution centers across the Northeast, New England and Ohio. The acquisition of Terry's Tire will enhance our market position in these areas and aligns very well with new distribution centers that we opened over the past two years in these regions of the United States. The Terry's Tire acquisition closed for an aggregate purchase price of approximately $378.1 million (the "Terry's Tire Purchase Price"), 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 achieved prior to closing. The Terry's Tire Purchase Price was funded by a combination of borrowings under a new senior secured term loan facility, as more fully described under Liquidity and Capital Resources, and borrowings of approximately $72.5 million under Holdings' existing U.S. ABL Facility. The Terry's Tire 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 Tire Holdings LLC ("Hercules Holdings") pursuant to an Agreement and Plan of Merger, dated January 24, 2014 (the "Merger Agreement"). Hercules Holdings owns all of the capital stock of The Hercules Tire & Rubber Company ("Hercules"). Hercules is engaged in the business of purchasing, marketing, distributing, and selling after-market 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 owned and operated 15 distribution centers in the United States., 6 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. 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, providing 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 today has 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. The Hercules acquisition closed for an aggregate purchase price of approximately $319.3 million (the "Hercules Closing Purchase Price"), 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 Hercules Closing Purchase Price also includes an estimate for initial working capital adjustments. The Merger Agreement provides for the payment of up to $6.5 million in additional consideration contingent 32



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upon the occurrence of certain post-closing events (to the extent payable, the "Hercules Additional Purchase Price" and, collectively with the Hercules Closing Purchase Price, the "Hercules Purchase Price"). The cash consideration paid for the Hercules acquisition was funded by a combination of the issuance of additional Senior Subordinated Notes, as more fully described under Liquidity and Capital Resources, an equity contribution of $50.0 million from Holdings' indirect parent and borrowings under Holdings' credit agreement, as more fully described under Liquidity and Capital Resources The Hercules Closing Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. On January 17, 2014, TriCan Tire Distributors, Inc. ("TriCan") entered into 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 further strengthened TriCan's presence in the Southern Ontario region of Canada. 33



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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 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 our year-end and quarter-end reporting dates are different from our recently acquired subsidiaries Hercules and Terry's Tire. Both Hercules and Terry's Tire have calendar year-end and quarter-end reporting dates. There were no significant changes to the business subsequent to their fiscal period ends that would have a material impact on the condensed consolidated balance sheet or condensed consolidated statement of comprehensive income (loss) as of and for the quarter ended April 5, 2014.



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: Period Over Period Over Percentage of Net Sales Quarter Quarter Period Period For the Respective Ended Ended Change % Change Period Ended April 5, March 30, Favorable Favorable April 5, March 30, In thousands 2014 2013 (unfavorable) (unfavorable) 2014 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 %) Provision (benefit) for income taxes (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"), Tire Distributors, Inc. ("TDI") and Regional Tire Distributors Inc. ("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 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.



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. 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. 34



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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. Excluding 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 Tire Distributors ("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 ABL Facility, FILO Facility Additional Subordinated Notes and Term Loan, all as defined under Liquidity and Capital Resources, which were driven by our acquisitions of Hercules and Terry's Tire. 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 from the statutory U.S. federal rate and the impact of several non-deductable 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. 35



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Table of Contents Liquidity and Capital Resources Overview



The following table contains several key measures that we think are relevant to our financial condition and liquidity:

April 5, December 28, In thousands 2014 2013 Cash and cash equivalents $ 37,824$ 35,760 Working capital 796,610 538,444 Total debt 1,710,106 967,000 Total stockholder's equity 704,268 692,974 Debt-to-capital ratio 70.8 % 58.3 %



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 • Funding of working capital • Funding of capital expenditures Our primary sources of liquidity include cash flows from operations and 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 United States, 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 United Stated during the next twelve month period and for 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 70.8%. Cash interest payments for the quarters ended April 5, 2014 and March 30, 2013 amounted to $10.5 million and $3.7 million, respectively. 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 a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facilities may not be available when we need them. 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, many of which are described under "Item 1A - Risk Factors" in our most recently filed Annual Report on Form 10-K. 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 ABL Facility, the incurrence of other 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. 36



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Cash Flows

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

Quarter Quarter Ended Ended April 5, March 30, In thousands 2014 2013



Cash provided by (used in) operating activities $ (72,625 ) $

2,132

Cash provided by (used in) investing activities (689,243 ) (16,697 )

Cash provided by (used in) financing activities 765,613 4,210 Effect of exchange rate changes on cash (1,681 ) (513 )



Net increase (decrease) in cash and cash equivalents 2,064 (10,868 )

Cash and cash equivalents - beginning of period 35,760



25,951

Cash and cash equivalents - end of period $ 37,824 $



15,083

Cash payments for interest $ 10,464 $



3,733

Cash payments (receipts) for taxes, net $ 1,586$ 1,239 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 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.



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.



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 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.



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. 37



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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.



Indebtedness

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

Interest Rate Outstanding In thousands Matures (1) 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 2018 5.8 299,252 Senior Secured Notes 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 rates at April 5, 2014.

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 "Canadian ABL Facility" and, collectively with the U.S. ABL Facility, the "ABL Facility"). In addition, the Credit Agreement provides (i) the U.S. borrowers under the agreement with a first-in last-out facility (the "U.S. FILO Facility") in the aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and (ii) 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 is available to ATDI, Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that the Company designates in the future in accordance with the terms of the agreement. The Canadian ABL Facility is available to TriCan and any other Canadian subsidiaries that the Company designates 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 $175.0 million (up to $25.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks 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 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 January 31, 2017.



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 38



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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. 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 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, as 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% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable. 39



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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 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 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 FILO Facility contain customary covenants, including covenants that restricts 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 agreement. 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 repayments 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 agreement.



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 if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount if the redemption date occurs between June 1, 2016 and May 31, 2017. 40



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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, 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 or repurchase or redeem ATDI's capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI's subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur 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. Senior Subordinated Notes On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the "Initial 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. In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of an additional $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the "Additional Subordinated Notes" and, collectively with the Initial Subordinated Notes, the "Senior Subordinated Notes"). The Additional Subordinated Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $221.1 million. The Additional Subordinated Notes will accrete based on an effective interest rate of 12% to an aggregate accreted value of $225.0 million, the full principal amount at maturity. The Additional Subordinated Notes have identical terms to the Initial Subordinated Notes except the Additional Subordinated Notes accrues interest from January 31, 2014. The Additional Subordinated Notes and the Initial Subordinated Notes are treated as a single class of securities for all purposes under the indenture. The Senior Subordinated Notes will mature on June 1, 2018. 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 if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016. 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 or repurchase or redeem ATDI's capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI's subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur 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.



Adjusted EBITDA

We report our financial results in accordance with Generally Accepted Accounting Principles in the United States ("GAAP"). In addition, we present Adjusted EBITDA as a supplemental financial measure in order to provide a more complete understanding of the factors and trends affecting our business. Adjusted EBITDA is a non-GAAP financial measure that should be considered supplemental to, not a substitute for or superior to, the financial measure calculated in accordance with GAAP. It has limitations in that it does not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. In addition, this measure may not be comparable to non-GAAP financial measures reported by other companies. We believe that Adjusted EBITDA provides important supplemental information to both management and investors regarding financial and business trends used in assessing our financial condition. As a result, one should not consider Adjusted EBITDA in isolation or as a substitute for our results reported under GAAP. We compensate for these limitations by analyzing results on a GAAP basis as well as on a non-GAAP basis, predominantly disclosing GAAP results and providing reconciliations from GAAP results to non-GAAP results. 41



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The following table shows a reconciliation of Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss) in order to show the differences in these measures of operating performance:

Quarter Quarter Ended Ended April 5, March 30, In thousands 2014 2013 Net income (loss) $ (34,044 )$ (16,291 ) Depreciation and amortization 29,323 25,031 Interest expense 24,399 17,240 Income tax provision (benefit) (16,606 ) (7,627 ) Management fee 608 991 Stock-based compensation 567 668 Transaction fees 4,686 1,023 Non-cash inventory step up 19,183 2,194 Other 894 682 Adjusted EBITDA $ 29,010$ 23,911



Off-Balance Sheet Arrangements

We have no significant off balance sheet arrangements, other than liabilities related to leases of Winston Tire Company ("Winston Tire") that we guaranteed when we sold Winston Tire 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 Polices 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 judgments 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. Management believes there have been no significant changes during the quarter ended April 5, 2014, to the items that we disclosed as our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. Recent Accounting Pronouncements 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 Exists." 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 adopted this guidance on December 29, 2013 (the first day of our 2014 fiscal year) and the adoption did not have a material impact 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 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 42



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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. 43



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