UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form________________________
FORM 10-K
(Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 30, 2017January 2, 2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________.
Commission file number 001-16797
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ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 54-2049910 |
| (State or other jurisdiction of incorporation or organization) | 54-2049910
(I.R.S. Employer Identification No.) |
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| 2635 East Millbrook Road, Raleigh, North Carolina 27604 (Address of principal executive offices) (Zip Code) 5008 Airport Road Roanoke, VA
(Address of Principal Executive Offices)
| 24012
(Zip Code)
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(540) 362-4911
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act
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Title of each class Common Stock ($0.0001 par value)
| | Trading symbol | | Name of each exchange on which registered |
| Common Stock, $0.0001 par value | | AAP | | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
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Large accelerated filer x
| Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
| Smaller reporting company o
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| Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Yes o No x
As of the last business day of the registrant’s most recently completed second fiscal quarter, July 14, 2017,10, 2020, the aggregate market value of common stock held by non-affiliates of the registrant was $7,204,158,912, was $9,274,738,343, based on the last sales price on July 14, 2017,10, 2020, as reported by the New York Stock Exchange.
As of February 16, 2018,17, 2021, the number of shares of the registrant’s common stock outstanding was 73,978,120 65,524,420 shares.
Documents Incorporated by Reference:
Portions of the registrant’s definitive proxy statement for its 20182021 Annual Meeting of Stockholders, to be held on May 16, 2018,26, 2021, are incorporated by reference into Part III of this Form 10-K.
FORWARD-LOOKING STATEMENTS
ThisCertain statements in this Annual Report on Form 10-K containsare “forward-looking statements” within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1933 (the “Securities Act”) and Section 21E1995. All statements, other than statements of the Securities Exchange Act of 1934 (the “Exchange Act”). The Securities and Exchange Commission (“SEC”) encourages companies to disclosehistorical facts, may be forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions.statements. Forward-looking statements are usually identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “projection,” “should,” “strategy,” “will,” or similar expressions. These statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not place undue reliance on those statements. We intendRefer to “Item 1A. Risk Factors” included in this report and other filings made by us with the Securities and Exchange Commission (“SEC”) for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Actadditional description of 1995.risks that could materially affect our actual results.
PART I
Item 1.Business.
Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its subsidiaries and their respective operations.operations on a consolidated basis. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31st of each year. Our 2017, 2016fiscal year ended January 2, 2021 (“2020”), included 53 weeks of operation. Fiscal year ended December 28, 2019 (“2019”) and 2015 fiscal yearsyear ended December 29, 2018 (“2018”) included 52 weeks of operations.
Overview
We are a leading automotive aftermarket parts provider in North America, serving both professional installers (“Professional”), and “do-it-yourself” (“DIY”), customers, as well as independently owned operators. Our stores and branches offer a broad selection of brand name, original equipment manufacturer (“OEM”) and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. As of December 30, 2017, the end of our 2017 fiscal year (“2017”),January 2, 2021, we operated 5,0544,806 total stores and 129170 branches primarily under the trade names “Advance Auto Parts”,Parts,” “Autopart International”,International,” “Carquest” and “Worldpac”.“Worldpac.”
We were founded in 1929 as Advance Stores Company, Incorporated and operated as a retailer of general merchandise until the 1980s. During the 1980s, we began targeting the sale of automotive parts and accessories to DIY customers. We beganinitiated our Professional delivery program in 1996 and have steadily increased our sales to Professional customers since 2000. We have grown significantly as a result of comparable store sales growth, new store openings and strategic acquisitions. Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc. In 2014, we acquired General Parts International, Inc. (“GPI”), a privately held company that was a leading distributor and supplier of original equipment and aftermarket automotive replacement products for Professional markets operating under the Carquest and Worldpac trade names.
Segment and Related Information
During 2017 and 2016 we aggregated our operating segments into a single reportable segment comprised of our store and branch operations. A discussion of our segment structure is available in Note 2, Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included herein.
Stores and Branches
Through our integrated operating approach, we serve our Professional and DIY customers through a variety of channels ranging from traditional “brick and mortar” store locations to self-service e-commerce sites. We believe we are better able to meet our customers’ needs by operating under several storetrade names, which are as follows:
Advance Auto Parts - Consists of 4,432 — Our 4,287 stores as of December 30, 2017January 2, 2021 are generally located in freestanding buildings with a heavy focus on both Professional and DIY customers. The average size of an Advance Auto Parts store is approximately 7,500 square feet with the size of our typical new stores ranging from approximately 6,200 to 15,0007,700 square feet. These stores carry a wide variety of products serving aftermarket auto part needs for both domestic and import vehicles. Our Advance Auto Parts stores carry a product offering of approximately 22,00021,000 stock keeping units (“SKUs”), generally consisting of a custom mix of product based on each store’s respective market. Supplementing the inventory on-hand at our stores, additional less common SKUs are available in many of our larger stores (known as “HUB” stores). These additional SKUs are typically available on a same-day or next-day basis.
Autopart International(“AI”) - Consists of 185 — Our 161 stores as of December 30, 2017 operatingJanuary 2, 2021 operate primarily in the Northeastern and Mid-Atlantic regions of the United States focusingwith a focus on the Professional customer.customers. These stores specialize in imported aftermarket and private label branded auto parts. The AIAutopart International stores offer approximately 41,000 SKUs through routine replenishment from their supply chain.47,000 SKUs.
Carquest - Consists of 437 — Our 358 stores as of December 30, 2017,January 2, 2021, including 138145 stores in Canada. Our Carquest storesCanada, are generally located in freestanding buildings with a heavyprimary focus on Professional customers, but also servingserve DIY customers. The average size of a Carquest store is approximately 7,6007,200 square feet. These stores carry a wide variety of products serving the aftermarket auto part needs for both domestic and import vehicles with a product offering of approximately 23,00019,000 SKUs. We continue to convert or consolidate the U.S. Carquest stores with our Advance Auto Parts stores as part of our multi-year integration plan. As of December 30, 2017,January 2, 2021, Carquest also served 1,2181,277 independently owned stores that operate under the Carquest“Carquest” name.
Worldpac - Consists of 129 — Our 170 branches as of December 30, 2017 thatJanuary 2, 2021 principally serve Professional customers utilizing an efficient and sophisticated on-line ordering and fulfillment system. The Worldpac branches are generally larger than our other store locations averaging approximately 28,00025,000 square feet in size. Worldpac specializes in imported, OEM parts. Worldpac’s complete product offering includes over 120,000200,000 SKUs for over 40 import and domestic vehicle carlines.vehicles.
As part of our transformation efforts, we have consolidated 8 Autopart International (“AI”) stores into the Worldpac format during 2020. Under our strategic business plan, we plan to continue integrating the operations of AI and Worldpac.
Our Products
The following table shows some of the types of products that we sell by major category of items:
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| Parts & Batteries | Accessories & Chemicals | Engine Maintenance |
| Batteries and battery accessories | Air conditioning chemicals and accessories | Air filters |
| Belts and hoses | Air fresheners | Fuel and oil additives |
| Brakes and brake pads | Antifreeze and washer fluid | Fuel filters |
| Chassis parts | Electrical wire and fuses | Grease and lubricants |
| Climate control parts | Electronics | Motor oil |
| Clutches and drive shafts | Floor mats, seat covers and interior accessories | Oil filters |
| Engines and engine parts | Hand and specialty tools | Part cleaners and treatments |
| Exhaust systems and parts | Lighting | Transmission fluid |
| Hub assemblies | Performance parts | |
| Ignition components and wire | Sealants, adhesives and compounds | |
| Radiators and cooling parts | Tire repair accessories | |
| Starters and alternators | Vent shades, mirrors and exterior accessories | |
| Steering and alignment parts | Washes, waxes and cleaning supplies | |
| Wiper blades | |
We provide our customers with quality products which manythat are often offered at a good, better or best recommendation differentiated by price and quality. We accept customer returns for many new, core and warranty products.
Our Customers
Our Professional customers consist primarily of customers for whom we deliver product from our store or branch locations to their places of business, including garages, service stations and auto dealers. Our Professional sales represented approximately 58%57%, 58%60% and 57%58% of our sales in 2017, 20162020, 2019 and 2015.2018. We also serve 1,2181,277 independently owned Carquest stores with shipments directly from our distribution centers. Our DIY customers are primarily served through our stores, andbut can also order online to pick up merchandise at a conveniently located store or have their purchases shipped directly to them. Except where prohibited, we also provide a variety of services at our stores free of charge to our customers, including:
•Battery and wiper installation;
Battery charging;
•Check engine light reading;scanning;
•Electrical system testing, including batteries, starters alternators and sensors;alternators;
•“How-To” video clinics;
•Oil and battery recycling; and
•Loaner tool programs.
We also serve our customers online at www.AdvanceAutoParts.com. Our Professional customers can conveniently place their orders electronically, over theincluding through MyAdvance.com, by phone, or in-store and we deliver product from our store or branch locations to their places of business. Our online websites also allow our DIY customers to pick up merchandise at a conveniently located store or have their purchases shipped directly to them.
Store Development
KeyThe key factors used in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. Our 5,183As of January 2, 2021, 4,809 stores and branches were located in the following49 U.S. states and 2 U.S. territories and international locations as of December 30, 2017:167 stores and branches were located in 9 Canadian provinces.
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| Location | | Number of Stores | | Location | | Number of Stores | | Location | | Number of Stores |
| U.S. States: | | | | | | | | | | |
| Alabama | | 135 |
| | Maine | | 39 |
| | Ohio | | 265 |
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| Alaska | | 11 |
| | Maryland | | 136 |
| | Oklahoma | | 29 |
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| Arizona | | 20 |
| | Massachusetts | | 124 |
| | Oregon | | 28 |
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| Arkansas | | 24 |
| | Michigan | | 146 |
| | Pennsylvania | | 269 |
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| California | | 95 |
| | Minnesota | | 44 |
| | Rhode Island | | 22 |
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| Colorado | | 88 |
| | Mississippi | | 64 |
| | South Carolina | | 148 |
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| Connecticut | | 75 |
| | Missouri | | 64 |
| | South Dakota | | 10 |
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| Delaware | | 19 |
| | Montana | | 26 |
| | Tennessee | | 156 |
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| Florida | | 535 |
| | Nebraska | | 30 |
| | Texas | | 279 |
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| Georgia | | 272 |
| | Nevada | | 14 |
| | Utah | | 23 |
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| Idaho | | 9 |
| | New Hampshire | | 29 |
| | Vermont | | 12 |
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| Illinois | | 176 |
| | New Jersey | | 134 |
| | Virginia | | 244 |
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| Indiana | | 119 |
| | New Mexico | | 15 |
| | Washington | | 32 |
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| Iowa | | 40 |
| | New York | | 260 |
| | West Virginia | | 80 |
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| Kansas | | 39 |
| | North Carolina | | 310 |
| | Wisconsin | | 106 |
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| Kentucky | | 112 |
| | North Dakota | | 5 |
| | Wyoming | | 13 |
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| Louisiana | | 71 |
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| U.S. Territories: | | | | | | | | | | |
| Puerto Rico | | 27 |
| | Virgin Islands | | 1 |
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| Canadian Provinces: | | | | | | | | |
| Alberta | | 3 |
| | New Brunswick | | 11 |
| | Ontario | | 60 |
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| British Columbia | | 4 |
| | Newfoundland and Labrador | | 3 |
| | Prince Edward Island | | 1 |
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| Manitoba | | 1 |
| | Nova Scotia | | 13 |
| | Quebec | | 63 |
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We serve our Advance Auto Partsstores and Carquest storesbranches primarily from our principal corporate offices in Raleigh, NC and Roanoke, VA. We also maintain store support centers in Roanoke, VA and Raleigh, NC. We also maintain a store support center in Newark, CA to support our Worldpac and e-commerce operations and in Norton, MA to support our Autopart International stores.MA.
Supply Chain
Our supply chain consists of a network of distribution centers, HUBs, stores and branches that enable us to provide same-day or next-day availability to our customers. As of December 30, 2017,January 2, 2021, we operated 5451 distribution centers, ranging in size from approximately 51,00050,000 to 943,000950,000 square feet with total square footage of approximately 12.011.6 million. Currently, our smaller distribution centers primarily service our Carquest stores, including those that have converted to the Advance Auto Parts format, while our larger distribution centers primarily service Advance Auto Parts, Autopart International and Worldpac locations. In 2017, we opened new distribution centers in Houston, TX and in the greater Nashville, TN area.
Merchandise, Marketing and Advertising
In 2017,2020, we purchased merchandise from over 6001,100 vendors, with no single vendor accounting for more than 9%10% of purchases. Our purchasing strategy involves negotiating agreements with most of our vendors to purchase merchandise over a specified period of time along with other provisions, including pricing, volume and payment terms.
Our merchandising strategy is to carry a broad selection of high quality and reputable brand name automotive parts and accessories that we believe will appeal to our Professional customers and also generate DIY customer traffic. Some of our brands include Bosch®, Castrol®, Dayco®, Denso®, Gates®, Moog®, Monroe®, NGK®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high qualityhigh-quality private label products that appealwith a goal of appealing to value-conscious customers. These lines of merchandise include chemicals, interior automotive accessories, batteries and parts under various private label names such as Autocraft®, Autopart International®, Driveworks®, Tough One® and Wearever®as well as the Carquest® brand.
On December 23, 2019, we purchased the DieHard® brand for a cash purchase price of $200.0 million. This purchase gave us the right to sell DieHard® batteries and enables us to extend the DieHard® brand into other automotive and vehicular categories. We granted the seller an exclusive royalty-free, perpetual license to develop, market and sell DieHard® branded products in certain non-automotive categories.
Our marketing and advertising program is designed to drive brand awareness, consideration by consumers and omni-channelomnichannel traffic by positioning Advance Auto Parts as the leaderposition in parts availability, in-store parts and project expertise within the aftermarket auto parts category. We strive to exceed our customers’ expectations end-to-end through a comprehensive online and in-store pick up in-store experience, extensive parts assortment, quality brands, experienced parts professionals, Professional programs that are designed to build loyalty with our customers and our DIY customer loyalty program, Speed Perks.program. Our DIY campaign was developed around a multi-channel communications plan that brings together radio, television, directdigital marketing, social media, sponsorships, store eventsexecution, public relations and Speed Perks.
Seasonality
Our business is somewhat seasonal in nature, with the highest sales usually occurring in the spring and summer months. In addition, our business can be affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot or cold weather tends to enhance sales by causing automotive parts to fail at an accelerated rate. Our fourth quarter is generally our most volatile as weather and spending trade-offs typically influence our Professional and DIY sales.
Team MembersHuman Capital Management
As of December 30, 2017,January 2, 2021, we employed approximately 40,000 full-time Team Members and approximately 31,000 part-timeapproximately 28,000 part-time Team Members. Our workforce consisted of 86% 82% of our Team Members employed in store-level operations, 10%12% employed in distribution and 4% employed 6% employed in our corporate offices. As of December 30, 2017, less than 1%January 2, 2021, approximately 1.2% of our TeamTeam Members were represented by labor unions. We believe our People are Our Best Part, and we have never experienced any labor disruption.adopted six Cultural Beliefs to help us foster a culture that fully engages our Team Members with our business: Speak Up, Be Accountable, Take Action, Move Forward, Grow Talent and Champion Inclusion. Our Cultural Belief of Grow Talent highlights the importance to us of developing our Team Members in their careers, and we seek to not only recruit the best talent, but also retain and promote the best talent. Through another of our Cultural Beliefs, Champion Inclusion, we seek to fully leverage the ideas and talents of all our Team Members in caring for our customers. We encourage our Team Members to Speak Up and promote their engagement through a variety of programs and networks within our organization. In 2020, we had record response to our annual organizational health survey, evidencing high engagement company wide, and we plan to continue to invest in our Team Members to help create long-term value for our stakeholders.
Intellectual Property
We own a number of trade names, service marks and trademarks, including “Advance Auto Parts”Parts®,” “Advance Same DayTM,” “Autopart International”International®, “Carquest”” “Carquest®,” “CARQUEST Technical Institute”Institute®, “DriverSide”” “DieHard®, “MotoLogic”” “DriverSide®, “MotoShop”” “MotoLogic®, “Worldpac”” “MotoShop®, “speedDIAL” and” “speedDIAL®,” “TECH-NET Professional Auto Service”Service®” and “Worldpac®” for use in connection with the automotive parts business. In addition, we own and have registered a number of trademarks for our private label brands. We believe that these trade names, service marks and trademarks are important to our merchandising strategy. We do not know of any infringing uses that would materially affect the use of these trade names and marks and we actively defend and enforce them.
Competition
We operate in both the Professional and DIY markets of the automotive aftermarket industry. Our primary competitors are (i) both national and regional chains of automotive parts stores, including AutoZone, Inc., NAPA, O’Reilly Automotive, Inc., The Pep Boys-Manny, Moe & Jack and Auto Plus (formerly Uni-Select USA, Inc.), (ii) internet-based retailers, (iii) discount stores and mass merchandisers that carry automotive products, (iii)(iv) wholesalers or jobberjobbers stores, including those associated with national parts distributors or associations, (iv)(v) independently owned stores (v)and (vi) automobile dealers that supply parts and (vi) internet-based retailers.parts. We believe that chains of automotive parts stores that, like us, have multiple locations in one or more markets, have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution as compared to independent retailers and jobbers that are not part of a chain or associated with other retailers or jobbers. The principal methods of competition in our business include customer service, product offerings, availability, quality, price and store location.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing collection, transportation and recycling of automotive lead-acid batteries, used automotivemotor oil and other recyclable items and ownership and operation of real property. We sell products containing hazardous materials as part of our business. In addition, our customers may bring automotive lead-acid batteries, used automotivemotor oil or other recyclable items onto our properties. We currently provide collection and recycling programs for used lead-acid batteries, used oil and other recyclable items at a majority of our stores as a service to our customers. Pursuant to agreements with third partythird-party vendors, lead-acid batteries, used motor oil and other recyclable items are collected by our Team Members, deposited onto pallets or into vendor supplied containers and stored by us until collected by the third partythird-party vendors for recycling or proper disposal. The terms of our contracts with third party vendors require that they are in compliance with all applicable laws and regulations. Our third partythird-party vendors who arrange for the removal, disposal, treatment or other handling of hazardous or toxic substances may be liable for the costs of removal or remediation at any affected disposal, treatment or other site affected by such substances. Based on our experience, we do not believe that there are any material environmental costs associated with the current business practice of accepting lead-acid batteries, used oil and other recyclable items as these costs are borne by the respective third partythird-party vendors.
We own and lease real property. Under various environmental laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. These laws often impose joint and several liability and may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous or toxic substances. Other environmental laws and common law principles also could be used to impose liability for releases of hazardous materials into the environment or work place, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. From time to time, we receive notices from the U.S. Environmental Protection Agency and state environmental authorities indicating that there may be contamination on properties we own, lease or operate or may have owned, leased or operated in the past or on adjacent properties for which we may be responsible. Compliance with these laws and regulations and clean-up of released hazardous substances have not had a material impact on our operations to date.
We are also subject to numerous regulations including those related to labor and employment, discrimination, anti-bribery/anti-corruption, product quality and safety standards, data privacy and taxes. Compliance with any such laws and regulations has not had a material adverse effect on our operations to date. For more information, see the following disclosures in ���Part I. Item 1A, Risk Factors” elsewhere in this report.
Available Information
Our Internet address is www.AdvanceAutoParts.com. TheOur website and the information on our website iscontained therein or linked thereto are not part of this Annual Report on Form 10-K for 2017.2020. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish them to the SEC. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website atwww.sec.gov.
Item 1A. Risk Factors.
Our business is subject to a varietyYou should consider carefully the risks and uncertainties described below together with the other information included in this Annual Report on Form 10-K, including without limitation our consolidated financial statements and related notes thereto and “Item 7-Management’s Discussion and Analysis of risks. Our business, financial condition, resultsFinancial Condition and Results of operations and cash flows could be negatively impacted byOperations-Critical Accounting Policies.” The occurrence of any of the following risk factors. These risks are not the only risks that may impact our business.
If overall demand for the products we sell slows or declines,could materially adversely affect our business, financial condition, results of operations, and cash flows will suffer. Decreased demandand future prospects, which could also negatively impact our stock price.
Overall demand for products sold by our stores depends on many factors and may slow or decrease due to any number of reasons, including:
a decrease in turn materially affect the number of vehicles or in the number of annual miles driven or significant increase in the use of mobile services, because fewer vehicles means less maintenance and repairs, and lower vehicle mileage, which decreases the need for maintenance and repair;
the economy, because during periods of declining economic conditions, consumers may reduce their discretionary spending by deferring vehicle maintenance or repair and new car purchases, which may impact the number of cars requiring repair in the future;
the weather, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles;
the average duration of vehicle manufacturer warranties and average age of vehicles being driven, because newer cars typically require fewer repairs and will be repaired by the manufacturers’ dealer networks using dealer parts pursuant to warranties (which have gradually increased in duration and/or mileage expiration over the recent past), while vehicles that are seven years old and older are generally no longer covered under manufacturers’ warranties and tend to need more maintenance and repair than newer vehicles;
an increase in internet-based retailers, because potentially favorable prices and ease of use of purchasing parts via the internet may decrease the need for customers to visit and purchase their aftermarket parts from our physical stores;
technological advances, such as battery electric vehicles, and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance and have low part failure rates will require less frequent repairs using aftermarket parts; and
the refusal of vehicle manufacturers to make available diagnostic, repair and maintenance informationtothe automotive aftermarket industry that our Professional and DIY customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have a majority of diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer networks.
If we are unable to compete successfully against other companies in the automotive aftermarket industry we may lose customers, our revenues may decline, and we may be less profitable or potentially unprofitable.
The sale of automotive parts, accessories and maintenance items is highly competitive in many ways, including name recognition, location, price quality, product availability and customer service. We compete in both the Professional and DIY categories of the automotive aftermarket industry, primarily with: (i) national and regional chains of automotive parts stores, (ii) discount stores and mass merchandisers that carry automotive products, (iii) wholesalers or jobbers stores, including those associated with national parts distributors or associations (iv) independently owned stores, (v) automobile dealers that supply parts and (vi) internet-based retailers. These competitors and the level of competition vary by market. Some of our competitors may possess advantages over us in certain markets we share, including with respectcommon stock.
Risks Related to the level of marketing activities, number of stores, store locations, store layouts, operating histories, name recognition, established customer bases, vendor relationships, pricesOur Operations and product warranties. Internet-based retailers may possess cost advantages over us due to less overhead costs, time and travel savings and ability to price competitively. Consolidation among our competitors could enhance their market share and financial position, provide them with the ability to achieve better purchasing terms and allow them to provide more competitive prices to customers for whom we compete.Growth Strategy
In addition, our reputation is critical to our continued success. If we fail to maintain high standards for, or receive negative publicity (whether through social media or traditional media channels) relating to, product safety and quality or our integrity and reputation, we could lose customers to our competition. The product we sell is branded both in brands of our vendors and in our own private label brands. If the perceived quality or value of the brands we sell declines in the eyes of our customers, our results of operations could be negatively affected.
Competition may require us to reduce our prices below our normal selling prices or increase our promotional spending, which could lower our revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines, require us to discontinue current product offerings, or change some of our current operating strategies. If we do not have the resources, expertise and consistent execution, or otherwise fail to develop successful strategies, to address these potential competitive disadvantages, we may lose customers, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
If we are unable to successfully implement our business strategy, including increasing sales to Professional and DIY customers, expanding our margins and increasing our return on invested capital, our business, financial condition, results of operations and cash flows could be adversely affected.
We have identified numerousseveral initiatives as part of our business strategy to increase sales to both Professional and DIY customers and expand our margins in order to increase our earnings and cash flows. We are currently making and expect to continue to make significant investments to pursue our strategic initiatives. If we are unable to implement theseour strategic initiatives efficiently and effectively, or if these initiatives are unsuccessful, our business, financial condition, results of operations and cash flows could be adversely affected. Successful implementationWe could also be adversely affected if we have not appropriately prioritized and balanced our initiatives or if we are unable to effectively manage change throughout our organization. Implementing strategic initiatives could disrupt or reduce the efficiency of our business strategy also dependsoperations and may not provide the anticipated benefits, or may provide them on factors specific to the automotive aftermarket industry and numerous other factors that may be beyond our control.a delayed schedule or at a higher cost. These risks increase when significant changes are undertaken.
Our inventory and ability to meet customer expectations may be adversely impacted by factors out or our control.
For that portion of our inventory manufactured and/or sourced outside the United States, geopolitical changes, changes in trade regulations, currency fluctuations, shipping related issues, natural disasters, pandemics and other factors beyond our control may increase the cost of items we purchase or create shortages that could have a material adverse effect on our sales and profitability. In addition, unanticipated changes in consumer preferences and/or any unforeseen hurdles to meeting our customers’ needs for automotive products (particularly parts availability) in a timely manner could undermine our business strategy.
If we are unable to successfully implement our growth strategy, keep existing store locations or open new locations in desirable places on favorable terms, it could adversely affect our business, financial condition, results of operations and cash flows.
We intend to continue to expand the markets we serve as part of our growth strategy, which may include opening new stores or branches, as well as expansion of our online business. We may also grow our business through strategic acquisitions. We do not know whether the implementation of our growth strategy will be successful. As we expand our market presence, through various means, it becomes more critical that we have consistent and effective execution across all of our entire Company’s locations and brands. We are unsure whether we will be able to open and operate new locations on a timely or sufficiently profitable basis, or that opening new locations in markets we already serve will not harm the profitability or comparable store sales of existing locations. The newly opened and existing locations’ profitability will depend on the competition we face as well as our ability to properly stock, market and price the products desired by customers in these markets. The actual number and format of any new locations to be opened and the success of our growth strategy will depend on a number of factors, including, among other things:
•the availability of desirable locations;
•the negotiation of acceptable lease or purchase terms for new locations;
•the availability of financial resources, including access to capital at cost-effective interest rates;
•our ability to expand our on-line offerings and sales; and
•our ability to manage the expansion and to hire, train and retain qualified Team Members.
We compete with other retailers and businesses for suitable locations for our stores. Local land use and zoning regulations, environmental regulations and other regulatory requirements may impact our ability to find suitable locations and influence the cost of constructing, renovating and operating our stores. In addition, real estate, zoning, construction and other delays may adversely affect store openings and renovations and increase our costs. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores. The termination or expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. If we determine to close or relocate a store subject to a lease, we may remain obligated under the applicable lease for the balance of the lease term. In addition to potentially incurring costs related to lease obligations, we may also incur severance or other facility closure costs for stores that are closed or relocated.
Omnichannel growth in our business is complex and if we are unable to successfully maintain a relevant omnichannel experience for our customers, our sales and results of operations could adversely be impacted.
Our business has become increasingly omnichannel as we strive to deliver a seamless shopping experience to our customers through both online and in-store shopping experiences. Operating an e-commerce platform is a complex undertaking and exposes us to risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand, and develop our internet operations, website, mobile applications and software and other related operational systems. Continuing to improve our e-commerce platform involves substantial investment of capital and resources, increasing supply chain and distribution capabilities, attracting, developing and retaining qualified personnel with relevant subject matter expertise and effectively managing and improving the customer experience. Omnichannel and e-commerce retail are competitive and evolving environments. Insufficient, untimely or inadequately prioritized or ineffectively implemented investments could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
Enhancing the customer experience through omnichannel programs such as buy-online-pickup-in-store, new or expanded delivery options, the ability to shop through a mobile application or other similar programs depends in part on the effectiveness of our inventory management processes and systems, the effectiveness of our merchandising strategy and mix, our supply chain and distribution capabilities, and the timing and effectiveness of our marketing activities, particularly our promotions. Costs associated with implementing omnichannel initiatives may be higher than expected, and the initiatives may not result in increased sales, including same store sales, customer traffic, customer loyalty or other anticipated results. Website downtime and other technology disruptions in our e-commerce platform, including due to cyber-related issues or natural disasters, and supply and distribution delays and other related issues may affect the successful operation of our e-commerce platform. If we are not able to successfully operate or improve our e-commerce platform and omnichannel business, we may not be able to provide a relevant shopping experience or improve customer traffic, sales or margins, and our reputation, operations, financial condition, results of operations and cash flows could be materially adversely affected.
If we are unable to successfully integrate future acquisitions into our existing operations or implement joint ventures or other strategic relationships, it could adversely affect our business, financial condition, results of operations and cash flows.
We also expect to continue to make strategic acquisitions and enter into strategic relationships as an element of our growth strategy. Acquisitions, joint ventures and other strategic relationships involve certain risks that could cause our growth and profitability to differ from our expectations. The success of ourthese acquisitions and relationships depends on a number of factors, including among other things:
•our ability to continue to identify and acquire suitable targets or strategic partners, or to acquire additional companies or enter into strategic relationships, at favorable prices and on otherand/or with favorable terms;
•our ability to obtain the full benefits envisioned by strategic transactions or relationships;
•the risk that management’s attention may be distracted;
•our ability to attract and retain key personnel from acquired businesses;personnel;
•our ability to successfully integrate the operations and systems of the acquired companies, and to achieve the strategic, operational, financial or other anticipated synergies of the acquisition;acquisition or other transaction or relationship;
•the performance our of our strategic partners;
•we may incur significant transaction andor integration costs in connection with acquisitions that may not be offset by the synergies or other benefits achieved from the acquisition in the near term, or at all;
•we may become subject to additional operational risks, such as those associated with doing business internationally or expanding operations into new territories, geographies or channels; and
•we may assume or become subject to loss contingencies, known or unknown, of the acquired companies, which could relate to past, present or future facts, events, circumstances or occurrences.
If we experience difficulties implementing various information systems, including our new enterprise resource planning system (“ERP”), our ability to conduct or business could be negatively impacted.
We are dependent on information systems to facilitate the day-to-day operations of the business and to produce timely, accurate and reliable information on financial and operational results. We are in process of implementing various information systems, including a new ERP. These implementations will require significant investment of human and financial resources, and we may experience significant delays, increased costs and other difficulties with these projects. Any significant disruption or deficiency in the design and implementation of these information systems could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. While we have invested meaningful resources in planning, project management and training, additional and serious implementation issues may arise as we integrate onto these new information systems that may disrupt our operations and negatively impact our business, financial condition, results of operations and cash flows.
If we are unable to maintain adequate supply chain capacity and improve supply chain efficiency, we will not be able to expand our business, which could adversely affect our business, financial condition, results of operations and cash flows.
Our store inventories are primarily replenished by shipments from our network of distribution centers, warehouses and HUB stores. As we expand our market presence, we will need to increase the efficiency and maintain adequate capacity of our supply chain network in order to achieve the business goal of reducing inventory costs while improving availability and movement of goods throughout our supply chain to meet consumer product needs and channel preferences. We continue to streamline and optimize our supply chain network and systems and cannot be assured of our ability to increase the productivity and efficiency of our overall supply chain network to desired levels.systems. If we fail to effectively utilize our existing supply chain or if our investments in our supply chain do not provide the anticipated benefits, we could experience sub-optimal inventory levels or increases in our costs, which could adversely affect our business, financial condition, results of operations and cash flows.
We are dependent on our suppliers to supply us with products that comply with safety and quality standards at competitive prices.
We are dependent on our vendors continuing to supply us quality products on payment terms that are favorable to us. If our merchandise offerings do not meet our customers’ expectations regarding safety and quality, we could experience lost sales, increased costs and exposure to legal and reputational risk. All of ourOur suppliers must comply withare subject to applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/orand private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to additional government regulation of their product design and/or manufacturing processes, the cost of the merchandise we purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.
Our reliance on suppliers subjects us to various risks and uncertainties which could affect our financial results.
We source the products we sell from a wide variety of domestic and international suppliers. Our financial results depend on us securing acceptable terms with our suppliers for, among other things, the price of merchandise we purchase from them, funding for various forms of promotional programs, payment terms and terms covering returns and factory warranties. To varying degrees, our suppliers may be able to leverage their competitive advantages - for example, their financial strength, the strength of their brand with customers, their own stores or online channels or their relationships with other retailers - to our commercial disadvantage. Generally, our ability to negotiate favorable terms with our suppliers is more difficult with suppliers for whom our purchases represent a smaller proportion of their total revenues, consequently impacting our profitability from such vendor relationships. We have established standards for product safety and quality and workplace standards that we require all our suppliers to meet. We do not condone human trafficking, forced labor, child labor, harassment or abuse of any kind, and we expect our suppliers to operate within these same principles. Our ability to find qualified suppliers who can supply products in a timely and efficient manner that meet our standards can be challenging. Suppliers may also fail to invest adequately in design, production or distribution facilities, may reduce their customer incentives, advertising and promotional activities or change their pricing policies. If we encounter any of these issues with our suppliers, our business, financial condition, results of operations and cash flows could be adversely impacted.
We depend on the services of many qualified executives and other Team Members, whom we may not be able to attract, develop and retain.
Our success depends to a significant extent on the continued engagement, services and experience of our executives and other Team Members. We may not be able to retain our current executives and other key Team Members or attract and retain additional qualified executives and Team Members who may be needed in the future. We must also continue to motivate employees and keep them focused on our strategies and goals. Our ability to maintainattract, develop and retain an adequate number of executive and other qualified Team Members is highly dependentdepends on an attractive andfactors such as employee morale, our reputation, competition from other employers, availability of qualified personnel, our ability to offer competitive compensation and benefits package.benefit packages and our ability to maintain a safe working environment. We also believe our future success will depend in part upon our ability to attract and retain highly skilled personnel for whom the market is highly competitive, particularly for individuals with certain types of technical skills. Failure to recruit or retain qualified employees may impair our efficiency and effectiveness and our ability to pursue growth opportunities. Additionally, turnover in executive or other key positions can disrupt progress in implementing business strategies, result in a loss of institutional knowledge, cause other Team Members to take on substantially more responsibility, resulting in greater workload demands and diverting attention away from key areas of the business, or otherwise negatively impact our growth prospects or future operating results.
We operate in a competitive labor market and there is a risk that market increases in compensation could have an adverse effect on our profitability. Market or government regulated increases to employee hourly wage rates, along with our ability to implement corresponding adjustments within our labor model and wage rates, could have a significant impact to the profitability of our business. In addition, less thanapproximately one percent of our team membersTeam Members are represented by unions. If these team membersTeam Members were to engage in a strike, work stoppage, or other slowdown, or if the terms and conditions in labor agreements were renegotiated, we could experience a disruption in our operations and higher ongoing labor costs. If we fail or are unable to maintain competitive compensation, our customer service and execution levels could suffer by reason of a declining quality of our workforce, which could adversely affect our business, financial condition, results of operations and cash flows.
The market price of our common stock may be volatileBecause we are involved in litigation from time to time, and could expose us to securities class action litigation.
The stock market and the price of our common stock may beare subject to wide fluctuations based upon general economicnumerous laws and market conditions. Downturns ingovernmental regulations, we could incur substantial judgments, fines, legal fees and other costs.
We are sometimes the stock marketsubject of complaints or litigation, which may cause the price of our common stock to decline. The market price of our stock may also be affected by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, securitiesinclude class action litigation has often been instituted against such a company. If similarfrom customers, Team Members or others for various actions. From time to time, we are involved in litigation were institutedinvolving claims related to, among other things, breach of contract, tortious conduct, employment, discrimination, breach of laws or regulations (including The Americans With Disabilities Act), payment of wages, exposure to asbestos or potentially hazardous product, real estate and product defects. The damages sought against us it could result in substantial costs and a diversionsome of our attention and resources, which could have an adverse effect on our business.
Our level of indebtedness, a downgrade in our credit ratings or a deterioration in global credit markets could limit the cash flow availablethese litigation proceedings are substantial. Although we maintain liability insurance for operations and could adversely affect our ability to service our debt or obtain additional financing.
Our level of indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. For example, our level of indebtedness could, among other things:
affect our liquidity by limiting our ability to obtain additional financing for working capital;
limit our ability to obtain financing for capital expenditures and acquisitions or make any available financing more costly;
require us to dedicate all or a substantial portion of our cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures, dividends or acquisitions;
limit our flexibility in planning for or reacting to changes in the markets in which we compete;
place us at a competitive disadvantage relative to our competitors who may have less indebtedness;
render us more vulnerable to general adverse economic and industry conditions; and
make it more difficult for us to satisfy our financial obligations.
The indenture governing our notes and credit agreement governing our credit facilities contain financial and other restrictive covenants. Our failure to comply with those covenants could result in an event of default which,some litigation claims, if not cured or waived, could result in the acceleration of all of our debt, including such notes.
In addition, our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors that may or may not be within our control. The interest rates on our publicly issued debt and revolving credit facility are linked directly to our credit ratings. Accordingly, any negative impact on our credit ratings would likely result in higher interest rates and interest expense on any borrowings under our revolving credit facility or future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements.
Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of that debt. It is possible that one or more of the banks that provide us with financing underclaims were to greatly exceed our revolving credit facility may fail to honor the terms ofinsurance coverage limits or if our existing credit facility or be financially unable to provide the unused credit asinsurance policies do not cover a result of significant deterioration in such bank’s financial condition. An inability to obtain sufficient financing at cost-effective ratesclaim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows. For instance, we are currently subject to a putative securities class action regarding past public disclosures (see Item 3, "Legal Proceedings" of this Annual Report on Form 10-K) and to numerous lawsuits alleging injury as a result of exposure to asbestos-containing products (see Note 13, Contingencies, of the Notes to the Consolidated Financial Statements included herein).
We are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality and safety standards, building and zoning requirements, labor and employment, discrimination, anti-bribery/anti-corruption, data privacy and income taxes. Compliance with existing and future laws and regulations could increase the cost of doing business and adversely affect our results of operations. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs, as well as reputational risk. In addition, our capital and operating expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.
We work diligently to maintain the privacy and security of our customer, supplier, Team Member and business information and the functioning of our computer systems, website and other on-line offerings. In the event of a security breach or other cyber security incident, we could experience adverse operational effects or interruptions and/or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace and substantial costs.
The nature of our business requires us to receive, retain and transmit certain personally identifiable information about our customers, suppliers and Team Members, some of which is entrusted to third-party service providers. While we have taken and continue to undertake significant steps to protect such personally identifiable information and other confidential information and to protect the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers, suppliers, Team Members or business being obtained by unauthorized persons or adverse operational effects or interruptions, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We develop, maintain and update processes and systems in an effort to try to prevent this from occurring, but these actions are costly and require constant, ongoing attention as technologies change, privacy and information security regulations change, and efforts to overcome security measures by bad actors continue to become ever more sophisticated. The cost of complying with stricter and more complex data privacy (such as the California Consumer Privacy Act, which grants expanded rights to access and delete personal information and opt out of certain personal information sharing), data collection and information security laws and standards could also be significant to us. Such laws and standards may also increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms ensuring compliance with privacy laws and regulations.
Despite our efforts, our security measures may be breached in the future due to a cyber-attack, computer malware viruses, exploitation of hardware and software vulnerabilities, Team Member error, malfeasance, fraudulent inducement (including so-called “social engineering” attacks and “phishing” scams) or other acts. While we have experienced threats to our data and systems, including phishing attacks, to date we are not aware that we have experienced a material cyber-security breach that has in any manner hindered our operational capabilities. Unauthorized parties may in the future obtain access to our data or the data of our customers, suppliers or Team Members or may otherwise cause damage to or interfere with our equipment, our data and/or our network including our supply chain. While the Company maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover losses in any particular situation. Any breach, damage to or interference with our equipment or our network, or unauthorized access in the future could result in significant operational difficulties including legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is always the risk that the confidentiality or accessibility of data held or utilized by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and possibly subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise, which may adversely impact our sales and profitability.
Hurricanes, tornadoes, earthquakes or other natural disasters, war or acts of terrorism, public health issues or pandemics or the threat of any of these incidents or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or Team Members, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States due to business interruption (including regulation of exporting or importing), and if we cannot obtain such merchandise from other sources at similar costs and without an adverse delay, our sales and profit margins may be negatively affected.
In the event that commercial transportation, including the global shipping industry, is curtailed or substantially delayed, our business may be adversely impacted as we may have difficulty receiving merchandise from our suppliers and/or transporting it to our stores.
Terrorist attacks, war in the Middle East, geopolitical unrest or uncertainty or insurrection involving any oil producing country could result in an abrupt increase in the price of crude oil, gasoline and diesel fuel. Such price increases would increase the cost of doing business for us and our suppliers, and also negatively impact our customers’ disposable income, causing an adverse impact on our business, sales, profit margins and results of operations.
We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. These systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events or occasional system breakdowns related to ordinary use or wear and tear. If our computer systems or those of our business partners fail, we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any significant business interruptions may make it difficult or impossible to continue operations, and any disaster recovery or crisis management plans we may employ may not suffice in any particular situation to avoid a significant adverse impact to our business, financial condition and our results of operations.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The concern over climate change has led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions (“GHG”). For example, proposals that would impose mandatory requirements related to GHG continue to be considered by policy makers in the United States and elsewhere. Laws enacted to reduce GHG that directly or indirectly affect our suppliers (through an increase in their cost of production) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Changes in automotive technology and compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers all of which could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
Risks Related to Our Industry and the Business Environment
The COVID-19 pandemic may significantly and adversely impact our business operations, demand for our products, availability of labor, access to inventory, our exposure to litigation, financial condition, results of operations and cash flows.
The COVID-19 pandemic significantly impacted our business as the uncertainty, volatility and disruption of a new public health crisis emerged in 2020. In our first fiscal quarter of 2020, we experienced disruption to our normal business operations from a number of factors, including the need to rapidly adopt new health and safety measures, significant impact to demand driven by stay at home orders and uncertainty around regulatory, economic and market conditions. The onset of the pandemic also created significant volatility in our stock price and may continue to create volatility, which may not be reflective of our actual business and competitive position. While we have taken numerous steps to mitigate the impact of the pandemic on our results of operations, many uncertainties could still materially impact our business, results of operations, cash flows, and financial condition.
Uncertainty remains about the severity and duration of the pandemic, including whether there will be additional “waves” or other continued periods of increases or spikes in the number of COVID-19 cases in future periods; the severity and transmission rate of “variations” or future mutations of COVID-19; and the development, efficacy, distribution and adoption rates of vaccines for COVID-19 and variants thereof. The risk of the spread of COVID-19 could adversely impact our ability to staff our stores or distribution centers, result in significant increased expenses related to store cleanings and Team Member benefits or negatively impact the operations of our suppliers, logistics or transportation providers, and our service providers or subcontractors. Additionally, while we have continued to prioritize the health and safety of our Team Members and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments and depending on the extent and severity of the pandemic, may incur significant increased operating costs associated with potential increases in insurance premiums, medical claims costs, and/or workers’ compensation claim costs, which could negatively affect our results of operations both during and after the pandemic.
While we have not experienced widespread store or distribution center closures, it is unknown how the current administration, specific locales or governmental and nongovernmental authorities of jurisdictions in which we and/or our suppliers, distributors and others that we do business with will respond to the continuation of the COVID-19 pandemic.Actions such as quarantine or shelter-in-place measures, limitations on access to unemployment compensation, economic measures and other governmental orders could cause disruption to our operations or those of our suppliers, distributors or others that we do business with.
If overall demand for the products we sell declines, our business, financial condition, results of operations and cash flows will suffer. Decreased demand could also negatively impact our stock price.
Overall demand for products sold by our stores depends on many factors and may decrease due to any number of reasons, including:
•a decrease in the total number of vehicles on the road or in the number of annual miles driven or significant increase in the use of ridesharing services, because fewer vehicles means less maintenance and repairs, and lower vehicle mileage, which decreases the need for maintenance and repair;
•the economy, as consumers reduce their discretionary spending by deferring vehicle maintenance or repair, sales may decline and as new car purchases increase, the number of cars requiring maintenance and repair may decrease.
•the weather, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles;
•the average duration of vehicle manufacturer warranties and average age of vehicles being driven, because newer cars typically require fewer repairs and will be repaired by the manufacturers’ dealer networks using dealer parts pursuant to warranties (which have gradually increased in duration and/or mileage expiration over the recent past), while vehicles that are seven years old and older are generally no longer covered under manufacturers’ warranties and tend to need more maintenance and repair than newer vehicles;
•an increase in internet-based retailers, because potentially favorable prices and ease of use of purchasing parts via other websites on the internet may decrease the need for customers to visit and purchase their aftermarket parts from our physical stores and may cause fewer customers to order aftermarket parts on our website;
•technological advances, such as battery electric vehicles, and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance or have lower part failure rates will require less frequent repairs using aftermarket parts and, in the case of battery electric vehicles, do not require oil changes; and
•the refusal of vehicle manufacturers to make available diagnostic, repair and maintenance informationtothe automotive aftermarket industry that our Professional and DIY customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have a majority of diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer networks.
If we are unable to compete successfully against other companies in the automotive aftermarket industry, we may lose customers and our revenues may decline.
The sale of automotive parts, accessories and maintenance items is highly competitive and influenced by a number of factors, including name recognition, location, price, quality, product availability and customer service. We compete in both the Professional and DIY categories of the automotive aftermarket industry, primarily with: (i) national and regional chains of automotive parts stores, (ii) internet-based retailers, (iii) discount stores and mass merchandisers that carry automotive products, (iv) wholesalers or jobbers stores, including those associated with national parts distributors or associations (v) independently owned stores and (vi) automobile dealers that supply parts. These competitors and the level of competition vary by market. Some of our competitors may possess advantages over us in certain markets we share, including with respect to the level of marketing activities, number of stores, store locations, store layouts, operating histories, name recognition, established customer bases, vendor relationships, prices and product warranties. Internet-based retailers may possess cost advantages over us due to lower overhead costs, time and travel savings and ability to price competitively. In order to compete favorably, we may need to increase delivery speeds and incur higher shipping costs. Consolidation among our competitors could enhance their market share and financial position, provide them with the ability to achieve better purchasing terms and allow them to provide more competitive prices to customers for whom we compete.
In addition, our reputation is critical to our continued success. Customers are increasingly shopping, reading reviews and comparing products and prices on-line. If we fail to maintain high standards for; or receive negative publicity (whether through social media or traditional media channels) relating to, product safety and quality or our integrity and reputation, we could lose customers to our competition. The product we sell is branded both in brands of our vendors and in our owned private label brands. If the perceived quality or value of the brands we sell declines in the eyes of our customers, our results of operations could be negatively affected.
Competition may require us to reduce our prices below our normal selling prices or increase our promotional spending, which could lower our revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines, require us to discontinue current product offerings, or change some of our current operating strategies. If we do not have the resources, expertise and consistent execution, or otherwise fail to develop successful strategies, to address these potential competitive disadvantages, we may lose customers, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
Our inventory and ability to meet customer expectations may be adversely impacted by factors out of our control.
For that portion of our inventory manufactured and/or sourced outside the United States, geopolitical changes, changes in trade regulations or tariff rates, currency fluctuations, work stoppages, labor strikes, port delays, civil unrest, natural disasters, pandemics and other factors beyond our control may increase the cost of items we purchase or create shortages that could have a material adverse effect on our sales and profitability. In addition, unanticipated changes in consumer preferences or any unforeseen hurdles to meeting our customers’ needs for automotive products (particularly parts availability) in a timely manner could undermine our business strategy.
In addition, preparing for and responding to the continuing pandemic could divert management’s attention from our key strategic priorities, further increase costs as we prioritize health and safety matters for our Team Members and customers, increase vulnerability to information technology or cybersecurity related risks as more of our Team Members work remotely and otherwise continue to disrupt our business operations.
Even after the pandemic has subsided, we may experience adverse impacts to our business as a result of economic volatility or changes to the macroeconomic environment that have occurred or may occur. The pandemic could also amplify other risks and uncertainties described herein.
Deterioration of general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, could have a negative impact on our business, financial condition, results of operations and cash flows due to impacts on our suppliers, customers and operating costs.
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability and willingness to sell quality products to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. Such factors include a general decline in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements. Financial or operational difficulties that some of our suppliers may face could also increase the cost of the products we purchase from them or our ability to source product from them. We might not be able to pass our increased costs onto our customers. If our suppliers fail to develop new products we may not be able to meet the demands of our customers and our results of operations could be negatively affected.
In addition, the trend towards consolidation among automotive parts suppliers as well as the off-shoring of manufacturing capacity to foreign countries may disrupt or end our relationship with some suppliers, and could lead to less competition and result in higher prices. We could also be negatively impacted by suppliers who might experience bankruptcies, work stoppages, labor strikes, changes in foreign or domestic trade policies, changes in tariff rates or other interruptions to or difficulties in the manufacture or supply of the products we purchase from them.
Deterioration in macro-economic conditions or an increase in fuel costs or proposed or additional tariffs may have a negative impact on our customers’ net worth, financial resources, and disposable income. This impact could reduce our customers’income or willingness or ability to pay for accessories, maintenance or repair for their vehicles, which resultsresulting in lower sales in our stores.sales. An increase in fuel costs may also reduce the overall number of miles driven by our customers resulting in fewer parts failures and a reduced need for elective maintenance.
Rising energy prices couldalso directly impact our operating and product costs, including our store, supply chain, Professional delivery, utility and product acquisition costs.
Because we are involved in litigation from timeRisks Related to time,Our Common Stock and areFinancial Condition
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to numerous lawswide fluctuations based upon general economic and governmental regulations, wemarket conditions. Downturns in the stock market may cause the price of our common stock to decline. The market price of our stock may also be affected by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could incur substantial judgments, fines, legal fees and other costs.
We are sometimeshave an adverse effect on the subjectprice of complaints or litigation, which may includeour common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation from customers, Team Membershas often been instituted against such a company. For example, in February 2018, following a significant decline in the price of our common stock, a putative class action was commenced against us (see Item 3 “Legal Proceedings” of this Annual Report on Form 10-K). Such litigation could result in substantial costs and a diversion of our attention and resources, which could have an adverse effect on our business.
The amount and frequency of our share repurchases and dividend payments may fluctuate.
The amount, timing and execution of our share repurchase program may fluctuate based on our priorities for the use of cash for other purposes such as operational spending, capital spending, acquisitions or othersrepayment of debt. Changes in cash flows, tax laws and our share price could also impact our share repurchase program and other capital activities. Additionally, decisions to return capital to shareholders, including through our repurchase program or the issuance of dividends on our common stock, remain subject to determination of our Board of Directors that any such activity is in the best interests of our shareholders and is in compliance with all applicable laws and contractual obligations.
Our level of indebtedness, a downgrade in our credit ratings or a deterioration in global credit markets could limit the cash flow available for various actions. From timeoperations and could adversely affect our ability to time, we are involved in litigation involving claims relatedservice our debt or obtain additional financing.
Our level of indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. For example, our level of indebtedness could, among other things, breachthings:
•affect our liquidity by limiting our ability to obtain additional financing for working capital;
•limit our ability to obtain financing for capital expenditures and acquisitions or make any available financing more costly;
•require us to dedicate all or a substantial portion of contract, tortious conduct, employment, labor discrimination, breachour cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures, dividends or acquisitions;
•limit our flexibility in planning for or reacting to changes in the markets in which we compete;
•place us at a competitive disadvantage relative to our competitors who may have less indebtedness;
•render us more vulnerable to general adverse economic and industry conditions; and
•make it more difficult for us to satisfy our financial obligations.
The indenture governing our notes and credit agreement governing our credit facilities contain financial and other restrictive covenants. Our failure to comply with those covenants could result in an event of lawsdefault which, if not cured or regulations (includingwaived, could result in the acceleration of all of our debt, including such notes.
In addition, our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors that may or may not be within our control. The Americans With Disabilities Act),interest rates on our publicly issued debt and revolving credit facility are linked directly to our credit ratings. Accordingly, any negative impact on our credit ratings would likely result in higher interest rates and interest expense on any borrowings under our revolving credit facility or future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements.
Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of wages, exposure to asbestos or potentially hazardous product, real estate and product defects. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, ifthat debt. It is possible that one or more of the claims werebanks that provide us with financing under our revolving credit facility may fail to greatly exceedhonor the terms of our insurance coverage limitsexisting credit facility or if our insurance policies do not coverbe financially unable to provide the unused credit as a claim, thisresult of significant deterioration in such bank’s financial condition. An inability to obtain sufficient financing at cost-effective rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality and safety standards, building and zoning requirements, labor and employment, discrimination and income taxes. Compliance with existing and future laws and regulations could increase the cost of doing business and adversely affect our results of operations. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs, as well as reputational risk. In addition, our capital and operating expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.
We work diligently to maintain the privacy and security of our customer, supplier, Team Member and business information and the functioning of our computer systems, website and other on-line offerings. In the event of a security breach or other cyber security incident, we could experience adverse operational effects or interruptions and/or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace and substantial costs.
The nature of our business requires us to receive, retain and transmit certain personally identifiable information about our customers, suppliers and Team Members, some of which is entrusted to third-party service providers. While we have taken and continue to undertake significant steps to protect such personally identifiable information and other confidential information and to protect the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers, suppliers, Team Members or business being obtained by unauthorized persons or adverse operational effects or interruptions, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We develop, maintain and update processes and systems in an effort to try to prevent this from occurring, but these actions are costly and require constant, ongoing attention as technologies change, privacy and information security regulations change, and efforts to overcome security measures by bad actors continue to become ever more sophisticated.
Despite our efforts, our security measures may be breached in the future due to a cyber-attack, computer malware and/or viruses, exploitation of hardware and software vulnerabilities, Team Member error, malfeasance, fraudulent inducement (including so-called “social engineering” attacks and “phishing” scams) or other acts. Unauthorized parties may in the future obtain access to our data or the data of our customers, suppliers or Team Members or may otherwise cause damage to or interfere with our equipment and/or network. Any breach, damage to or interference with our equipment or network, or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is always the risk that the confidentiality or accessibility of data held or utilized by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and possibly subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise, which may adversely impact our sales and profitability.
Hurricanes, tornadoes, earthquakes or other natural disasters, war or acts of terrorism, or the threat of any of these calamities or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or Team Members, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States due to business interruption (including regulation of exporting or importing), and if we cannot obtain such merchandise from other sources at similar costs and without an adverse delay, our sales and profit margins may be negatively affected.
In the event that commercial transportation, including the global shipping industry, is curtailed or substantially delayed, our business may be adversely impacted as we may have difficulty receiving merchandise from our suppliers and/or transporting it to our stores.
Terrorist attacks, war in the Middle East, or insurrection involving any oil producing country could result in an abrupt increase in the price of crude oil, gasoline and diesel fuel. Such price increases would increase the cost of doing business for us and our suppliers, and also negatively impact our customers’ disposable income, causing an adverse impact on our business, sales, profit margins and results of operations.
We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. These systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events or occasional system breakdowns related to ordinary use or wear and tear. If our computer systems or those of our business partners fail we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any such failure, including plans for disaster recovery, if widespread or extended, could adversely affect the operation of our business and our results of operations.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The concern over climate change has led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions (“GHG”). For example, proposals that would impose mandatory requirements related to GHG continue to be considered by policy makers in the United States and elsewhere. Laws enacted to reduce GHG that directly or indirectly affect our suppliers (through an increase in their cost of production) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Changes in automotive technology and compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers all of which could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, principal corporate offices and retail stores and branches at the end of 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
| | | | Square Footage (in thousands) |
| | Location | | Leased | | Owned |
| Distribution centers | | 51 locations in 32 U.S. states and 4 Canadian provinces | | 7,304 | | | 4,401 | |
| Principal corporate offices: | | | | | | |
| Raleigh, NC | | Raleigh, NC | | 387 | | | — | |
| Roanoke, VA | | Roanoke, VA | | 265 | | | — | |
| Stores and branches | | 4,809 stores and branches in 49 U.S. states and 2 U.S. territories and 167 stores and branches in 9 Canadian provinces | | 34,755 | | | 6,307 | |
|
| | | | | | | | |
| | | | | Square Footage (in thousands) |
| | | Location | | Leased | | Owned |
| Distribution Centers | | 54 locations in 34 states and 4 Canadian provinces | | 7,408 |
| | 4,589 |
|
| Store Support Centers: | | | | | | |
| Roanoke, VA | | Roanoke, VA | | 328 |
| | — |
|
| Raleigh, NC | | Raleigh, NC | | 251 |
| | — |
|
| Stores and branches | | 5,183 stores in 49 states, 2 U.S. territories and 9 Canadian provinces | | 36,042 |
| | 6,231 |
|
Item 3. Legal Proceedings.
On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleges that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020 the court granted in part and denied in part our motion to dismiss. The surviving claims are subject to discovery. On November 6, 2020 the court granted plaintiff’s motion for class certification. In addition, derivative complaints purportedly on behalf of the Company were filed against us as nominal defendant and certain of our current and former officers and directors related to similar allegations for the Class Period on April 29, 2020 in the U.S. District Court for the District of Delaware and August 13, 2020 in the Delaware Court of Chancery. The defendants have moved to dismiss the federal derivative complaint and the state court derivative claim is stayed pending the determination of the federal motion to dismiss. We strongly dispute the allegations of the complaints and intend to defend the cases vigorously.
Refer to discussion in Note 14, 13, Contingencies, of the Notes to the Consolidated Financial Statements included herein for information relating to additional legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the New York Stock Exchange or NYSE,(“NYSE”) under the symbol “AAP”. The table below sets forth the high and low sale prices per share for our common stock, as reported by the NYSE, for the periods indicated:“AAP.”
|
| | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 30, 2017 | | December 31, 2016 |
| | | High | Low | | High | Low |
| First Quarter | | $ | 177.50 |
| $ | 140.15 |
| | $ | 165.99 |
| $ | 131.59 |
|
| Second Quarter | | $ | 151.72 |
| $ | 99.13 |
| | $ | 166.32 |
| $ | 132.98 |
|
| Third Quarter | | $ | 115.40 |
| $ | 82.21 |
| | $ | 172.87 |
| $ | 145.15 |
|
| Fourth Quarter | | $ | 107.79 |
| $ | 78.81 |
| | $ | 177.83 |
| $ | 134.08 |
|
At February 16, 2018,17, 2021, there were 378were 293 holders of record of our common stock, which does not include the number of beneficial owners whose shares were representedrepresented by security position listings.
Our Boardshare repurchase program authorizing the repurchase of Directors has declared a $0.06 per share quarterly cash dividend since 2006. Any payments of dividendsup to $400.0 million in the future will be at the discretion ofcommon stock was authorized by our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.on August 7, 2019. On February 6, 2018,November 8, 2019 our Board of Directors declared a quarterly dividend of $0.06 perauthorized $700 million as an addition to the existing share to be paid on April 6, 2018 to all common stockholders of record as of March 23, 2018.
repurchase program. The following table sets forth information with respect to repurchases of our common stock for the fourth quarter ended December 30, 2017:January 2, 2021:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Maximum Dollar Value that May Yet Be Purchased Under the Plans or Programs (2) (In thousands) |
| October 8, 2017 to November 4, 2017 | | 13,601 |
| | $ | 81.85 |
| | — |
| | $ | 415,092 |
|
| November 5, 2017 to December 2, 2017 | | 12,972 |
| | 95.91 |
| | — |
| | 415,092 |
|
| December 3, 2017 to December 30, 2017 | | 7,584 |
| | 100.31 |
| | — |
| | 415,092 |
|
| Total | | 34,157 |
| | $ | 91.29 |
| | — |
| | $ | 415,092 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (1) | | Total Number of Shares Purchased as Part of
Publicly Announced Programs | | Maximum Dollar Value that May Yet Be Purchased
Under the Programs (In thousands) |
| October 4, 2020 to October 30, 2020 | | 492,429 | | | $ | 154.31 | | | 492,429 | | | $ | 676,170 | |
| November 1, 2020 to November 28, 2020 | | 592,062 | | | 147.07 | | | 582,298 | | | 590,534 | |
| November 29, 2020 to January 2, 2021 | | 1,026,947 | | | 154.15 | | | 1,026,939 | | | 432,234 | |
| Total | | 2,111,438 | | | $ | 152.20 | | | 2,101,666 | | | $ | 432,234 | |
| |
(1)
| The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $3.1 million during the fourth quarter ended December 30, 2017.
|
| |
(2)
| Our stock repurchase program authorizing the repurchase of up to $500.0 million in common stock was authorized by our Board of Directors and publicly announced on May 14, 2012.
|
(1)The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $1.4 million, or an average price of $147.24 per share, during the twelve weeks ended January 2, 2021.
Stock Price Performance
The following graph shows a comparison of the cumulative total return on our common stock, the Standard & Poor’s (“S&P”) 500 Index and the Standard & Poor’s Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on December 29, 2012,January 2, 2016, and that any dividends have been reinvested. The comparison in the graph below is based solely on historical data and is not intended to forecast the possible future performance of our common stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P RETAIL INDEX
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company/Index | | January 2, 2016 | | December 31, 2016 | | December 30, 2017 | | December 29, 2018 | | December 28, 2019 | | January 2, 2021 |
| Advance Auto Parts | | $ | 100.00 | | | $ | 112.36 | | | $ | 66.23 | | | $ | 103.29 | | | $ | 105.21 | | | $ | 104.65 | |
| S&P 500 Index | | $ | 100.00 | | | $ | 100.00 | | | $ | 136.40 | | | $ | 129.31 | | | $ | 171.94 | | | $ | 203.04 | |
| S&P Retail Index | | $ | 100.00 | | | $ | 104.64 | | | $ | 135.08 | | | $ | 150.14 | | | $ | 192.14 | | | $ | 277.63 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Company/Index | | December 29, 2012 | | December 28, 2013 | | January 3, 2015 | | January 2, 2016 | | December 31, 2016 | | December 30, 2017 |
| Advance Auto Parts | | $ | 100.00 |
| | $ | 154.04 |
| | $ | 222.51 |
| | $ | 211.44 |
| | $ | 237.85 |
| | $ | 140.40 |
|
| S&P 500 Index | | $ | 100.00 |
| | $ | 134.11 |
| | $ | 153.03 |
| | $ | 155.18 |
| | $ | 173.74 |
| | $ | 211.67 |
|
| S&P Retail Index | | $ | 100.00 |
| | $ | 146.08 |
| | $ | 160.40 |
| | $ | 200.69 |
| | $ | 210.00 |
| | $ | 271.10 |
|
Item 6.Selected Consolidated Financial Data.
The following table sets forth our selected historical consolidated statements of operations, balance sheets and other operating data. Included in this table are key metrics and operating results used to measure our financial progress. The selected historical consolidated financial and other data (excluding the Selected Store Data and Performance Measures) as of December 30, 2017January 2, 2021 and December 31, 201628, 2019 and for the three years ended December 30, 2017, December 31, 2016 and January 2, 20162021, December 28, 2019 and December 29, 2018 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this report. The historical consolidated financial and other data as of January 2,December 29, 2018, December 30, 2017, December 31, 2016 January 3, 2015 and December 28, 2013 and for the years ended January 3, 2015December 30, 2017 (“2017”) and December 28, 201331, 2016 (“2016”) have been derived from our audited consolidated financial statements and the related notes that have not been included in this report. You should read this data along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data, store data and ratios) | Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Statement of Operations Data: (1) | | | | | | | | | |
| Net sales | $ | 10,106,321 | | | $ | 9,709,003 | | | $ | 9,580,554 | | | $ | 9,373,784 | | | $ | 9,567,679 | |
| Gross profit | $ | 4,481,614 | | | $ | 4,254,746 | | | $ | 4,219,413 | | | $ | 4,085,049 | | | $ | 4,255,915 | |
| Operating income | $ | 749,907 | | | $ | 677,180 | | | $ | 604,275 | | | $ | 570,212 | | | $ | 787,598 | |
Net income (2) | $ | 493,021 | | | $ | 486,896 | | | $ | 423,847 | | | $ | 475,505 | | | $ | 459,622 | |
| Basic earnings per common share | $ | 7.17 | | | $ | 6.87 | | | $ | 5.75 | | | $ | 6.44 | | | $ | 6.22 | |
| Diluted earnings per common share | $ | 7.14 | | | $ | 6.84 | | | $ | 5.73 | | | $ | 6.42 | | | $ | 6.20 | |
| Cash dividends declared per basic share | $ | 1.00 | | | $ | 0.24 | | | $ | 0.24 | | | $ | 0.24 | | | $ | 0.24 | |
| | | | | | | | | |
| Balance Sheet and Other Financial Data: | | | | | | | | | |
Total assets (3) | $ | 11,839,636 | | | $ | 11,248,525 | | | $ | 9,040,648 | | | $ | 8,482,301 | | | $ | 8,315,033 | |
| Total debt | $ | 1,032,984 | | | $ | 747,320 | | | $ | 1,045,930 | | | $ | 1,044,677 | | | $ | 10,433,255 | |
| Total stockholders’ equity | $ | 3,559,512 | | | $ | 3,549,081 | | | $ | 3,550,813 | | | $ | 3,415,196 | | | $ | 2,916,192 | |
| | | | | | | | | |
| Selected Store Data and Performance Measures: | | | | | | | | | |
Comparable store sales growth (4) | 2.4 | % | | 1.1 | % | | 2.3 | % | | (2.0 | %) | | (1.4 | %) |
| Number of stores, beginning of year | 5,037 | | | 5,109 | | | 5,183 | | | 5,189 | | | 5,293 | |
| New stores | 13 | | | 26 | | | 27 | | | 60 | | | 78 | |
| Closed stores | (74) | | | (98) | | | (101) | | | (66) | | | (182) | |
| Number of stores, end of year | 4,976 | | | 5,037 | | | 5,109 | | | 5,183 | | | 5,189 | |
Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 - 2016 include 52 weeks.
(1)In 2020 we reported Net sales of $10.1 billion, Gross profit of $4.5 billion, Operating income of $749.9 million, Net income of $493.0 million and $7.14 Diluted earnings per share. The 53rd week in 2020 added approximately $158.5 million of Net sales, $20.1 million of Operating income, $15.7 million of Net income and increased Diluted earnings per share by $0.23.
(2)Net income for 2018 and 2017 includes an income tax benefit of $5.7 million and $143.8 million related to the U.S. Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017. Refer to discussion in Note 12, Income Taxes, of the Notes to the Consolidated Financial Statements included herein for further information. Net income for 2020 includes loss on early redemption of our senior unsecured notes of $48.0 million. Refer to discussion in Note 6, Long-term Debt and Fair Value of Financial Instruments, of the Notes to the Consolidated Financial Statements included herein for further information.
(3)Effective December 30, 2018, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which resulted in the recording of lease assets and lease liabilities on our Consolidated Balance Sheet. As of January 2, 2021, total assets includes Operating lease right-of-use assets of 2.4 billion. Refer to discussion in Note 2, Significant Accounting Policies, and Note 8, Leases and Other Commitments, of the Notes to the Consolidated Financial Statements included herein for further information.
(4)Comparable store sales include net sales from our stores, branches and e-commerce websites. Sales to independently owned Carquest branded stores are excluded from our comparable store sales. The change in store sales is calculated based on the change in net sales starting once a store or branch has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth does not include the results from the 53rd week in 2020.
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| | | | | | | | | | | | | | | | | | | |
| (in thousands, except per share data, store data and ratios) | Year (1) |
| 2017 | | 2016 | | 2015 | | 2014 (2) | | 2013 |
| Statement of Operations Data: | | | | | | | | | |
| Net sales | $ | 9,373,784 |
| | $ | 9,567,679 |
| | $ | 9,737,018 |
| | $ | 9,843,861 |
| | $ | 6,493,814 |
|
| Gross profit | $ | 4,085,049 |
| | $ | 4,255,915 |
| | $ | 4,422,772 |
| | $ | 4,453,613 |
| | $ | 3,252,146 |
|
| Operating income | $ | 570,212 |
| | $ | 787,598 |
| | $ | 825,780 |
| | $ | 851,710 |
| | $ | 660,318 |
|
Net income (3) | $ | 475,505 |
| | $ | 459,622 |
| | $ | 473,398 |
| | $ | 493,825 |
| | $ | 391,758 |
|
| Basic earnings per common share | $ | 6.44 |
| | $ | 6.22 |
| | $ | 6.45 |
| | $ | 6.75 |
| | $ | 5.36 |
|
| Diluted earnings per common share | $ | 6.42 |
| | $ | 6.20 |
| | $ | 6.40 |
| | $ | 6.71 |
| | $ | 5.32 |
|
| Cash dividends declared per basic share | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.24 |
|
| | | | | | | | | | |
| Balance Sheet and Other Financial Data: | | | | | | | | | |
| Total assets | $ | 8,482,301 |
| | $ | 8,315,033 |
| | $ | 8,127,701 |
| | $ | 7,954,392 |
| | $ | 5,556,054 |
|
| Total debt | $ | 1,044,677 |
| | $ | 1,043,255 |
| | $ | 1,206,895 |
| | $ | 1,628,927 |
| | $ | 1,044,864 |
|
| Total stockholders’ equity | $ | 3,415,196 |
| | $ | 2,916,192 |
| | $ | 2,460,648 |
| | $ | 2,002,912 |
| | $ | 1,516,205 |
|
| | | | | | | | | | |
| Selected Store Data and Performance Measures: | | | | | | | | | |
Comparable store sales growth (4) | (2.0 | %) | | (1.4 | %) | | 0.0 | % | | 2.0 | % | | (1.5 | %) |
| Number of stores, beginning of year | 5,189 |
| | 5,293 |
| | 5,372 |
| | 4,049 |
| | 3,794 |
|
New stores (5) | 60 |
| | 78 |
| | 121 |
| | 1,487 |
| | 296 |
|
| Closed stores | (66 | ) | | (182 | ) | | (200 | ) | | (164 | ) | | (41 | ) |
| Number of stores, end of year | 5,183 |
| | 5,189 |
| | 5,293 |
| | 5,372 |
| | 4,049 |
|
| |
(1)
| All fiscal years presented are 52 weeks, with the exception of 2014, which consisted of 53 weeks. The impact of week 53 included in sales, gross profit and selling, general and administrative expenses for 2014 was $150.4 million, $67.8 million and $46.7 million. |
| |
(2)
| We have included the financial results of GPI in our consolidated financial statements commencing with its acquisition in 2014. |
| |
(3)
| Net income for 2017 includes a $143.8 million net benefit related to the Tax Cuts and Jobs Act that the President signed into law on December 22, 2017. Refer to discussion in Note 12, Income Taxes, of the Notes to the Consolidated Financial Statements included herein for further information.
|
| |
(4)
| Comparable store sales include net sales from our stores, branches and e-commerce websites. Sales to independently owned Carquest branded stores are excluded from our comparable store sales. The change in store sales is calculated based on the change in net sales starting once a store or branch has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth for 2014 and 2015 excludes sales from the 53rd week of 2014.
|
| |
(5)
| Includes 1,336 stores resulting from our acquisition of GPI during 2014 and 124 stores resulting from our acquisition of B.W.P. Distributors, Inc. during 2013. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the section entitled “Risktitled “Part 1. Item 1A. Risk Factors” elsewhere in this report.
Management OverviewImpact of COVID-19 on Our Business
We generated diluted earnings per share (“diluted EPS”)During the COVID-19 pandemic, we continued to prioritize the health, safety and wellbeing of $6.42our Team Members and customers; worked to drive financial performance by preserving our cash position, scrutinized planned spending and the prioritization of various initiatives; and worked to help ensure that when the current period of crisis passes, our team will emerge even stronger.
In response to the COVID-19 pandemic, we have continued to take additional measures to help ensure the health, safety and wellbeing of our Team Members and customers. Such measures include retro-fitting our stores with plexiglass care shields, the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery.
Government imposed restrictions and stay at home orders related to the pandemic occurred during 2017 comparedour first quarter of 2020. These contributed to $6.20 for 2016. Comparable store sales were down 2.0%negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. However, as the second and third quarters of 2020 progressed, we experienced a significant improvement in 2017. The lower than expected sales performance was driven by the following factors:
Short-term disruptions resulting from our transformation actions taken in 2017;
Macroeconomic pressures on the automotive aftermarket industry; and
Weather-related impactsdemand, particularly in our Northeast, Mid-Atlantic, Midwest and North Central markets.
The softness in the industry over the last year resulted from higher gas prices and a significantly lower number of new cars sold during 2008 and 2009 resulting in an abnormal trough of vehicles of that age and their typical parts, maintenance items and accessories needs. Our analysis shows that short-term volatility is not unusual in the industry. We have completed a number of transformation actions in 2017, including the restructuring and reduction in the number of Advance Auto Parts (“AAP”) and Carquest US (“CQUS”) store regions, implementation of improved pricing discipline in our stores and reduction in inventory.DIY omnichannel business. While we believe these actions are needed for the long term, there were some short-term disruption impacts during the third and fourth quarters of 2017. Despite stronger performance in our Western and Southern markets, we experienced softness in our cooling parts and chemicals category sales across many of our other markets as a result of the milder summer weather. Partially offsetting the softness in our AAP/CQUS business was the performance of certain aspects of our Professional and Canadian businesses, which grew their sales during the year, as well as an increased demandgovernment restrictions began to tighten again in the fourth quarter of 20172020, we still experienced increased demand, resulting in increased comparable store sales.
In addition to external factors, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day options, contributed to driving demand and the improvement in our results. We have also continued to make progress on the execution of our key supply chain initiatives, including cross-banner replenishment and our single warehouse management system.
Despite the increase in Net sales during the fifty-three weeks ended January 2, 2021, the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.
Management Overview
Net sales increased 4.1% in 2020 as compared to 2019, which was primarily driven by an increase in comparable store sales of 2.4% resulting from more favorable winter weather.
Our operating profit margin reflects deliberate choices to investgrowth in our DIY omnichannel business, with the remaining increase attributable to 2020 including a 53rd week of operations versus only 52 weeks of operations in 2019. We experienced positive comparable store sales across every region, with Southeast, Florida and improve productivity overCentral having the long term despitestrongest growth. Our West, Mid Atlantic and Northeast regions had the lowest comparable sales softness. growth.
We believe these investments are necessary as we build a foundation for sustainable, long-term performance improvement.
generated Diluted earnings per share (“Diluted EPS”) of $7.14 during 2020 compared to $6.84 in 2019. When adjusted for the following non-operational items, our adjustedAdjusted diluted earnings per share (“Adjusted EPS”) in 20172020 was $5.37$8.51 compared to $7.15$8.19 during 2016:2019:
| | | | | | | | | | | | | | |
| | Year Ended |
| | January 2, 2021 | | December 28, 2019 |
| Transformation expenses | | $ | 0.55 | | | $ | 0.81 | |
| General Parts International, Inc. (“GPI”) amortization of acquired intangible assets | | $ | 0.30 | | | $ | 0.29 | |
| Other adjustments | | $ | 0.52 | | | $ | 0.25 | |
|
| | | | | | | | |
| | | Year Ended |
| | | December 30,
2017 | | December 31,
2016 |
| GPI integration and store consolidation costs | | $ | 0.22 |
| | $ | 0.61 |
|
| GPI amortization of acquired intangible | | $ | 0.33 |
| | $ | 0.34 |
|
| Transformation expenses | | $ | 0.41 |
| | $ | — |
|
| Other income adjustment | | $ | (0.07 | ) | | $ | — |
|
| Impact of the Act, net | | $ | (1.94 | ) | | $ | — |
|
Refer to “Reconciliation of Non-GAAP Financial Measures” for further details of our comparable adjustments and the usefulness of such measures to investors.
A high-level summary of our financial results and other highlights from 20172020 includes:
Total•Net sales during 20172020 were $9,373.8 million, a decrease$10.1 billion, an increase of 2.0%4.1% as compared to 2016, which2019, primarily related to adriven by an increase in comparable store sales decline of 2.0%.2.4%, led by growth in our DIY omnichannel business, as well as $158.5 million of Net sales attributable to the additional week in 2020.
•Gross profit margin for 2020 was 44.3% of Net sales, an increase of 52 basis points as compared to 2019. This increase was primarily due to favorable channel mix, growth in our DIY omnichannel business, supply chain leverage, inventory management, including decrease in inventory shrink and favorable pricing actions.
•Operating income for 20172020 was $570.2$749.9 million, a decreasean increase of $217.4$72.7 million from 2016.2019. As a percentage of total sales, operating income was 6.1%7.4%, a decreasean increase of 21545 basis points as compared to 2016,2019. The favorable impact in Gross profit was offset by deleveraging SG&A costs compared to prior year due to a decrease in comparable store salesincreased marketing spend on advertising, lease termination costs as we optimize our real estate footprint and higher supplies and cleaning costs related to COVID-19.
•We generated cash flow from operations of $969.7 million during 2020, an increase of 11.9% compared to 2019, primarily due to an increase in selling, general and administrative expenses (“SG&A”).Net income, as well as improvements related to working capital.
Inventories as of December 30, 2017 decreased $157.4 million, or 3.6%, from inventories as of December 31, 2016. This decrease was driven by our inventory optimization efforts.
We generated operating cash flow of $600.8 million million during 2017, an increase of 14.8% compared to 2016, primarily due to a decrease in inventory levels generated by the focus on inventory optimization across the Company.
Provision for income taxes decreased $234.5 million to $44.8 million in 2017 as compared to $279.2 million in 2016 primarily due to a net $143.8 million of one-time benefits associated with the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017.
Refer to “Results of Operations” and “Liquidity and Capital Resources” for further details ofon our income statement and cash flow results.
Business Update
We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience and driving consistent execution for both Professional and DIY“do-it-yourself” (“DIY”) customers. To achieve these improvements, we have undertaken planned transformation actionsstrategic initiatives to help build a foundation for long-term success across the entire company. These transformation actions initiated during 2017organization, which include:
A continued roll-out of our common catalog across all four banners - Advance Auto Parts, Carquest, Worldpac and Autopart International. This expanded catalog leverages our enterprise-wide assortment to all of our customers and will be fully enabled through each banner’s point-of-sale system. This capability also provides the customer more flexibility in originating orders across banners.
Development•Continued development of a demand-drivendemand-based assortment, leveraging purchase and search history and look-ups from theour common catalog, versus our existing push-down supply approach. This technology is a first step in moving from a supply-driven
•Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to a demand-driven assortment.drive share, repurpose our in-market store and asset base and streamline our distribution network.
Progression•Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand.
•Progress in the early developmentimplementation of a more efficient end-to-end supply chain to deliver our broad assortment.
Expanded use•Enhancement of Telematics, a fleet management‘Advance Same Day’ Curbside Pick Up, ‘Advance Same Day’ Home Delivery and tracking platform, that is critical for real-time fleet managementour mobile application and accurate measurementeCommerce performance.
•Actively pursuing new store openings in 2021, including through lease acquisition opportunities as available and management of customer orderappropriate, in existing markets and delivery commitments.
Creation of new DIY omni-channel capabilities to reach our customers in the manner that is most desirable for them, including the launchmarkets, as well as expansion of our enhanced website during the third quarter and eventual launch of a mobile app.independent Carquest network.
Entered into a strategic partnership with Interstate Batteries where Advance Auto Parts and Carquest stores will be the only retailer in the nation to carry a complete range of Interstate Batteries in store and online.
Acceleration of Worldpac branch openings to drive Professional growth while investing in online and digital to drive DIY improvements.
Industry Update
Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry. TheseIn addition to the “Impact of COVID-19 on Our Business” section included within Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:
•Fuel costs
•Unemployment rates
•Consumer confidence
•Competition
Reduction•Changes in new car sales in 2008 and 2009
•Miles driven
•Vehicle manufacturer warranties
Increasing number•Average age of vehicles 11 years and olderin operation
•Economic and political uncertainty
•Deferral of elective automotive maintenance and improvements in new car quality
While these factors tend to fluctuate, we remain confident in the long-term growth prospects for the automotive parts industry.
Results of Operations
The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | 2020 vs. 2019
$ Change | | Basis Points | | 2019 vs. 2018
$ Change | | Basis Points |
| (in millions) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 | | | | |
| Net sales | $ | 10,106.3 | | 100.0 | % | | $ | 9,709.0 | | 100.0 | % | | $ | 9,580.6 | | 100.0 | % | | $ | 397.3 | | | — | | | $ | 128.4 | | | — | |
| Cost of sales | 5,624.7 | | 55.7 | | | 5,454.3 | | 56.2 | | | 5,361.1 | | 56.0 | | | 170.4 | | | (52) | | | 93.1 | | | 22 | |
| Gross profit | 4,481.6 | | 44.3 | | | 4,254.7 | | 43.8 | | | 4,219.4 | | 44.0 | | | 226.9 | | | 52 | | | 35.3 | | | (22) | |
| SG&A | 3,731.7 | | 36.9 | | | 3,577.6 | | 36.8 | | | 3,615.1 | | 37.7 | | | 154.1 | | | 8 | | | (37.6) | | | (89) | |
| Operating income | 749.9 | | 7.4 | | | 677.2 | | 7.0 | | | 604.3 | | 6.3 | | | 72.8 | | | 45 | | | 72.9 | | | 67 | |
| Interest expense | (46.9) | | (0.5) | | | (39.9) | | (0.4) | | | (56.6) | | (0.6) | | | (7.0) | | | (5) | | | 16.7 | | | 18 | |
| Loss on debt extinguishment | (48.0) | | (0.5) | | | (10,756) | | (0.1) | | | — | | — | | | (37.2) | | | (36) | | | (10.8) | | | (11) | |
| Other income, net | (4.0) | | 0.0 | | | 11.2 | | 0.1 | | | 7.6 | | 0.1 | | | (15.2) | | | (15) | | | 3.6 | | | 4 | |
| Provision for income taxes | 158.0 | | 1.6 | | | 150.9 | | 1.6 | | | 131.4 | | 1.4 | | | 7.1 | | | 1 | | | 19.4 | | | 18 | |
| Net income | $ | 493.0 | | 4.9 | % | | $ | 486.8 | | 5.0 | % | | $ | 423.8 | | 4.4 | % | | $ | 6.3 | | | (14) | | | $ | 63.0 | | | 59 | |
Note 1: Table amounts may not foot due to rounding.
Note 2: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | 2017 vs. 2016 $ Change | | Basis Points | | 2016 vs. 2015 $ Change | | Basis Points |
| (in millions) | December 30, 2017 | | December 31, 2016 | | January 2, 2016 | | | | |
| Net sales | $ | 9,373.8 |
| 100.0 | % | | $ | 9,567.7 |
| 100.0 | % | | $ | 9,737.0 |
| 100.0 | % | | $ | (193.9 | ) | | — |
| | $ | (169.3 | ) | | — |
|
| Cost of sales | 5,288.7 |
| 56.4 |
| | 5,311.8 |
| 55.5 |
| | 5,314.2 |
| 54.6 |
| | (23.0 | ) | | 90 |
| | (2.5 | ) | | 94 |
|
| Gross profit | 4,085.1 |
| 43.6 |
| | 4,255.9 |
| 44.5 |
| | 4,422.8 |
| 45.4 |
| | (170.9 | ) | | (90 | ) | | (166.9 | ) | | (94 | ) |
| SG&A | 3,514.8 |
| 37.5 |
| | 3,468.3 |
| 36.3 |
| | 3,597.0 |
| 36.9 |
| | 46.5 |
| | 125 |
| | (128.7 | ) | | (69 | ) |
| Operating income | 570.3 |
| 6.1 |
| | 787.6 |
| 8.2 |
| | 825.8 |
| 8.5 |
| | (217.4 | ) | | (215 | ) | | (38.2 | ) | | (25 | ) |
| Interest expense | (58.8 | ) | (0.6 | ) | | (59.9 | ) | (0.6 | ) | | (65.4 | ) | (0.7 | ) | | 1.1 |
| | — |
| | 5.5 |
| | 5 |
|
| Other income, net | 8.8 |
| 0.1 |
| | 11.1 |
| 0.1 |
| | (7.5 | ) | (0.1 | ) | | (2.3 | ) | | (2 | ) | | 18.6 |
| | 19 |
|
| Provision for income taxes | 44.8 |
| 0.5 |
| | 279.2 |
| 2.9 |
| | 279.5 |
| 2.9 |
| | (234.5 | ) | | (244 | ) | | (0.3 | ) | | 5 |
|
| Net income | $ | 475.6 |
| 5.1 | % | | $ | 459.6 |
| 4.8 | % | | $ | 473.4 |
| 4.9 | % | | $ | 15.9 |
| | 27 |
| | $ | (13.8 | ) | | (6 | ) |
20172020 Compared to 20162019
Net Sales
The year ended January 2, 2021 consisted of 53 weeks compared to 52 weeks in 2019. Net sales for 20172020 were $9,373.8 million, a decline$10.1 billion, an increase of $193.9$397.3 million, or 2.0%4.1%, from netNet sales in 2016.2019. This decrease wasincrease primarily duereflected the impact of our positive comparable store sales 2.4% resulting from growth in our DIY omnichannel business, as well as $158.5 million of Net sales attributable to the additional week in 2020. We experienced positive comparable store sales across every region, with Southeast, Florida and Central having the strongest growth. Our West, Mid Atlantic and Northeast regions had the lowest comparable sales growth.
We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store sales decline of 2.0%. During 2017, we consolidated 16once the stores and closed 50have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores which was partially offset by the opening of 60 new stores. Our decline in comparable store sales was driven byfrom the original date of opening. Net sales for the 53rd week in a decrease in overall transactions in 2017 and mild summer weather conditions, which was partially offset by an increaseyear are not included in the average transaction valuecomparable sales calculation for that year. For example, our comparable sales results for 2020 compare weeks 1 through 52 in 2020 to the 52-week period reported for 2019. Comparable sales is intended only as supplemental information and favorable weatheris not a substitute for Net sales presented in accordance with accounting principles generally accepted in the fourth quarterUnited States of the year that drove a stronger demand across the business.America (“GAAP”).
Gross Profit
Gross profit for 20172020 was $4,085.0 million,$4.5 billion, or 43.6%44.3% of net sales, as compared to $4,255.9 million,$4.3 billion, or 44.5%43.8% of net sales, in 2016, a decrease2019, an increase of 9052 basis points. The decreaseincrease in gross profit as a percentage of net sales was primarily thedue to favorable channel mix, growth in our DIY omnichannel business, operational productivity relating to our ability to leverage our supply chain, inventory management including a decrease in inventory shrink and favorable pricing actions.
As a result of higher supply chain costs driven by unfavorable commodity priceschanges in our last in, first out (“LIFO”) reserve, a benefit of $13.8 million, an expense of $101.3 million and the negative impact related to the continued inventory optimization efforts, partially offset by continued material cost improvement.a benefit of $39.8 million were included in Cost of Sales in 2020, 2019 and 2018.
Selling, general and administrative expenses (“SG&A”)
SG&A for 2017 were $3,514.8 million,2020 was $3.7 billion, or 37.5%36.9% of net sales, as compared to $3,468.3 million,$3.6 billion, or 36.3%36.8% of net sales, for 2016,2019, an increase of 1258 basis points. This increase as a percentage of net sales was primarily due to increased marketing spend on advertising, lease termination costs incurred in connection with the continued transformation planas we optimize our real estate footprint and higher customer facingsupplies and cleaning costs including store labor and incentives and higher medical costs. Partially offsetting these costs were lower GPI integration, store closure and consolidation costs and expensesrelated to COVID-19. The additional week in 2017 compared2020 contributed $53.5 million to the prior year and continued focus on expense management throughout the year.SG&A.
Interest Expenseexpense
Interest expense for 20172020 was $58.8$46.9 million, asan increase of $7.0 million when compared to $59.9 million in 2016. The decrease in interest expense2019. This increase was due to lower outstanding balances of our credit facilities during 2017, as compared to 2016.
Income Taxes
Income tax expense for 2017 was $44.8 million, as compared to $279.2 million for 2016. Our effective income tax rate was 8.6% and 37.8% for 2017 and 2016. The decrease in our effective tax rate for 2017 compared to 2016 is primarily due to a net $143.8the issuance of our $500.0 million benefit related to the Act.2030 senior unsecured notes on April 16, 2020 and our$350.0 million 2027 senior unsecured notes on September 29, 2020. Refer to discussion in Note 12, Income Taxes, 6, Long-term Debt and Fair Value of Financial Instrumentsof the Notes to the Consolidated Financial Statements included herein for further information relatingdetails.
Loss on early redemptions of senior unsecured notes
During the fifty-three weeks ended January 2, 2021, we incurred charges of $48.0 million related to impact the early redemption of our 2022 and 2023 senior unsecured notes. During the fifty-two weeks ended December 28, 2019, we incurred charges of $10.8 million related to the early redemption of our 2020 senior unsecured notes. Refer to Note 6, Long-term Debt and Fair Value of Financial Instrumentsof the Act in 2017.Notes to the Consolidated Financial Statements included herein for further details.
Provision for income taxes
2016 Compared to 2015
Net Sales
Net sales for 2016 were $9,567.7$7.1 million, a decline of $169.3 million, or 1.7%, over net sales for 2015. This decrease was primarily due to our comparable store sales decline of 1.4% and the portion of sales that did not transfer from stores that were consolidated. During 2016, we consolidated 159 stores and closed 23 stores, which was partially offset by the opening of 78 new stores. Our decline in comparable store sales was driven by a decline in overall transactions, partially offset by an increase in the average transaction value. While the number of comparable store transactions decreased from the comparable period in all four quarters of 2016, we saw improving trends in the second half of the year.
Our comparable store sales for the year were negatively impacted by challenges with product availability and service levels, particularly in our Northeast and Great Lakes markets. On a quarterly basis our comparable store sales decreased 1.9%, 4.1% and 1.0% in the first, second and third quarters of 2016 and increased 3.1% in the fourth quarter of 2016. We attribute the improvement in our comparable store sales in the last half of the year to our efforts to improve our focus on the customer, including sustained investments in availability, customer service and incentives for front line employees, as well as improved levels of execution throughout our supply chain. We also benefited in the fourth quarter of 2016 from the timing of the Christmas and New Years holidays.
Gross Profit
Gross profit for 2016 was $4,255.9 million, or 44.5% of net sales, as compared to $4,422.8 million, or 45.4% of net sales, in 2015, a decrease of 94 basis points. The decrease in gross profit as a percentage of net sales was primarily the result of higher supply chain costs driven by significantly higher inventory levels in the first half of 2016 and disruption in our distributions centers located in our Northeast and Great Lakes markets resulting from changes in delivery frequency.
SG&A
SG&A for 2016 was $3,468.3 million, or 36.3% of net sales, as compared to $3,597.0 million, or 36.9% of net sales, for 2015, a decrease of 69 basis points. This decrease as a percentage of net sales was primarily due to lower GPI integration, store closure and consolidation and support center restructuring costs in 2016 compared to the prior year. Excluding these costs, SG&A decreased 14 basis points as a percentage of sales compared to the prior year driven by lower administrative costs partially offset by higher customer facing costs, including store labor and incentives and inventory availability support costs.
Operating Income
Operating income for 2016 was $787.6 million, representing 8.2% of net sales, as compared to $825.8 million, or 8.5% of net sales, for 2015, a decrease of 25 basis points. This decrease was due to a lower gross profit rate, partially offset by a decrease in our SG&A rate. These changes on a rate basis were due to the gross profit and SG&A drivers previously discussed.
Interest Expense
Interest expense for 2016 was $59.9 million, as compared to $65.4 million in 2015. The decrease in interest expense was due to repayments made on our credit facility over the last year.
Income Taxes
Income tax expense for 2016 was $279.2 million, as compared to $279.5 million for 2015.taxable income. Our effective income tax rate was 37.8%24.3% for 2020 and 37.1%23.7% for 2016 and 2015. Our income2019. During 2019, the driver of the lower tax rate in both 2016 and 2015 reflect favorable incomeexpense resulted from a benefit relating to a release of a valuation allowance that was previously established against the deferred tax settlements and statuteasset related to our federal foreign tax credit carryforward.
2019 Compared to 2018
A discussion of limitation expirations. The increasechanges in our effective tax rate for 2016results of operations in 2019 compared to 20152018 has been omitted from this Form10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC on February 18, 2020, which is primarily due to $7.8 millionavailable free of settlements recorded in 2016 related to income tax auditscharge on the SECs website at www.sec.gov and at www.AdvanceAutoParts.com, by clicking “Investor Relations” located at the bottom of GPI for time periods prior to our acquisition of GPI. These settlements were largely recoverable under the escrow for indemnification claims in our purchase agreement with GPI and therefore recorded corresponding income of $7.3 million in Other Income, net.home page.
Net Income
Net income was $459.6 million, or $6.20 per diluted share, for 2016 as compared to $473.4 million, or $6.40 per diluted share, for 2015. As a percentage of net sales, net income for 2016 was 4.8%, as compared to 4.9% for 2015. The decrease in diluted EPS was driven primarily by the decrease in net income.
Reconciliation of Non-GAAP Financial Measures
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”).America. Non-GAAP financial measures, including Adjusted net income and Adjusted EPS, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. We have presented these non-GAAP financial measures as we believe that the presentation of our financial results that exclude (1) non-operational expenses associated with the integration of GPI and store closure and consolidation costs; (2) non-cash charges related to the acquired GPI intangibles; (3) transformation expenses under our strategic business plan;plan and (4) nonrecurring impact ofnon-cash amortization related to the Act, isacquired GPI intangible assets and other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to the integration of GPI and store closure and consolidation activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors to evaluate our performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.
Transformation Expenses—We acquired GPI for $2.08 billion Costs incurred in 2014 and are in the midst of a multi-yearconnection with our business plan that focuses on specific transformative activities that relate to integrate the operations of GPI with AAP. This includes the integration and streamlining of product brands and assortments, supply chain and information technology. The integration is being completed in phases andour operating structure across the nature and timing of expenses will vary from quarter to quarter over several years. The integration of product brands and assortments was primarily completed in 2015, which our focus then shifted to integrating the supply chain and information technology systems. Due to the size of the acquisition,enterprise, that we consider these expensesdo not view to be outside of our base business. Therefore, we believe providing additional information in the form of non-GAAP measures that exclude these costs is beneficial to the users of our financial statements in evaluating thenormal cash operating performance of our base business and our sustainability once the integration is complete.
Store Closure and Consolidation Expenses—Store closure and consolidation expenses consist of expenses associated with our plans to convert and consolidate the Carquest stores acquired from GPI. The conversion and consolidation of the Carquest stores is a multi-year process that began in 2014. As of December 30, 2017, 346 Carquest stores acquired from GPI had been consolidated into existing AAP stores and 422 stores had been converted to the AAP format. While periodic store closures are common, these closures represent a major program outside of our typical market evaluation process. We believe it is useful to provide additional non-GAAP measures that exclude these costs to provide investors greater comparability of our base business and core operating performance. We also continue to have store closures that occur as part of our normal market evaluation process and have not excluded the expenses associated with these store closures in computing our non-GAAP measures.
Transformation Expenses—We expect to recognize a significant amount of transformation expenses over the next several years as we transition from integration of our AAP/CQUS businesses to a plan that involves a more holistic and integrated transformation of the entire Company across all four banners, including Worldpac and AI.expenses. These expenses will include, but not be limited to restructuringthe following:
•Restructuring costs third-party- Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and Team Member severance in connection with our 2018 Store Rationalization plan and 2017 Store and Supply Chain Rationalization plan.
•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and othersupply chain projects in connection with our enterprise integration initiatives.
•Other significant costs - Costs primarily relating to integrateaccelerated depreciation of various legacy information technology and streamlinesupply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise. We focused
GPI Amortization of Acquired Intangible Assets — As part of our initial transformation efforts on our AAP/CQUS field structure in the second quarteracquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and are reviewing other areas throughout the Company, such as supply chain and information technology.favorable leases agreements, which we expect to be subject to amortization through 2025.
U.S. Tax Reform—On December 22, 2017, the Act was signed into law. The Act amends the Internal Revenue Code by, among other things, permanently lowering the corporate tax rate to 21% from the existing maximum rate of 35%, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result of the reduction to the corporate tax rate, which is effective on January 1, 2018, the Company is required to re-value deferred income tax assets and liabilities in the reporting period of enactment. The Company also recorded an estimated charge to income tax expense for the nonrecurring repatriation tax on accumulated earnings of foreign subsidiaries and it is the Company’s intention to bring back the accumulated foreign earnings held as cash in the near term.
We have included a reconciliation of this information to the most comparable GAAP measures in the following table.
| | | | | | | | | | | |
| Year Ended |
| (in thousands, except per share data) | January 2, 2021 | | December 28, 2019 |
| Net income (GAAP) | $ | 493,021 | | | $ | 486,896 | |
| Cost of sales adjustments: | | | |
| Transformation expenses: | | | |
| Restructuring costs | — | | | 3,345 | |
| Other significant costs | 3,161 | | | — | |
Other adjustment (1) | — | | | 13,010 | |
| SG&A adjustments: | | | |
| | | |
| GPI amortization of acquired intangible assets | 27,337 | | | 27,500 | |
| Transformation expenses: | | | |
| Restructuring costs | 16,765 | | | 19,028 | |
| Third-party professional services | 14,117 | | | 35,579 | |
| Other significant costs | 15,965 | | | 19,351 | |
Other income adjustment (2) | 48,022 | | | 10,756 | |
Provision for income taxes on adjustments (3) | (31,342) | | | (32,142) | |
| | | |
| Adjusted net income (Non-GAAP) | $ | 587,046 | | | $ | 583,323 | |
| | | |
| Diluted earnings per share (GAAP) | $ | 7.14 | | | $ | 6.84 | |
| Adjustments, net of tax | 1.37 | | | 1.35 | |
| Adjusted diluted earnings per share (Non-GAAP) | $ | 8.51 | | | $ | 8.19 | |
(1)During the sixteen weeks ended April 20, 2019, we made an out-of-period correction, which increased Cost of sales by $13.0 million, related to received not invoiced inventory.
(2)During the twelve weeks ended October 3, 2020, we incurred charges relating to a make-whole provision and tender premiums of $46.3 million and debt issuance costs of $1.7 million resulting from the early
redemption of our 2022 and 2023 Notes. During the sixteen weeks ended April 20, 2019, we incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting
from the early redemption of our 2020 senior unsecured notes.
(3)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.
|
| | | | | | | | |
| | | Year Ended |
| (in thousands, except per share data) | | December 30,
2017 | | December 31,
2016 |
| Net income (GAAP) | | $ | 475,505 |
| | $ | 459,622 |
|
| SG&A adjustments: | | | | |
| GPI integration and store consolidation costs | | 26,207 |
| | 72,828 |
|
| GPI amortization of acquired intangible assets | | 39,477 |
| | 40,940 |
|
| Transformation expenses | | 50,425 |
| | — |
|
Other income adjustment (1) | | (8,878 | ) | | — |
|
Provision for income taxes on adjustments (2) | | (40,748 | ) | | (43,232 | ) |
| Impact of the Act, net | | (143,756 | ) | | — |
|
| Adjusted net income (Non-GAAP) | | $ | 398,232 |
| | $ | 530,158 |
|
| | | | | |
| Diluted earnings per share (GAAP) | | $ | 6.42 |
| | $ | 6.20 |
|
| Adjustments, net of tax | | (1.05 | ) | | 0.95 |
|
| Adjusted EPS (Non-GAAP) | | $ | 5.37 |
| | $ | 7.15 |
|
| |
(1)
| The adjustment to Other income for 2017 relates to income recognized from an indemnification agreement associated with the acquisition of GPI. |
| |
(2)
| The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments. |
Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, and funding of initiatives under our strategic business plan. In addition,plan and other operational priorities. Historically, we may usehave used available funds for acquisitions, to repay borrowings under our credit agreement,facility, to periodically repurchase shares of our common stock under our stock repurchase programsprogram, to pay our quarterly cash dividends and for acquisitions; however, given uncertainties related to the paymentCOVID-19 pandemic, our future uses of quarterly cash dividends. Historically,may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity change. Typically, we have funded theseour cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our primary obligations for the next year.
Share Repurchases
On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program as an addition to the previous $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.
During 2020, we repurchased 3.0 million shares of our common stock at an aggregate cost of $458.5 million, or an average price of $150.65 per share, in connection with our share repurchase program. We had $432.2 million remaining under our share repurchase program as of January 2, 2021. During 2019, we repurchased 3.4 million shares of our common stock at an aggregate cost of $487.4 million, or an average price of $144.23 per share, under our share repurchase program.
Capital Expenditures
Our primary capital requirementsrequirements have been the funding of our new store development (leased and owned locations), maintenance of existing stores, and investments in supply chain and information technology.technology, e-commerce and maintenance of existing stores and branches. We lease approximately 84% of our stores. stores and branches.
Our capital expenditures were $189.8$267.6 million in 2017,2020, a decrease of $69.8$2.6 million from 2016. This decrease in2019. Our capital expenditures was duewere primarily related to disciplined capital spending by the Company to focus on priorityseveral information technology projects, including our Finance enterprise resource planning system, as well as investments in an effort to optimize cash flow for 2017.supply chain and store improvements.
Our future capital requirements will depend in large part on the timing or number of the investments we make in information technology and timing ofsupply chain network initiatives and existing stores and new store development (leased and owned locations) within a given year and the investments we make in existing stores, information technology and supply chain network.year. In 2018,2021, we anticipate that our capital expenditures related to such investments will be uprange from $275 million to $250$325 million, but may vary with business conditions.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| (in millions) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Cash flows provided by operating activities | $ | 969.7 | | | $ | 866.9 | | | $ | 811.0 | |
| Cash flows used in investing activities | (266.9) | | | (462.9) | | | (191.8) | |
| Cash flows used in financing activities | (286.0) | | | (882.2) | | | (263.9) | |
| Effect of exchange rate changes on cash | (0.5) | | | 0.3 | | | (5.7) | |
| Net (decrease) increase in cash and cash equivalents | $ | 416.3 | | | $ | (477.9) | | | $ | 349.6 | |
|
| | | | | | | | | | | |
| | Year Ended |
| (in millions) | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| Cash flows from operating activities | $ | 600.8 |
| | $ | 523.3 |
| | $ | 702.6 |
|
| Cash flows from investing activities | (178.6 | ) | | (262.0 | ) | | (253.4 | ) |
| Cash flows from financing activities | (14.9 | ) | | (217.1 | ) | | (459.0 | ) |
| Effect of exchange rate changes on cash | 4.5 |
| | 0.3 |
| | (4.2 | ) |
| Net increase (decrease) in cash and cash equivalents | $ | 411.8 |
| | $ | 44.4 |
| | $ | (13.9 | ) |
Operating Activities
For 2017,2020, net cash provided by operating activities increased $77.5$102.8 million to $600.8$969.7 million. ThisThe net increase in cash flows provided by operating cash flowactivities compared to the prior year was primarily driven by an increase in Net income, improvements in working capital and the timingdeferral of payments withinpayroll taxes under the CARES Act. In the current year, working capital. Our inventory balance ascapital included an increase in cash provided by Accrued expenses, partially offset by a decrease in cash provided by Accounts payable and an increase in cash used by Inventories. Refer to “Results of December 30, 2017 decreased $157.4 million, or 3.6%, over the prior year primarily driven by the focusOperations” for further details on inventory optimization across the Company.our results.
For 2016,2019, net cash provided by operating activities decreased $179.3increased $55.9 million to $523.3 million. This$866.9 million. The net decreaseincrease in operating cash flowflows compared to the prior year was primarily driven by an increase in Net income, which was partially offset by a decrease in accounts payable, lower net income and the timing of payments within working capital, partially offset by the timing of income tax deductions. Our inventory balance as of December 31, 2016 increased $151.1 million, or 3.6%, over the prior year driven mainly by the build-up of transitional inventory associated with our Carquest product and store integration and the opening of new locations, including a new Worldpac distribution center.capital.
Investing Activities
For 2017,2020, net cash used in investing activities decreased by $83.4$196.0 million to $178.6$266.9 million compared to 2016. 2019. Cash used in investing activities for 2020 consisted primarily of purchases of property and equipment, which was comparable to capital expenditures in 2019. The decrease in cash used in investing activities was primarily driven byin 2020 is attributable to the decrease inDieHard® brand acquisition on December 23, 2019, which we purchased for a cash used for purchasespurchase price of property and equipment.$200.0 million.
For 2016,2019, net cash used in investing activities increased by $8.7$271.1 million to $262.0$462.9 million compared to 2015. 2018. The increase in cash used in investing activities was primarily driven by the acquisition of the DieHard® brand on December 23, 2019 for a cash used for purchasespurchase price of property$200.0 million. This purchase gave us the right to sell DieHard® batteries and equipment.enables us to extend the DieHard® brand into other automotive and vehicular categories. Additionally, the remaining increase was in capital expenditures related to several IT projects, including our Finance enterprise resource planning system, as well as investments in supply chain, e-commerce and store improvements.
Financing Activities
For 2017,2020, net cash used in financing activities decreased by $202.2$596.2 million to $14.9 million.$286.0 million compared to 2019. This decrease was primarily a result of lowerthe net repaymentsproceeds of $244.5 million received in 2020 that resulted from the issuance of our $500.0 million 2030 senior unsecured notes on April 16, 2020 and our$350.0 million 2027 senior unsecured notes on September 29, 2020, offset by the revolving credit facilityredemption of all of our $300.0 million 2022 senior unsecured notes on September 16, 2020 and term loan than in the prior year.cash tender offer on September 29, 2020 for a portion of the 2023 senior secured notes. In 2019, we used $310.0 million to redeem all $300.0 million aggregate principal amount of our outstanding 2020 senior unsecured notes.
For 2016,2019, net cash used in financing activities decreasedincreased by $241.9$618.2 million to $217.1$882.2 million. compared to 2018. This decreaseincrease was primarily a result of lower net repayments on the revolving credit facility and term loan thanreturning cash to shareholders in the prior year.form of share repurchases and dividends, as well as on February 28, 2019, we redeemed all $300.0 million aggregate principal amount of our outstanding 2020 Notes. We incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting from the early redemption of our 2020 Notes.
Our Board of Directors has declared a quarterly cash dividend since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. On February 10, 2021, our Board of Directors declared a quarterly cash dividend of $0.25 per share to be paid on April 2, 2021 to all common shareholders of record as of March 19, 2021.
Long-Term Debt
For detailed information refer to Note 7, Long-term Debt and Fair Value of Financial Instruments, of the Notes to the Consolidated Financial Statements included herein.
As of December 30, 2017,January 2, 2021, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa2. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may become morebe limited. In addition, it could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
Off-Balance-Sheet Arrangements
As of December 30, 2017, other than as disclosed inFor additional information on transactions entered into relating to Long-term debt during the fifty-three weeks ended January 2, 2021, refer to Note 7, 6, Long-term Debt and Fair Value of Financial Instrumentsof the Notes to the Consolidated Financial Statements included herein.
Off-Balance-Sheet Arrangements
As of January 2, 2021, other than as disclosed in Note 6, Long-term Debt and Fair Value of Financial Instruments andNote 8, Leases and Other Commitments, of the Notes to the Consolidated Financial Statements included herein, we had no other off-balance-sheet arrangements. We include other off-balance-sheet arrangements in our Contractual Obligations table including operating lease payments and interest payments on our Notes,senior unsecured notes, revolving credit facility and letters of credit outstanding.
Contractual Obligations
In addition to our Notessenior unsecured notes and revolving credit facility, we utilize operating leases as another source of financing. The amounts payable under these operating leases are included in our Contractual Obligations table. Our future contractual obligations related to long-term debt, operating leases and other contractual obligations as of December 30, 2017January 2, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Long-term debt (1) | | $ | 1,043,673 | | | $ | — | | | $ | 193,673 | | | $ | — | | | $ | 850,000 | |
| Interest payments | | 254,304 | | | 34,374 | | | 68,680 | | | 51,250 | | | 100,000 | |
Operating leases (2) | | 2,831,305 | | | 539,068 | | | 872,151 | | | 629,030 | | | 791,056 | |
Other long-term liabilities (3) | | 488,726 | | | — | | | — | | | — | | | — | |
Purchase commitments (4) | | 122,843 | | | 49,005 | | | 66,694 | | | 7,144 | | | — | |
| | $ | 4,740,851 | | | $ | 622,447 | | | $ | 1,201,198 | | | $ | 687,424 | | | $ | 1,741,056 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | Payments Due by Period |
| Contractual Obligations | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years |
Long-term debt (1) | | $ | 1,050,350 |
| | $ | 350 |
| | $ | 300,000 |
| | $ | 300,000 |
| | $ | 450,000 |
|
| Interest payments | | 227,769 |
| | 51,000 |
| | 96,029 |
| | 61,269 |
| | 19,471 |
|
Operating leases (2) | | 2,959,853 |
| | 484,427 |
| | 846,829 |
| | 620,090 |
| | 1,008,507 |
|
Other long-term liabilities (3) | | 542,681 |
| | — |
| | — |
| | — |
| | — |
|
Purchase obligations (4) | | 25,809 |
| | 10,948 |
| | 9,086 |
| | 3,600 |
| | 2,175 |
|
| | | $ | 4,806,462 |
| | $ | 546,725 |
| | $ | 1,251,944 |
| | $ | 984,959 |
| | $ | 1,480,153 |
|
Note: For additional information refer to Note 7, 6, Long-term Debt and Fair Value of Financial Instruments; Note 8, Lease and other Commitments; Note 12, Income Taxes; Note 13, Lease Commitments; Note 14, Contingencies; and Note 15, 14, Benefit Plans, of the Notes to the Consolidated Financial Statements included herein.
| |
(1)
| Long-term debt represents the principal amount of our 2020 Notes, 2022 Notes and 2023 Notes, which become due in 2020, 2022 and 2023. |
| |
(2)
| We lease certain store locations, distribution centers, office space, equipment and vehicles. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments that are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations. |
| |
(3)
| Includes the long-term portion of deferred income taxes and other liabilities, including self-insurance reserves for which no contractual payment schedule exists. As we expect the payments to occur beyond 12 months from December 30, 2017, the related balances have not been reflected in the “Payments Due by Period” section of the table.
|
| |
(4)
| Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Included in the table above is the lesser of the remaining obligation or the cancellation penalty under the agreement. |
(1)Long-term debt represents the principal amount of our senior unsecured notes, which become due in 2023, 2027 and 2030. (2)We lease certain store locations, distribution centers, office space, equipment and vehicles. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments that are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations.
(3)Includes the long-term portion of deferred income taxes and other liabilities, including self-insurance reserves for which no contractual payment schedule exists. As we expect the payments to occur beyond 12 months from January 2, 2021, the related balances have not been reflected in the “Payments Due by Period” section of the table.
(4)Purchase commitments include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Included in the table above is the lesser of the remaining obligation or the cancellation penalty under the agreement.
Critical Accounting Policies
Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.
The preparation of our financial statements included the following significant estimates and exercise of judgment.
27
Vendor Incentives
Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangibles for impairment annually as of the first day of our fourth quarter or whenever events or changes in circumstances indicate the carrying value of the goodwill or other intangible asset may not be recoverable. We test goodwill for impairment at the reporting unit level. Effectivereceive incentives in the third quarterform of 2017,reductions to amounts owed and/or payments from vendors related to volume rebates and other promotional considerations. Many of these incentives are under agreements with terms in excess of one year, while others are negotiated on an annual basis or less. Volume rebates and vendor promotional allowances are earned based on inventory purchases and initially recorded as a reduction to inventory, except for amounts that are offset in SG&A when circumstances exist as described below. These deferred amounts are recorded as a reduction to cost of sales as the Company realigned its three geographic divisions, whichinventory is sold.
Vendor promotional allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to SG&A when the operations of the stores operating under the Advance Auto Parts, Carquest and Autopart International trade names, into two U.S. geographic divisions. As a result of this realignment and change in the operating structure of its Carquest Independent and Carquest Canada businesses, the Company has increased its number of operating segments from four to five. As each operating segment represents a reporting unit, goodwill was reassigned to the affected reporting units using a relative fair value approach.
Our detailed impairment testing involves comparingcost is incurred if the fair value of each reporting unitthat benefit can be reasonably estimated. Certain of our vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes.
Similarly, we recognize other promotional incentives earned under long-term agreements as a reduction to its carrying value, including goodwill. If a reporting unit’s fair value has historically significantly exceeded its carrying value, then a risk-based market approachCost of determining the reporting unit’s fair value is utilized. The Company uses a valuation specialist to determine the fair value for the remaining reporting units. If the fair value exceeds carrying value, we conclude that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss.
Our indefinite-lived intangible assets primarily consist of the Carquest and Worldpac brands acquired in the acquisition of GPI in 2014 andsales. However, these incentives are tested for impairment at the asset group level. Indefinite-lived intangibles are evaluated by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If the fair valuerecognized based on the future discounted cash flows exceedscumulative net purchases as a percentage of total estimated net purchases over the carrying value, we conclude that no intangible asset impairment has occurred. If the carrying valuelife of the indefinite-lived intangible asset exceeds the fair value, we recognize an impairment loss.
We complete our impairment evaluations by combining information from our internal valuation analyses, considering other publicly available market information and using an independent valuation firm. We determine fair value using widely accepted valuation techniques, including discounted cash flows and market multiple analyses. These types of analyses require management to make assumptionsagreement. Short-term incentives with terms less than one year are generally recognized as a marketplace participant would andreduction to apply judgment to estimate industry economic factors andcost of sales over the profitability of future business strategies of our Company and our reporting units. These assumptions and estimates are a major componentduration of the derived fair value of our reporting units. Critical assumptions include projected sales growth, gross profit rates, SG&A rates, working capital fluctuations, capital expenditures, discount rates, royalty rates and terminal growth rates. If actual resultsagreements.
Amounts received or receivable from vendors that are not consistent with our estimates or assumptions, we mayyet earned are reflected as deferred revenue. Our estimate of the portion of deferred revenue that will be exposedrealized within one year of the balance sheet date is included in Other current liabilities. Earned amounts that are receivable from vendors are included in Receivables, net except for that portion expected to an impairment charge that could be material.
Inventory Reserves
Our inventory consists primarily of parts, batteries, accessories and other products used on vehicles that have reasonably long shelf lives. Althoughreceived after one year, which is included in Other assets, net. We regularly review the risk of obsolescence is minimal, we consider whether we may have excess inventory based on our current approach for managing slower moving inventory. We establish reserves whenreceivables from vendors to ensure they are able to meet their obligations. Historically, the expected net proceeds are less than carrying value.
Future changes by vendors in their policies or willingness to accept returns of excess inventory, changeschange in our inventory management approachreserve for excess and obsolete inventory or failure by usreceivables related to effectively manage the life cycle of our inventory could require us to revise our estimates of required reserves and result in a negative impact on our consolidated statement of operations. A 10% difference in actual inventory reserves at December 30, 2017 would result in a change in expense of approximately $11.1 million for 2017.vendor funding has not been significant.
Self-Insurance Reserves
Our self-insurance reserves consist of the estimated exposure for claims filed, claims incurred but not yet reported and projected future claims, and are established using actuarial methods followed in the insurance industry and our historical claims experience. Specific factors include, but are not limited to, assumptions about health care costs, the severity of accidents and the incidence of illness and the average size of claims. Generally, claims for automobile and general liability and workers’ compensation take several years to settle. We classify the portion of our self-insurance reserves that is not expected to be settled within one year in long-term liabilities.
While we do not expect the amounts ultimately paid to differ significantly from our estimates, our self-insurance reserves and corresponding SG&A could be affected if future claim experience differs significantly from historical trends and actuarial assumptions. A 10% change in our self-insurance liabilities at December 30, 2017January 2, 2021 would result in a change in expense of approximately $15.3approximately $14.4 million for 2017.2020.
Vendor Incentives
We receive incentives in the form of reductions to amounts owed and/or payments from vendors related to volume rebates and other promotional considerations. Many of these incentives are under agreements with terms in excess of one year, while others are negotiated on an annual basis or less. Volume rebates and vendor promotional allowances not offsetting in SG&A are earned based on inventory purchases and initially recorded as a reduction to inventory. These deferred amounts are included as a reduction to cost of sales as the inventory is sold.
Vendor promotional allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to SG&A when the cost is incurred if the fair value of that benefit can be reasonably estimated. Certain of our vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes.
Similarly, we recognize other promotional incentives earned under long-term agreements as a reduction to cost of sales. However, these incentives are recognized based on the cumulative net purchases as a percentage of total estimated net purchases over the life of the agreement. Short-term incentives with terms less than one year are generally recognized as a reduction to cost of sales over the duration of the agreements.
Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue. Management’s estimate of the portion of deferred revenue that will be realized within one year of the balance sheet date is included in Other current liabilities. Earned amounts that are receivable from vendors are included in Receivables, net except for that portion expected to be received after one year, which is included in Other assets, net. We regularly review the receivables from vendors to ensure they are able to meet their obligations. Historically, the change in our reserve for receivables related to vendor funding has not been significant. A 10% difference in our vendor incentives deferred in inventory at December 30, 2017 would result in a change in deferred incentives of approximately $17.9 million for 2017.
New Accounting Pronouncements
For a description of recently adopted and issued accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Recently Issued Accounting Pronouncements” in Note 2, Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included herein.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee.
Certain 100% wholly owned domestic subsidiaries of the Issuer, including our Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors (“Guarantor Subsidiaries”) of our senior unsecured notes. The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiaries. Certain of our wholly owned subsidiaries, including all of our foreign subsidiaries and captive insurance subsidiary, do not serve as guarantors of our senior unsecured notes (“Non-Guarantor Subsidiaries”).
The following tables present summarized financial information for the Issuer and Guarantor Subsidiaries on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor Subsidiaries and (ii) equity in earnings from and investments in any subsidiaries that are a Non-Guarantor Subsidiary.
Summarized Financial Information
| | | | | | | | | | | |
| Balance Sheets | | | |
| Issuer and Guarantor Subsidiaries |
| (in millions) | January 2, 2021 | | December 28, 2019 |
| Assets | | | |
Current assets (1) | $ | 5,796.3 | | | $ | 5,329.9 | |
Non-current assets (2) | $ | 5,395.4 | | | $ | 5,403.6 | |
| | | |
| Liabilities | | | |
| Current liabilities | $ | 4,539.1 | | | $ | 4,264.3 | |
| Intercompany payables, net due to Non-Guarantor Subsidiaries | $ | 290.7 | | | $ | 342.8 | |
| Other non-current liabilities | $ | 3,401.7 | | | $ | 3,128.2 | |
(1)Current assets includes $4,318.6 million and $4,234.2 million of Inventories as of January 2, 2021 and December 28, 2019.
(2)Non-current assets includes $1,585.9 million and $1,613.8 million of Goodwill and Intangible assets, net as of January 2, 2021 and December 28, 2019. ��
| | | | | | | | | | | |
| Statements of Operations | | | |
| Issuer and Guarantor Subsidiaries |
| Fifty-Three Weeks Ended | | Fifty-Two Weeks Ended |
| (in millions) | January 2, 2021 | | December 28, 2019 |
| Net sales | $ | 9,735.8 | | | $ | 9,342.2 | |
| Gross profit | $ | 4,335.1 | | | $ | 4,089.8 | |
| Operating income | $ | 687.8 | | | $ | 605.5 | |
| Income before provision for income taxes | $ | 598.0 | | | $ | 569.0 | |
| Net income | $ | 453.4 | | | $ | 486.9 | |
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
We are subject to interest rate risk to the extent we borrow against our revolving credit facility as it is based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. As of December 30, 2017January 2, 2021 and December 31, 2016,28, 2019, we had no borrowings outstanding under our revolving credit facility.
Our financial assets that are exposed to credit risk consist primarily of trade accounts receivable and vendor receivables. We are exposed to normal credit risk from customers. Our concentration of credit risk is limited because our customer base consists of a large number of customers with relatively small balances, which allows the credit risk to be spread across a broad base. We have not historically had significant credit losses.
We are exposed to foreign currency exchange rate fluctuations for the portion of the Company’sour inventory purchases denominated in foreign currencies. We believe that the price volatility relating to foreign currency exchange rates is partially mitigated by our ability to adjust selling prices. During 20172020, 2019 and 2016,2018, foreign currency transactions did not significantly impact net income.
Item 8. Financial Statements and Supplementary Data.
See financial statements included in Item 15 “Exhibits, Financial Statement Schedules” of this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controlsforms, and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness may vary over time.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of December 30, 2017 in accordance with Rule 13a-15(b) under the Exchange Act.January 2, 2021. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.effective to accomplish their objectives at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a) - 15(f) under the Exchange Act. The Company’sOur internal control over financial reporting is a process designed under the supervision of the Company’sour principal executive officer and principal financial officer, and effected by the Company’sour Board of Directors, management and other personnel, to provide “reasonable assurance” regarding the reliability of financial reporting and the preparation of the Company’sour financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors of the Company;directors; and (3) provide “reasonable assurance” regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’sour assets that could have a material effect on the financial statements.
As of December 30, 2017,January 2, 2021, management, including the Company’sour principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’sour internal control over financial reporting as of December 30, 2017January 2, 2021 is effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 30, 2017January 2, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of Registered Public Accounting Firm
Our internal control over financial reporting as of December 30, 2017January 2, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which also audited our Consolidated Financial Statementsconsolidated financial statements for the year ended December 30, 2017,January 2, 2021, as stated in their report included herein, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 30, 2017.January 2, 2021.
Item 9B. Other Information.
Refer to discussion in Note 4, Exit Activities and Other Initiatives, of the Notes to the Consolidated Financial Statements included herein.
None.
PART III
Item 10.Directors, Executive Officers and Corporate Governance.
For a discussion of our directors, executive officers and corporate governance, see the information set forth in the sections entitled “Proposal No. 1 - Election of Directors,” “Corporate Governance,” “Meetings and Committees of the Board,” “Information ConcerningAbout Our Executive Officers,” “Audit Committee Report,” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports,” “Code of Ethics and Business Conduct” and “Code of Ethics for Finance Professionals” in our proxy statement for the 20182021 annual meeting of stockholders to be filed with the SEC within 120 days after the end of the year ended December 30, 2017January 2, 2021 (the “2018“2021 Proxy Statement”), which is incorporated herein by reference.
Item 11. Executive Compensation.
See the information set forth in the sections entitled “Meetings and Committees of the Board,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Additional Information Regarding Executive Compensation” and “Director Compensation” in the 20182021 Proxy Statement, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
See the information set forth in the sections entitled “Equity Compensation Plan Information Table”Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 20182021 Proxy Statement, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
See the information set forth in the sections entitled “Corporate Governance”Governance-Related Party Transactions,” “Corporate Governance-Director Independence” and “Meetings and Committees of the Board” in the 20182021 Proxy Statement, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
See the information set forth in the section entitled “2017“2020 and 20162019 Audit Fees” in the 20182021 Proxy Statement, which is incorporated herein by reference.
PART IV
Item 15.Exhibits, Financial Statement Schedules.
| | | | | | | | |
| (a)(1) Financial Statements | | |
| | |
(a)(1) Financial Statements | | |
| | |
Audited Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries for the years ended December 30, 2017, December 31, 2016 and January 2, 2016:2021, December 28, 2019 and December 29, 2018: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| (2) Financial Statement Schedule | | |
| | |
| | |
| | |
| (3) Exhibits | | |
| | |
The | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersstockholders and the Board of Directors of Advance Auto Parts, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advance Auto Parts, Inc. and subsidiaries (the “Company”"Company") as of December 30, 2017January 2, 2021 and December 31, 2016,28, 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders’stockholders' equity, and cash flows for each of the three years in the period ended December 30, 2017,January 2, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017January 2, 2021 and December 31, 2016,28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017,January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 30, 2017,January 2, 2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2018,22, 2021, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, effective December 30, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-12, Leases (Topic 842), using the alternative transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Vendor Incentives - Refer to Note 2 to the Consolidated Financial Statements
Critical Audit Matter Description
The Company receives incentives in the form of reductions in amounts owed to and/or payments due from vendors related to volume rebates and other promotions. Volume rebates and vendor promotional allowances are earned based on inventory purchases and initially recorded as a reduction to inventory, except for allowances provided as reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products that are offset in selling, general and
administrative expenses. The deferred amounts are recorded as a reduction in cost of sales as the inventory is sold. Total deferred vendor incentives included as a reduction of inventories were $141.9 million as of January 2, 2021.
The Company purchases inventory from a significant number of vendors, with no single vendor accounting for more than 10% of purchases. While many of these incentives are under long-term agreements in excess of one year, others are negotiated on an annual basis or shorter. Accordingly, auditing vendor incentives was challenging due to the extent of audit effort required to evaluate whether the vendor incentives were recorded in accordance with the terms of the vendor agreements.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to whether the vendor incentives were recorded in accordance with the terms of the vendor agreements included the following, among others:
•We tested the effectiveness of controls over the process that ensures that all vendor agreements are communicated to accounting.
•We tested the effectiveness of controls over the recording of vendor incentives as a reduction in inventories, and subsequently as a reduction in cost of sales as the related inventory was sold.
•We selected a sample of vendor incentives earned during the year and deferred at year-end and recalculated, using the terms of the vendor agreement, both the amount recorded as deferred vendor incentives as a reduction in inventories and the amount recognized in earnings as a reduction in cost of sales.
•We selected a sample of vendors from the Company’s inventory purchases made during the year and from vendor incentives recorded as a reduction in cost of sales and confirmed directly with the vendor that the agreement obtained from the Company and used in the determination of deferred vendor incentives as a reduction in cost of sales was the most recent between the parties.
•We tested the amount of the deferred vendor incentives recorded as a reduction in cost of sales by developing an expectation of the amount based on the historical amounts recorded as a percentage of total cost of sales and compared our expectation to the amount recorded.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 21, 201822, 2021
We have served as the Company’s auditor since 2002.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersstockholders and the Board of Directors of Advance Auto Parts, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Advance Auto Parts, Inc. and subsidiaries (the “Company”) as of December 30, 2017,January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017,January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 30, 2017,January 2, 2021, of the Company and our report dated February 21, 2018,22, 2021, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
Basis for Opinion
The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 21, 2018
22, 2021
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
| | | | | | | | | | | |
| | January 2, 2021 | | December 28, 2019 |
| Assets | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 834,992 | | | $ | 418,665 | |
| Receivables, net | 749,999 | | | 689,469 | |
| Inventories | 4,538,199 | | | 4,432,168 | |
| Other current assets | 146,811 | | | 155,241 | |
| Total current assets | 6,270,001 | | | 5,695,543 | |
| Property and equipment, net of accumulated depreciation of $2,189,165 and $2,037,849 | 1,462,602 | | | 1,433,213 | |
| Operating lease right-of-use assets | 2,379,987 | | | 2,365,325 | |
| Goodwill | 993,590 | | | 992,240 | |
| Intangible assets, net | 681,127 | | | 709,756 | |
| Other assets | 52,329 | | | 52,448 | |
| | $ | 11,839,636 | | | $ | 11,248,525 | |
| | | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 3,640,639 | | | $ | 3,421,987 | |
| Accrued expenses | 606,804 | | | 535,863 | |
| Other current liabilities | 496,472 | | | 519,852 | |
| Total current liabilities | 4,743,915 | | | 4,477,702 | |
| Long-term debt | 1,032,984 | | | 747,320 | |
| Noncurrent operating lease liabilities | 2,014,499 | | | 2,017,159 | |
| Deferred income taxes | 342,445 | | | 334,013 | |
| Other long-term liabilities | 146,281 | | | 123,250 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock, nonvoting, $0.0001 par value, | | | |
| 10,000 shares authorized; no shares issued or outstanding | 0 | | | 0 | |
| Common stock, voting, $0.0001 par value, 200,000 shares authorized; | | | |
| 76,305 shares issued and 66,361 outstanding at January 2, 2021 | | | |
| 76,051 shares issued and 69,232 outstanding at December 28, 2019 | 8 | | | 8 | |
| Additional paid-in capital | 783,709 | | | 735,183 | |
| Treasury stock, at cost, 9,944 and 6,819 shares | (1,394,080) | | | (924,389) | |
| Accumulated other comprehensive loss | (26,759) | | | (34,569) | |
| Retained earnings | 4,196,634 | | | 3,772,848 | |
| Total stockholders’ equity | 3,559,512 | | | 3,549,081 | |
| | $ | 11,839,636 | | | $ | 11,248,525 | |
|
| | | | | | | |
| | December 30,
2017 | | December 31,
2016 |
| Assets | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 546,937 |
| | $ | 135,178 |
|
| Receivables, net | 606,357 |
| | 641,252 |
|
| Inventories | 4,168,492 |
| | 4,325,868 |
|
| Other current assets | 105,106 |
| | 70,466 |
|
| Total current assets | 5,426,892 |
| | 5,172,764 |
|
| Property and equipment, net of accumulated depreciation of $1,783,383 and $1,660,648 | 1,394,138 |
| | 1,446,340 |
|
| Goodwill | 994,293 |
| | 990,877 |
|
| Intangible assets, net | 597,674 |
| | 640,903 |
|
| Other assets, net | 69,304 |
| | 64,149 |
|
| | $ | 8,482,301 |
| | $ | 8,315,033 |
|
| Liabilities and Stockholders’ Equity | |
| | |
|
| Current liabilities: | |
| | |
|
| Accounts payable | $ | 2,894,582 |
| | $ | 3,086,177 |
|
| Accrued expenses | 533,548 |
| | 554,397 |
|
| Other current liabilities | 51,967 |
| | 35,472 |
|
| Total current liabilities | 3,480,097 |
| | 3,676,046 |
|
| Long-term debt | 1,044,327 |
| | 1,042,949 |
|
| Deferred income taxes | 303,620 |
| | 454,282 |
|
| Other long-term liabilities | 239,061 |
| | 225,564 |
|
| Commitments and contingencies |
|
| |
|
|
| Stockholders’ equity: | |
| | |
|
| Preferred stock, nonvoting, $0.0001 par value, | | | |
| 10,000 shares authorized; no shares issued or outstanding | — |
| | — |
|
| Common stock, voting, $0.0001 par value, 200,000 shares authorized; | | | |
| 75,569 shares issued and 73,936 outstanding at December 30, 2017 | | | |
| 75,326 shares issued and 73,749 outstanding at December 31, 2016 | 8 |
| | 8 |
|
| Additional paid-in capital | 664,646 |
| | 631,052 |
|
| Treasury stock, at cost, 1,633 and 1,577 shares | (144,600 | ) | | (138,102 | ) |
| Accumulated other comprehensive loss | (24,954 | ) | | (39,701 | ) |
| Retained earnings | 2,920,096 |
| | 2,462,935 |
|
| Total stockholders’ equity | 3,415,196 |
| | 2,916,192 |
|
| | $ | 8,482,301 |
| | $ | 8,315,033 |
|
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
| | | | Year Ended | | Year Ended |
| | December 30,
2017 | | December 31,
2016 | | January 2,
2016 | | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Net sales | $ | 9,373,784 |
| | $ | 9,567,679 |
| | $ | 9,737,018 |
| Net sales | $ | 10,106,321 | | | $ | 9,709,003 | | | $ | 9,580,554 | |
Cost of sales, including purchasing and warehousing costs | 5,288,735 |
| | 5,311,764 |
| | 5,314,246 |
| Cost of sales, including purchasing and warehousing costs | 5,624,707 | | | 5,454,257 | | | 5,361,141 | |
| Gross profit | 4,085,049 |
| | 4,255,915 |
| | 4,422,772 |
| Gross profit | 4,481,614 | | | 4,254,746 | | | 4,219,413 | |
| Selling, general and administrative expenses | 3,514,837 |
| | 3,468,317 |
| | 3,596,992 |
| Selling, general and administrative expenses | 3,731,707 | | | 3,577,566 | | | 3,615,138 | |
| Operating income | 570,212 |
| | 787,598 |
| | 825,780 |
| Operating income | 749,907 | | | 677,180 | | | 604,275 | |
| Other, net: | | | | | |
| Other, net: | | |
| Interest expense | (58,801 | ) | | (59,910 | ) | | (65,408 | ) | Interest expense | (46,886) | | | (39,898) | | | (56,588) | |
| Other income (expense), net | 8,848 |
| | 11,147 |
| | (7,484 | ) | |
| Loss on early redemptions of senior unsecured notes | | Loss on early redemptions of senior unsecured notes | (48,022) | | | (10,756) | | | 0 | |
| Other income, net | | Other income, net | (3,984) | | | 11,220 | | | 7,577 | |
| Total other, net | (49,953 | ) | | (48,763 | ) | | (72,892 | ) | Total other, net | (98,892) | | | (39,434) | | | (49,011) | |
| Income before provision for income taxes | 520,259 |
| | 738,835 |
| | 752,888 |
| Income before provision for income taxes | 651,015 | | | 637,746 | | | 555,264 | |
| Provision for income taxes | 44,754 |
| | 279,213 |
| | 279,490 |
| Provision for income taxes | 157,994 | | | 150,850 | | | 131,417 | |
| Net income | $ | 475,505 |
| | $ | 459,622 |
| | $ | 473,398 |
| Net income | $ | 493,021 | | | $ | 486,896 | | | $ | 423,847 | |
| | | | | | | | | | | | |
| Basic earnings per common share | $ | 6.44 |
| | $ | 6.22 |
| | $ | 6.45 |
| Basic earnings per common share | $ | 7.17 | | | $ | 6.87 | | | $ | 5.75 | |
| Weighted average common shares outstanding | 73,846 |
| | 73,562 |
| | 73,190 |
| Weighted average common shares outstanding | 68,748 | | | 70,869 | | | 73,728 | |
| | | | | | | |
| Diluted earnings per common share | $ | 6.42 |
| | $ | 6.20 |
| | $ | 6.40 |
| Diluted earnings per common share | $ | 7.14 | | | $ | 6.84 | | | $ | 5.73 | |
| Weighted average common shares outstanding | 74,110 |
| | 73,856 |
| | 73,733 |
| Weighted average common shares outstanding | 69,003 | | | 71,165 | | | 73,991 | |
| | | | | | | |
| Dividends declared per common share | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.24 |
| |
Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks.
Consolidated Statements of Comprehensive Income
(in thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended |
| January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Net income | $ | 493,021 | | | $ | 486,896 | | | $ | 423,847 | |
| Other comprehensive income (loss): | | | | | |
| Changes in net unrecognized other postretirement benefit costs, net of tax of $54, $67 and $103 | (152) | | | (142) | | | (294) | |
| Currency translation adjustments | 7,962 | | | 9,766 | | | (18,945) | |
| Total other comprehensive income (loss) | 7,810 | | | 9,624 | | | (19,239) | |
| Comprehensive income | $ | 500,831 | | | $ | 496,520 | | | $ | 404,608 | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| Net income | $ | 475,505 |
| | $ | 459,622 |
| | $ | 473,398 |
|
| Other comprehensive income (loss): | | | | | |
| Changes in net unrecognized other postretirement benefit costs, net of tax of $126, $346 and $289 | (194 | ) | | (534 | ) | | (445 | ) |
| Currency translation adjustments | 14,941 |
| | 4,892 |
| | (31,277 | ) |
| Total other comprehensive income (loss) | 14,747 |
| | 4,358 |
| | (31,722 | ) |
| Comprehensive income | $ | 490,252 |
| | $ | 463,980 |
| | $ | 441,676 |
|
Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks.
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Advance Auto Parts, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) |
| | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Treasury Stock, at cost | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | |
| Balance, December 30, 2017 | 73,936 | | | $ | 8 | | | $ | 664,646 | | | $ | (144,600) | | | $ | (24,954) | | | $ | 2,920,096 | | | $ | 3,415,196 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 423,847 | | | 423,847 | |
| Total other comprehensive loss | — | | | — | | | — | | | — | | | (19,239) | | | — | | | (19,239) | |
| Restricted stock, restricted stock units and deferred stock units vested | 215 | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| Share-based compensation | — | | | — | | | 27,760 | | | — | | | — | | | — | | | 27,760 | |
| Stock issued under employee stock purchase plan | 36 | | | — | | | 3,200 | | | — | | | — | | | — | | | 3,200 | |
| Repurchase of common stock | (1,738) | | | — | | | — | | | (281,354) | | | — | | | — | | | (281,354) | |
| Cash dividends declared ($0.24 per common share) | — | | | — | | | — | | | — | | | — | | | (17,788) | | | (17,788) | |
| Other | 11 | | | — | | | (809) | | | — | | | — | | | — | | | (809) | |
| Balance, December 29, 2018 | 72,460 | | | 8 | | | 694,797 | | | (425,954) | | | (44,193) | | | 3,326,155 | | | 3,550,813 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 486,896 | | | 486,896 | |
| Cumulative effect of accounting change from adoption of ASU 2016-02 | — | | | — | | | — | | | — | | | — | | | (23,165) | | | (23,165) | |
| Total other comprehensive income | — | | | — | | | — | | | — | | | 9,624 | | | — | | | 9,624 | |
| | | | | | | | | | | | | |
| Restricted stock units and deferred stock units vested | 192 | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| Share-based compensation | — | | | — | | | 37,438 | | | — | | | — | | | — | | | 37,438 | |
| Stock issued under employee stock purchase plan | 23 | | | — | | | 3,334 | | | — | | | — | | | — | | | 3,334 | |
| Repurchase of common stock | (3,448) | | | — | | | — | | | (498,435) | | | — | | | — | | | (498,435) | |
| Cash dividends declared ($0.24 per common share) | — | | | — | | | — | | | — | | | — | | | (17,038) | | | (17,038) | |
| Other | 5 | | | — | | | (386) | | | — | | | — | | | — | | | (386) | |
| Balance, December 28, 2019 | 69,232 | | | 8 | | | 735,183 | | | (924,389) | | | (34,569) | | | 3,772,848 | | | 3,549,081 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 493,021 | | | 493,021 | |
| Total other comprehensive income | — | | | — | | | — | | | — | | | 7,810 | | | — | | | 7,810 | |
| | | | | | | | | | | | | |
| Restricted stock units and deferred stock units vested | 234 | | | — | | | — | | | — | | | — | | | — | | | 0 | |
| Share-based compensation | — | | | — | | | 45,271 | | | — | | | — | | | — | | | 45,271 | |
| Stock issued under employee stock purchase plan | 20 | | | — | | | 3,270 | | | — | | | — | | | — | | | 3,270 | |
| Repurchase of common stock | (3,125) | | | — | | | — | | | (469,691) | | | — | | | — | | | (469,691) | |
| Cash dividends declared ($1.00 per common share) | — | | | — | | | — | | | — | | | — | | | (69,235) | | | (69,235) | |
| Other | 0 | | | — | | | (15) | | | — | | | — | | | — | | | (15) | |
| Balance, January 2, 2021 | 66,361 | | | $ | 8 | | | $ | 783,709 | | | $ | (1,394,080) | | | $ | (26,759) | | | $ | 4,196,634 | | | $ | 3,559,512 | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Advance Auto Parts, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (in thousands) |
| | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Treasury Stock, at cost | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | |
| Balance, January 3, 2015 | 73,074 |
| | $ | 7 |
| | $ | 562,945 |
| | $ | (113,044 | ) | | $ | (12,337 | ) | | $ | 1,565,341 |
| | $ | 2,002,912 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 473,398 |
| | 473,398 |
|
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (31,722 | ) | | — |
| | (31,722 | ) |
| Issuance of shares upon the exercise of stock options and stock appreciation rights | 138 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tax withholdings related to the exercise of stock appreciation rights | — |
| | — |
| | (13,112 | ) | | — |
| | — |
| | — |
| | (13,112 | ) |
| Tax benefit from share-based compensation, net | — |
| | — |
| | 12,989 |
| | — |
| | — |
| | — |
| | 12,989 |
|
| Restricted stock and restricted stock units vested | 109 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 35,336 |
| | — |
| | — |
| | — |
| | 35,336 |
|
| Stock issued under employee stock purchase plan | 35 |
| | — |
| | 5,139 |
| | — |
| | — |
| | — |
| | 5,139 |
|
| Repurchase of common stock | (42 | ) | | — |
| | — |
| | (6,665 | ) | | — |
| | — |
| | (6,665 | ) |
| Cash dividends declared ($0.24 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (17,662 | ) | | (17,662 | ) |
| Other | — |
| | — |
| | 35 |
| | — |
| | — |
| | — |
| | 35 |
|
| Balance, January 2, 2016 | 73,314 |
| | 7 |
| | 603,332 |
| | (119,709 | ) | | (44,059 | ) | | 2,021,077 |
| | 2,460,648 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 459,622 |
| | 459,622 |
|
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | 4,358 |
| | — |
| | 4,358 |
|
| Issuance of shares upon the exercise of stock appreciation rights | 149 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Tax withholdings related to the exercise of stock appreciation rights | — |
| | — |
| | (19,558 | ) | | — |
| | — |
| | — |
| | (19,558 | ) |
| Tax benefit from share-based compensation, net | — |
| | — |
| | 22,325 |
| | — |
| | — |
| | — |
| | 22,325 |
|
| Restricted stock and restricted stock units vested | 372 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | — |
| | 20,422 |
| | — |
| | — |
| | — |
| | 20,422 |
|
| Stock issued under employee stock purchase plan | 30 |
| | — |
| | 4,369 |
| | — |
| | — |
| | — |
| | 4,369 |
|
| Repurchase of common stock | (116 | ) | | — |
| | — |
| | (18,393 | ) | | — |
| | — |
| | (18,393 | ) |
| Cash dividends declared ($0.24 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (17,764 | ) | | (17,764 | ) |
| Other | — |
| | — |
| | 162 |
| | — |
| | — |
| | — |
| | 162 |
|
| Balance, December 31, 2016 | 73,749 |
| | 8 |
| | 631,052 |
| | (138,102 | ) | | (39,701 | ) | | 2,462,935 |
| | 2,916,192 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 475,505 |
| | 475,505 |
|
| Cumulative effect of accounting change from adoption of ASU 2016-09 | — |
| | — |
| | 782 |
| | — |
| | — |
| | (490 | ) | | 292 |
|
| Total other comprehensive income | — |
| | — |
| | — |
| | | | 14,747 |
| | — |
| | 14,747 |
|
| Issuance of shares upon the exercise of stock appreciation rights | 67 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Tax withholdings related to the exercise of stock appreciation rights | — |
| | — |
| | (6,531 | ) | | — |
| | — |
| | — |
| | (6,531 | ) |
| Restricted stock units vested | 147 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | — |
| | | | 35,267 |
| | — |
| | — |
| | — |
| | 35,267 |
|
| Stock issued under employee stock purchase plan | 29 |
| | — |
| | 4,053 |
| | — |
| | — |
| | — |
| | 4,053 |
|
| Repurchase of common stock | (56 | ) | | — |
| | — |
| | (6,498 | ) | | — |
| | — |
| | (6,498 | ) |
| Cash dividends declared ($0.24 per common share) | — |
| | — |
| | — |
| | — |
| | — |
| | (17,854 | ) | | (17,854 | ) |
| Other | — |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | 23 |
|
| Balance, December 30, 2017 | 73,936 |
| | $ | 8 |
| | $ | 664,646 |
| | $ | (144,600 | ) | | $ | (24,954 | ) | | $ | 2,920,096 |
| | $ | 3,415,196 |
|
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
| | | | | | | | | | | | | | | | | |
Advance Auto Parts, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(in thousands) |
| |
| | Year Ended |
| January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 493,021 | | | $ | 486,896 | | | $ | 423,847 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 250,081 | | | 238,371 | | | 238,184 | |
| Share-based compensation | 45,271 | | | 37,438 | | | 27,760 | |
| Loss and impairment of long-lived assets | 4,727 | | | 6,671 | | | 15,956 | |
| Loss on early redemption of senior unsecured notes | 48,022 | | | 10,756 | | | 0 | |
| Other, net | 1,467 | | | 1,681 | | | 2,195 | |
| Provision for deferred income taxes | 8,136 | | | 23,148 | | | 15,956 | |
| Net change in: | | | | | |
| Receivables, net | (59,014) | | | (62,837) | | | (21,471) | |
| Inventories | (101,449) | | | (63,130) | | | (206,125) | |
| Accounts payable | 216,488 | | | 245,785 | | | 285,493 | |
| Accrued expenses | 78,507 | | | (72,288) | | | 93,940 | |
| Other assets and liabilities, net | (15,569) | | | 14,418 | | | (64,707) | |
| Net cash provided by operating activities | 969,688 | | | 866,909 | | | 811,028 | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (267,576) | | | (270,129) | | | (193,715) | |
| Purchase of an indefinite-lived intangible asset | (230) | | | (201,519) | | | 0 | |
| Proceeds from sales of property and equipment | 909 | | | 8,709 | | | 1,888 | |
| Other, net | 0 | | | 0 | | | 0 | |
| Net cash used in investing activities | (266,897) | | | (462,939) | | | (191,827) | |
| Cash flows from financing activities: | | | | | |
| (Decrease) increase in bank overdrafts | 0 | | | (59,339) | | | 32,014 | |
| Redemption of senior unsecured note | (602,568) | | | (310,047) | | | 0 | |
| Borrowings under credit facilities | 500,000 | | | 0 | | | 0 | |
| Payments on credit facilities | (500,000) | | | 0 | | | 0 | |
| Proceeds from issuance of senior unsecured notes, net | 847,092 | | | 0 | | | 0 | |
| Dividends paid | (56,347) | | | (17,185) | | | (17,819) | |
| Proceeds from the issuance of common stock | 3,270 | | | 3,334 | | | 3,200 | |
| Repurchases of common stock | (469,691) | | | (498,435) | | | (281,354) | |
| Other, net | (7,753) | | | (481) | | | 44 | |
| Net cash used in financing activities | (285,997) | | | (882,153) | | | (263,915) | |
| Effect of exchange rate changes on cash | (467) | | | 321 | | | (5,696) | |
| Net increase (decrease) in cash and cash equivalents | 416,327 | | | (477,862) | | | 349,590 | |
Cash and cash equivalents, beginning of period | 418,665 | | | 896,527 | | | 546,937 | |
Cash and cash equivalents, end of period | $ | 834,992 | | | $ | 418,665 | | | $ | 896,527 | |
| | | | | |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | 34,011 | | | $ | 41,099 | | | $ | 45,322 | |
| Income tax payments | $ | 146,073 | | | $ | 108,163 | | | $ | 143,213 | |
| Non-cash transactions: | | | | | |
| Accrued purchases of property and equipment | $ | 4,963 | | | $ | 26,201 | | | $ | 15,365 | |
| | | | | |
|
| | | | | | | | | | | |
Advance Auto Parts, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(in thousands) |
| | |
| | Year Ended |
| | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 475,505 |
| | $ | 459,622 |
| | $ | 473,398 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 249,260 |
| | 258,387 |
| | 269,476 |
|
| Share-based compensation | 35,267 |
| | 20,452 |
| | 36,929 |
|
| Loss and impairment of property and equipment | 17,106 |
| | 5,999 |
| | 12,882 |
|
| Other, net | 3,123 |
| | (2,039 | ) | | 2,660 |
|
| (Benefit) provision for deferred income taxes | (151,263 | ) | | 20,213 |
| | (9,219 | ) |
| Net change in: | | | | | |
| Receivables, net | 36,047 |
| | (41,642 | ) | | (21,476 | ) |
| Inventories | 167,548 |
| | (144,603 | ) | | (244,096 | ) |
| Accounts payable | (197,168 | ) | | (119,325 | ) | | 119,164 |
|
| Accrued expenses | (13,295 | ) | | 49,341 |
| | 35,103 |
|
| Other assets and liabilities, net | (21,325 | ) | | 16,898 |
| | 27,823 |
|
| Net cash provided by operating activities | 600,805 |
| | 523,303 |
| | 702,644 |
|
| Cash flows from investing activities: | |
| | |
| | |
| Purchases of property and equipment | (189,758 | ) | | (259,559 | ) | | (234,747 | ) |
| Proceeds from sales of property and equipment | 11,099 |
| | 2,212 |
| | 270 |
|
| Other, net | 20 |
| | (4,697 | ) | | (18,889 | ) |
| Net cash used in investing activities | (178,639 | ) | | (262,044 | ) | | (253,366 | ) |
| Cash flows from financing activities: | |
| | |
| | |
| Increase (decrease) in bank overdrafts | 14,004 |
| | (5,573 | ) | | (2,922 | ) |
| Borrowings under credit facilities | 534,400 |
| | 799,600 |
| | 618,300 |
|
| Payments on credit facilities | (534,400 | ) | | (959,600 | ) | | (1,041,700 | ) |
| Dividends paid | (17,854 | ) | | (17,738 | ) | | (17,649 | ) |
| Proceeds from the issuance of common stock | 4,076 |
| | 4,532 |
| | 5,174 |
|
| Tax withholdings related to the exercise of stock appreciation rights | (6,531 | ) | | (19,558 | ) | | (13,112 | ) |
| Repurchase of common stock | (6,498 | ) | | (18,393 | ) | | (6,665 | ) |
| Other, net | (2,069 | ) | | (390 | ) | | (380 | ) |
| Net cash used in financing activities | (14,872 | ) | | (217,120 | ) | | (458,954 | ) |
| Effect of exchange rate changes on cash | 4,465 |
| | 257 |
| | (4,213 | ) |
| Net increase (decrease) in cash and cash equivalents | 411,759 |
| | 44,396 |
| | (13,889 | ) |
Cash and cash equivalents, beginning of period | 135,178 |
| | 90,782 |
| | 104,671 |
|
Cash and cash equivalents, end of period | $ | 546,937 |
| | $ | 135,178 |
| | $ | 90,782 |
|
| | | | | | |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | 53,509 |
| | $ | 55,457 |
| | $ | 62,371 |
|
| Income tax payments | $ | 192,116 |
| | $ | 225,327 |
| | $ | 254,408 |
|
| Non-cash transactions: | | | | | |
| Accrued purchases of property and equipment | $ | 14,335 |
| | $ | 21,176 |
| | $ | 44,038 |
|
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
1.Nature of Operations and Basis of Presentation: | |
1. | Nature of Operations and Basis of Presentation: |
Description of Business
Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both “do-it-for-me”, or Professional,professional installers (“Professional”) and “do-it-yourself,” or DIY“do-it-yourself” (“DIY”) customers. The accompanying consolidated financial statements have been prepared by the Companyus and include the accounts of Advance Auto Parts, Inc. (“Advance”), including, its wholly owned subsidiary,subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and itstheir subsidiaries (collectively referred to as “Advance,” “we,” “us,” “our” or “the Company”“our”).
As of December 30, 2017, the Company’sJanuary 2, 2021, our operations are comprised of 5,0544,806 stores and 129 distribution170 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. The Company’sOur stores operate primarily under the trade names “Advance Auto Parts,” “Carquest” and “Autopart International,” and our distribution branches operate under the “Worldpac” trade name. In addition, we served 1,2181,277 independently owned Carquest branded stores (“independent stores”) across the same geographic locations served by the Company’sour stores and branches in addition to Mexico, Grand Cayman, the Bahamas, Turks and Caicos theand British Virgin IslandsIslands.
In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic. As a majority of our stores and facilities have remained open, we have taken additional measures to help protect the Pacific Islands.health and safety of our Team Members and customers. Such measures, among others, include the implementation of other labor-related benefits for Team Members and increased sanitation practices across Advance. Since the assumptions underpinning our long-term revenue and cash flow growth rates, operating models and business strategies have not been significantly impacted, there was no material impairment of our various assets during the fifty-three weeks ended January 2, 2021.
The COVID-19 pandemic remains an evolving situation. If a period of decreased demand were to reoccur, it may lead to increased asset recovery and valuation risks in the future, such as impairment of goodwill, intangible assets and store and other assets. We will continue to assess the impact of the pandemic on our financial position. The extent to which the COVID-19 pandemic will impact our operations, liquidity, compliance with debt covenants or financial results in subsequent periods is uncertain, but such impact could be material.
Accounting Period
The Company’sOur fiscal year ends on the Saturday nearest the end of December. All references herein for the years 2017, 2016“2020,” “2019” and 2015“2018” represent the fiscal year ended January 2, 2021, which consist of 53 weeks, and fiscal years ended December 30, 2017,28, 2019 and December 31, 2016 and January 2, 2016,29, 2018, which were allboth had 52 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of Advance and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior years’ Consolidated Balance Sheetsconsolidated statements of changes in stockholders’ equity and Statementsstatements of Changes in Stockholders’ Equitycash flows have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
| |
2. | Significant Accounting Policies: |
2. Significant Accounting Policies:
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and money market funds with original maturities of three months or less. Also, included in cash equivalents are credit card and debit card receivables from banks, which generally settle in less than four business days.
Inventory
The Company’sOur inventory consists primarily of parts, batteries, accessories and other products used on vehicles that have reasonably long shelf lives and is stated at the lower of cost or market. The cost of the Company’sour merchandise inventory is primarily determined using the last-in, first-out (“LIFO”) method. Under the LIFO method, the Company’sour cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs relating to prices paid in 20172020 and prior years. The CompanyWe regularly reviewsreview inventory quantities on-hand, considersconsider whether itwe may have excess inventory based on the Company’sour current approach for managing slower moving inventory and adjustsadjust the carrying value as necessary.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Vendor Incentives
The Company receivesWe receive incentives in the form of reductions to amounts owed to and/or payments from vendors related to volume rebates and other promotional considerations. Many of these incentives are under long-term agreements in excess of one year, while others are negotiated on an annual basis or shorter. Advertising allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to selling, general and administrative expenses (“SG&A”) when the cost is incurred. Volume rebates and allowances that do not meet the requirements for offsetting in SG&A are recorded as a reduction to inventory as they are earned based on inventory purchases. Total deferred vendor incentives includedrecorded as a reduction of InventoryInventories were $179.2$141.9 million and $211.1$173.8 million as of December 30, 2017January 2, 2021 and December 31, 2016.28, 2019.
The Company recognizesWe recognize other promotional incentives earned under long-term agreements not specifically related to volume of purchases as a reduction to cost of sales. However, these incentives are not deferred as a reduction of inventory and are recognized based on the cumulative net purchases as a percentage of total estimated net purchases over the life of the agreement. Short-term incentives with terms less than one year are generally recognized as a reduction to cost of sales over the duration of the agreements. Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged directly to expense when incurred; major improvements are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the account balances, with any gain or loss reflected in the consolidated statements of operations.
Depreciation of land improvements, buildings, furniture, fixtures and equipment and vehicles is provided over the estimated useful lives of the respective assets using the straight-line method. Depreciation of building and leasehold improvements is provided over the shorter of the original useful lives of the respective assets or the term of the lease using the straight-line method.
Goodwill and Indefinite-Lived Intangible Assets
The Company performs itsWe perform our evaluation for the impairment of goodwill and indefinite-lived intangible assets for itsour reporting units annually as of the first day of the fourth quarter, or when indications of potential impairment exist. These indicators would include a significant change in operating performance, the business climate, legal factors, competition, or a planned sale or disposition of a significant portion of the business, among other factors. The Company assessesWe assess qualitative factors such as current company performance and overall economic factors to determine if it is more-likely-than-not that the goodwill might be impaired and whether it is necessary to perform the step onea quantitative goodwill impairment test. In the quantitative goodwill test, the Company compareswe compare the carrying value of a reporting unit to its fair value. If the carryingfair value of the reporting unit is lower than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds the estimatedreporting unit's fair value, a second step is performed, which compares the implied fair value of goodwill to the carrying value, to determine the amount of impairment. The Company’svalue. Our indefinite-lived intangible assets are tested for impairment at the asset group level. Indefinite-lived intangibles are evaluated by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If the fair value based on the future discounted cash flows exceeds the carrying value, we conclude that no intangible asset impairment has occurred. If the carrying value of the indefinite-lived intangible asset exceeds the fair value, we recognize an impairment loss.
Effective in the third quarter of 2017, the Company realigned its three geographic divisions, which included the operations of the stores operating under the Advance Auto Parts, Carquest and Autopart International trade names, into two U.S. geographic divisions. As a result of this realignment and change in the operating structure of its Carquest Independent and Carquest Canada businesses, the Company has increased its number ofWe have 5 operating segments, from four to five, and defined them as “Northern Division,” “Southern Division,” “Carquest Canada,” “Independents” and “Worldpac.” As each operating segment represents a reporting unit, goodwill was reassignedis assigned to the affectedeach reporting units using a relative fair value approach.unit.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Valuation of Long-Lived Assets
The Company evaluatesWe evaluate the recoverability of itsour long-lived assets, including finite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable and exceeds its fair value. When such an event occurs, the Company estimateswe estimate the undiscounted future cash flows expected to result from the use of the long-lived asset or asset group and its eventual disposition. These impairment evaluations involve estimates of asset useful lives and future cash flows. If the undiscounted expected future cash flows are less than the carrying amount of the asset and the carrying amount of the asset exceeds its fair value, an impairment loss is recognized. When an impairment loss is recognized, the carrying amount of the asset is reduced to its estimated fair value based on quoted market prices or other valuation techniques (e.g., discounted cash flow analysis).
Self-Insurance
The Company isWe are self-insured for general and automobile liability, workers’ compensation and health care claims of its employees, or Team Members, while maintaining stop-loss coverage with third-party insurers to limit its total liability exposure. Expenses associated with these liabilities are calculated for (i) claims filed, (ii) claims incurred but not yet reported and (iii) projected future claims using actuarial methods followed in the insurance industry as well as the Company’sour historical claims experience. The Company includesWe include the current and long-term portions of its self-insurance reserves in Accrued expenses and Other long-term liabilities.liabilities in the accompanying consolidated balance sheets.
Warranty Liabilities
The warranty obligation on the majority of merchandise sold by the Companyus with a manufacturer’s warranty is the responsibility of the Company’sour vendors. However, the Company haswe have an obligation to provide customers replacement of certain merchandise at no cost or merchandise at a prorated cost if under a warranty and not covered by the manufacturer. Merchandise soldAs of January 2, 2021 and December 28, 2019, our warranty liability primarily consisted of batteries with warranty coverage sold by the Company primarily includes batteries, but may also include other parts such as brakes and shocks. The Company estimates itsus. We estimate our warranty obligation at the time of sale based on the historical return experience, sales level and cost of the respective product sold. To the extent vendors provide upfront allowances in lieu of accepting the obligation for warranty claims and the allowance is in excess of the related warranty expense, the excess is recorded as a reduction to cost of sales.
Leases
The Company leasesWe lease certain store locations, distribution centers, office spaces, equipment and vehicles. The total amount of minimum rent is expensedWe recognize lease expense on a straight-line basis over the initial term of the lease unless external economic factors exist such that renewals are reasonably assured.certain. In those instances, the renewal period would be included in the lease term for purposes of establishing an amortizationto determine the period and determining if suchin which to recognize the lease qualified as a capital or operating lease. Differences between the calculated rent expense and cash payments are recorded as a liability within the Accrued expenses and Other long-term liabilities captions in the accompanying consolidated balance sheets, based on the terms of the lease.expense. Most leases require the Companyus to pay taxes, maintenance, insurance and other certain other expensescosts applicable to the leased premises. Management expects that
Effective December 30, 2018, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), using the alternative transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Using the alternative transition method, we applied the transition requirements at the effective date of ASU 2016-02 with the impact of initially applying ASU 2016-02 recognized as a cumulative-effect adjustment to retained earnings in the normal coursefirst quarter of business2019.
We elected the package of practical expedients permitted under the transition guidance within the new standard. In addition, as a practical expedient relating to our store locations, distribution centers, office spaces and vehicle leases, we elected not to separate lease components from nonlease components.
The adoption of ASU 2016-02 resulted in the recording of operating lease assets and lease liabilities of $2.4 billion as of December 30, 2018. At the date of adoption, there was a difference between the operating lease right-of-use assets and lease liabilities recorded that expire will be renewed or replaced by other leases.included an adjustment to retained earnings, net of a $7.9 million deferred tax impact, which primarily resulted from the impairment of operating lease right-of-use assets. For 2019, the adoption of the new standard did not have a material impact on our condensed consolidated statements of operations and condensed consolidated statements of cash flows as substantially all of our leases are operating in nature.
Fair Value Measurements
A three-level valuation hierarchy, based upon observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy: Level 1 - Quoted prices for identical instruments in active markets; Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and Level 3 - Instruments whose significant inputs are unobservable. Financial instruments are transferred in and/or out of Level 1, 2 or 3 at the beginning of the accounting period in which there is a change in the valuation inputs.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Closed Facility Liabilities and Exit Activities
The Company continually reviews the operating performance of its existing store locations and closes or relocates certain stores identified as underperforming. In addition, the Company is consolidating certain locations as part of its planned integration of General Parts International, Inc. (“GPI”). Expenses accrued pertaining to closed facility exit activities are included in the Company’s closed facility liabilities, within Accrued expenses and Other long-term liabilities in the accompanying consolidated balance sheets, and recognized in SG&A in the accompanying consolidated statements of operations at the time of facility closure. Closed facility liabilities include the present value of the remaining lease obligations and management’s estimate of future costs of insurance, property tax and common area maintenance expenses, reduced by the present value of estimated revenues from subleases and lease buyouts.
Employees receiving severance benefits as the result of a store closing or other restructuring activity are required to render service until they are terminated in order to receive benefits. Severance benefits are recognized over the related service period. Other restructuring costs, including costs to relocate employees, are recognized in the period in which the liability is incurred.
Share-Based Payments
The Company providesWe provide share-based compensation to itsour eligible Team Members and Board of Directors. The Company isWe are required to exercise judgment and make estimates when determining the (i) fair value of each award granted and (ii) projected number of awards expected to vest. The Company calculatesWe calculate the fair value of all share-based awards at the date of grant and usesuse the straight-line method to amortize this fair value as compensation cost over the requisite service period.
Revenues
Effective December 31, 2017, we adopted ASC 606, Revenue RecognitionFrom Contracts With Customers (Topic 606) (“ASC 606”). The results of applying Topic 606 using the modified retrospective approach were insignificant and did not have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems.
ASC 606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer and is considered the unit of account. The Company recognizesmajority of our contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Discounts and incentives are treated as separate performance obligations. We allocate the contract’s transaction price to each of these performance obligations separately using explicitly stated amounts or our best estimate using historical data. Additionally, we estimate and record gift card breakage as redemptions occur.
In accordance with ASC 606 revenue is recognized at the time the sale is made, at which time the Company’sour walk-in customers take immediate possession of the merchandise or same-day delivery is made to the Company’sour Professional delivery customers, which include certain independently ownedindependently-owned store locations. Payment terms are established for our Professional delivery customers based on pre-established credit requirements. Payment terms vary depending on the customer and generally range from 1 to 30 days. Based on the nature of receivables, no significant financing components exist. For e-commerce sales, revenue is recognized either at the time of pick-up at one of the Company’sour store locations or at the time of shipment depending on the customer’scustomer's order designation. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company estimatesWe estimate the reduction to Net sales and costCost of sales for returns based on current sales levels and the Company’sour historical return experience.
We provide assurance type warranty coverage primarily on batteries, brakes and struts whereby we are required to provide replacement product at no cost or a reduced cost for a set period of time.
The following table summarizes financial information for each of the Company’sour product groups.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Percentage of Sales, by Product Group | | | | | | |
| Parts and Batteries | | 66 | % | | 67 | % | | 66 | % |
| Accessories and Chemicals | | 21 | | | 21 | | | 20 | |
| Engine Maintenance | | 12 | | | 11 | | | 13 | |
| Other | | 1 | | | 1 | | | 1 | |
| Total | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | |
| | | Year Ended |
| | | December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
| Percentage of Sales, by Product Group | | | | | | |
| Parts and Batteries | | 65 | % | | 66 | % | | 66 | % |
| Accessories and Chemicals | | 20 | % | | 19 | % | | 19 | % |
| Engine Maintenance | | 14 | % | | 14 | % | | 14 | % |
| Other | | 1 | % | | 1 | % | | 1 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
Receivables, net consist primarily of receivables from Professional customers. The Company grantsWe grant credit to certain Professional customers who meet the Company’sour pre-established credit requirements. Accounts receivable is stated at net realizable value. The CompanyWe regularly reviewsreview accounts receivable balances and maintains allowances for doubtful accounts for estimated losses whenever events or circumstances indicate the carrying value may not be recoverable. The Company considersWe consider the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. The Company controlsWe control credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Cost of Sales
Cost of sales includes actual product cost, warranty costs, vendor incentives, cash discounts on payments to vendors, costs associated with operating our distribution network, including payroll and benefits costs, occupancy costs and depreciation, in-bound freight-related costs from our vendors, impairment of inventory resulting from store closures and costs associated with moving merchandise inventories from our distribution centers to stores, branch locations and customers.
Selling, General and Administrative Expenses
SG&A includes payroll and benefits costs for store and corporate Team Members, occupancy costs of store and corporate facilities, depreciation and amortization related to store and corporate assets, share-based compensation expense, advertising, self-insurance, costs of consolidating, converting or closing facilities, including early termination of lease obligations, severance and impairment charges, professional services and costs associated with our Professional delivery program, including payroll and benefit costs, and transportation expenses associated with moving merchandise inventories from stores and branches to customer locations.
Advertising Costs
The Company expensesWe expense advertising costs as incurred. Advertising expense, net of qualifying vendor promotional funds, was $102.8$132.3 million, $97.0$117.3 million and $108.8$120.9 million in 2017, 20162020, 2019 and 2015.2018. Vendor promotional funds, which reduced advertising expense, amounted to $33.3$48.5 million and $29.3$45.7 million and $17.5$26.9 million in 2017, 20162020, 2019 and 2015.2018.
Foreign Currency Translation
The assets and liabilities of the Company’sour foreign operations are translated into U.S. dollars at current exchange rates, and revenues, expenses and cash flows are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component in the Consolidated Statementsconsolidated statements of Comprehensive Income.comprehensive income. Losses from foreign currency transactions, which are included in Other income, net, were $4.0$6.9 million, during 20171.7 million and $7.45.0 million during 2015. Gainsin 2020, 2019 and losses from foreign currency transactions were not significant in 2016.2018.
Income Taxes
The Company accountsWe account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under the asset and liability method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income taxes reflect the net income tax effect of temporary differences between the basis of assets and liabilities for financial reporting purposes and for income tax reporting purposes. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date.
The Company recognizesWe recognize tax benefits and/or tax liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Companyus to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts as the Companywe must determine the probability of various possible outcomes.
The Company reevaluatesWe reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. The reevaluations are based on many factors, including but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes of limitations and new federal or state audit activity. Any change in either the Company’sour recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Earnings per Share
Basic earnings per share of common stock has been computed based on the weighted-average number of common shares outstanding during the period, which is reduced by stock held in treasury and shares of nonvested restricted stock units.period. Diluted earnings per share is calculated by including the effect of dilutive securities. Diluted earnings per share of common stock reflects the weighted-average number of shares of common stock outstanding, outstanding deferred stock units and the impact of outstanding stock options and stock appreciation rights (collectively “share-based awards”). Share-based awards containing performance conditions are included in the dilution impact as those conditions are met.
Segment Information
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’sOur CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about the Company’sour five operating segments, for purposes of allocating resources and evaluating financial performance.
For 2017 and 2016, the Company hasWe have one reportable segment as the five operating segments are aggregated due primarily to the economic and operational similarities of each operating segment as the stores and branches have similar characteristics, including the nature of the products and services, customer base and the methods used to distribute products and provide service to its customers.
Recently Issued Accounting Pronouncements
In January 2017,December 2019, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2017-04, “Intangibles - Goodwill and Other2019-12, Income Taxes (Topic 350)740): Simplifying the TestAccounting for Goodwill Impairment” to simplifyIncome Taxes, which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairmentincome taxes. This ASU will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2019, with early2020. We expect the adoption permitted after January 1, 2017. The Company electedof this new standard to early adopt ASU 2017-04 in 2017 and applied the new guidance in completionhave an insignificant impact on our consolidated financial condition, results of its annual goodwill impairment test performed in the fourth quarteroperations or cash flows.
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” aimed at simplifying certain aspects of accounting for share-based payment transactions. The areas for simplification include the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU 2016-09 inDuring the first quarter of 20172020, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and recorded a cumulative net increase in stockholders’ equity of $0.3 million relatedreasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the Company’s election to record forfeitures as they occur. In addition, the Company elected to retrospectively adopt the provision regarding the presentationmeasurement of excess tax benefits in the statement of cash flows, which resulted in an increase in our net cash provided by operating activities and a decrease in our net cash provided by financing activities of $22.4 million and $13.0 million for 2016 and 2015.credit losses on financial assets, including trade receivables. The provision requiring the inclusion of excess tax benefits (deficits) as a component of the Provision for income taxes in the consolidated results of operations is being applied prospectively. The Company recorded excess tax benefits of $2.3 million as a reduction in Provision for income taxes during 2017.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require lessees to recognize lease assets and lease liabilities for most leases, including those leases previously classified as operating leases under current GAAP. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those years; earlier adoption is permitted. The FASB issued an exposure draft to amend Topic 842 to provide entities with an additional transition method with which to adopt Topic 842. The proposed transition method would enable entities to apply the transition requirements in Topic 842 at the effective date of that Topic (rather than at the beginning of the earliest comparative period presented as currently required) with the effects of initially applying Topic 842 recognized as a cumulative-effect adjustment to retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with Topic 840, including the disclosure requirements of that Topic. Practical expedients are available for election as a package and if applied consistently to all leases.
The Company has selected its leasing software solution and is in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard in 2019. The Company is evaluating the impact that the new standard will have on the consolidated financial statements. While the Company is unable to quantify the impact at this time, it expects the adoption of the new standard to result in a material increase in the assets and liabilities in the consolidated financial statements. At this time, the Company does not expect adoption of ASU 2016-02 to have a material impact on its consolidated statements of operations as the majority of its leases will remain operating in nature. As such, the expense recognition will be similar to previously required straight-line expense treatment.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively, “Topic 606”). Topic 606 superseded existing revenue recognition standards with a single model. The revenue recognition principle in Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company plans to adopt Topic 606 in the first quarter of 2018 by applying the modified retrospective approach. Results for reporting periods beginning after December 30, 2017 will be presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. Generally the Company’s performance obligations are satisfied the same day contracts with customers are initiated. As such, the adoption of the new standard will2016-13 did not have a material impact on our consolidated financial statements.
During the second quarter of 2020, we early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s consolidated financial condition, resultsregistered securities under Rule 3-10 of operations, cash flows, business process, controls or systems. Additionally, we expectRegulation S-X. The final rule also allows for the impact of the adoption of the new standardsimplified disclosure to be immaterial to our net income on an ongoing basis.included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Company
3.Inventories:
We used the LIFO method of accounting for approximately 88% and 89%88.3% of inventoriesInventories at December 30, 2017January 2, 2021 and December 31, 2016.28, 2019. As a result of changes in the LIFO reserve, the Companywe recorded a reduction to Cost of sales of $13.8 million in 2020, an increase to costCost of sales of $2.7$101.3 million in 20172019 and a reduction to cost of sales of $40.7 million and $42.3$39.8 million in 2016 and 2015.2018.
Purchasing and warehousing costs included in inventoryInventories as of December 30, 2017January 2, 2021 and December 31, 2016,28, 2019, were $429.8$464.7 million and $395.2$476.3 million.
Inventory balances were as follows:
| | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Inventories at first in, first out (“FIFO”) | $ | 4,382,779 | | | $ | 4,290,565 | |
| Adjustments to state inventories at LIFO | 155,420 | | | 141,603 | |
| Inventories at LIFO | $ | 4,538,199 | | | $ | 4,432,168 | |
4.Goodwill and Intangible Assets:
|
| | | | | | | |
| (in thousands) | December 30,
2017 | | December 31,
2016 |
| Inventories at FIFO | $ | 3,965,370 |
| | $ | 4,120,030 |
|
| Adjustments to state inventories at LIFO | 203,122 |
| | 205,838 |
|
| Inventories at LIFO | $ | 4,168,492 |
| | $ | 4,325,868 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| |
4. | Exit Activities and Other Initiatives: |
Integration of Carquest stores
The Company is in the process of a multi-year integration, which includes the consolidation and conversion of its Carquest stores acquired with GPI in 2014. As of December 30, 2017, 346 Carquest stores acquired with GPI had been consolidated into existing Advance Auto Parts stores and 422 stores had been converted to the Advance Auto Parts format. During 2017, a total of 13 Carquest stores were consolidated and 140 stores were converted. During 2016, a total of 156 Carquest stores were consolidated and 123 stores were converted. We expect to consolidate or convert the remaining U.S. Carquest stores over the next few years. As of December 30, 2017, the Company had 437 stores, including 138 stores in Canada, still operating under the Carquest name.
The Company incurred $1.0 million, $18.9 million and $7.3 million of exit costs related to the consolidations and conversions during 2017, 2016 and 2015, primarily related to closed store lease obligations.
2017 Field and Support Center Restructuring
In June 2017, the Company restructured its field organization and streamlined its operating structure. The restructuring activity was substantially complete as of December 30, 2017 and resulted in the recognition of $7.9 million of severance expense.
2017 Store and Supply Chain Rationalization
During the fourth quarter 2017, the Board of Directors approved a plan to close certain underperforming stores and begin to rationalize the Company's supply chain costs as part of the Company’s strategy to transform the enterprise. The Company expects these actions will result in estimated charges of up to $70 million in 2018. These charges consist of $35 million related to the early termination of lease obligations, $15 million of inventory and supply chain asset impairment charges, $15 million of other facility closure costs, and $5 million of severance. At December 30, 2017, no stores or distribution centers had been closed in connection with this activity; however, the Company recorded an impairment charge of $6.9 million as part of this plan to close certain underperforming stores.
Total Exit Liabilities
The Company’s total exit liabilities include liabilities recorded in connection with the consolidation of Carquest stores and restructuring activities described above, along with liabilities associated with facility closures that have occurred as part of our normal market evaluation process. Cash payments on the closed facility lease obligations are expected to be made through 2028 and the remaining severance payments are expected to be made in 2018. Of the Company’s total exit liabilities as of December 30, 2017, $19.8 million is included in Other long-term liabilities and the remainder is included in Accrued expenses in the accompanying condensed consolidated balance sheets. A summary of the Company’s exit liabilities are presented in the following table:
|
| | | | | | | | | | | | |
| (in thousands) | | Closed Facility Lease Obligations | | Severance | | Total |
| Balance, January 2, 2016 | | $ | 42,490 |
| | $ | 6,255 |
| | $ | 48,745 |
|
| Reserves established | | 23,252 |
| | 988 |
| | 24,240 |
|
| Change in estimates | | (3,073 | ) | | (410 | ) | | (3,483 | ) |
| Cash payments | | (18,404 | ) | | (5,874 | ) | | (24,278 | ) |
| Balance, December 31, 2016 | | 44,265 |
| | 959 |
| | 45,224 |
|
| Reserves established | | 7,940 |
| | 7,927 |
| | 15,867 |
|
| Change in estimates | | (1,116 | ) | | (699 | ) | | (1,815 | ) |
| Cash payments | | (19,519 | ) | | (6,542 | ) | | (26,061 | ) |
| Balance, December 30, 2017 | | $ | 31,570 |
| | $ | 1,645 |
| | $ | 33,215 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| |
5. | Goodwill and Intangible Assets: |
Goodwill
At December 30, 2017January 2, 2021 and December 31, 2016,28, 2019, the carrying amount of goodwillGoodwill in the accompanying consolidated balance sheets was $994.3$993.6 million and $990.9$992.2 million. The change in goodwill during 20172020 and 20162019 was $3.4$1.4 million and $1.4$2.0 million related to foreign currency translation.
Intangible Assets Other Than Goodwill
On December 23, 2019, we purchased the DieHard® brand for a cash purchase price of $200.0 million, exclusive of $1.5 million of capitalizable transaction costs. This purchase gives us the right to sell DieHard® batteries and enables us to extend the DieHard® brand into other automotive and vehicular categories. We granted the seller an exclusive royalty-free, perpetual license to develop, market, and sell DieHard® branded products in non-automotive categories. We accounted for this transaction as a purchase of an indefinite-lived intangible asset, which is included within the Brands, trademarks and tradenames category below, and is not subject to amortization.
Amortization expense was $47.4$31.6 million, $48.0$31.7 million and $53.1$40.7 million for 2017, 20162020, 2019 and 2015.2018. A summary of the composition of the gross carrying amounts and accumulated amortization of acquired intangible assets are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 2, 2021 | | December 28, 2019 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortized intangible assets: | | | | | | | | | | | | |
| Customer relationships | | $ | 351,056 | | | $ | (209,440) | | | $ | 141,616 | | | 350,352 | | | (179,220) | | | $ | 171,132 | |
| Non-compete and other | | 38,492 | | | (37,632) | | | 860 | | | 38,256 | | | (37,318) | | | 938 | |
| | 389,548 | | | (247,072) | | | 142,476 | | | 388,608 | | | (216,538) | | | 172,070 | |
| | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Brands, trademark and tradenames | | 538,651 | | | 0 | | | 538,651 | | | 537,686 | | | 0 | | | 537,686 | |
| Total intangible assets | | $ | 928,199 | | | $ | (247,072) | | | $ | 681,127 | | | $ | 926,294 | | | $ | (216,538) | | | $ | 709,756 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 30, 2017 | | December 31, 2016 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortized intangible assets: | | | | | | | | | | | | |
| Customer relationships | | $ | 351,203 |
| | $ | (116,909 | ) | | $ | 234,294 |
| | $ | 349,615 |
| | $ | (89,420 | ) | | $ | 260,195 |
|
| Favorable leases | | 32,512 |
| | (14,959 | ) | | 17,553 |
| | 48,693 |
| | (24,864 | ) | | 23,829 |
|
| Non-compete and other | | 54,929 |
| | (46,389 | ) | | 8,540 |
| | 54,130 |
| | (32,708 | ) | | 21,422 |
|
| | | 438,644 |
| | (178,257 | ) | | 260,387 |
| | 452,438 |
| | (146,992 | ) |
| 305,446 |
|
| | | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Brands, trademark and tradenames | | 337,287 |
| | — |
| | 337,287 |
| | 335,457 |
| | — |
| | 335,457 |
|
| Total intangible assets | | $ | 775,931 |
| | $ | (178,257 | ) | | $ | 597,674 |
| | $ | 787,895 |
| | $ | (146,992 | ) | | $ | 640,903 |
|
During 2017, the Company retired $16.1 million of fully amortized intangible assets, impacting both the gross carrying amount and accumulated amortization by this amount.
Future Amortization Expense
The table below shows expected amortization expense for the next five years and thereafter for acquired intangible assets recorded as of December 30, 2017:January 2, 2021:
| | | | | | | | |
| Year | | Amount |
| (in thousands) | | |
| 2021 | | $ | 30,227 | |
| 2022 | | $ | 30,131 | |
| 2023 | | $ | 27,243 | |
| 2024 | | $ | 27,421 | |
| 2025 | | $ | 27,370 | |
| Thereafter | | $ | 84 | |
| | $ | 142,476 | |
5. Receivables, net:
|
| | | | |
| Year | | Amount |
| (in thousands) | | |
| 2018 | | $ | 42,795 |
|
| 2019 | | 32,358 |
|
| 2020 | | 31,707 |
|
| 2021 | | 31,066 |
|
| 2022 | | 30,947 |
|
| Thereafter | | 91,514 |
|
| | | $ | 260,387 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Receivables, net consist of the following:
| | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Trade | $ | 449,403 | | | $ | 422,403 | |
| Vendor | 278,180 | | | 249,009 | |
| Other | 34,345 | | | 32,306 | |
| Total receivables | 761,928 | | | 703,718 | |
| Less: allowance for doubtful accounts | (11,929) | | | (14,249) | |
| Receivables, net | $ | 749,999 | | | $ | 689,469 | |
|
| | | | | | | | |
| (in thousands) | | December 30,
2017 | | December 31,
2016 |
| Trade | | $ | 389,963 |
| | $ | 407,301 |
|
| Vendor | | 220,510 |
| | 239,770 |
|
| Other | | 14,103 |
| | 23,345 |
|
| Total receivables | | 624,576 |
| | 670,416 |
|
| Less: Allowance for doubtful accounts | | (18,219 | ) | | (29,164 | ) |
| Receivables, net | | $ | 606,357 |
| | $ | 641,252 |
|
6.Long-term Debt and Fair Value of Financial Instruments: | |
7. | Long-term Debt and Fair Value of Financial Instruments: |
Long-term debt consists of the following:
| | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| 4.50% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $559 at December 28, 2019) due January 15, 2022 | 0 | | | 299,441 | |
| 4.50% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $683 and $2,121 at January 2, 2021 and December 28, 2019) due December 1, 2023 | 192,990 | | | 447,879 | |
| 1.75% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $4,145 at January 02, 2021) due October 1, 2027 | 345,854 | | | 0 | |
| 3.90% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $5,600 at January 2, 2021) due April 15, 2030 | 494,140 | | | 0 | |
| | | |
| | | |
| Long-term debt, excluding current portion | $ | 1,032,984 | | | $ | 747,320 | |
| | | |
| Fair value of long-term debt | $ | 1,145,000 | | | $ | 795,000 | |
|
| | | | | | | |
| (in thousands) | December 30, 2017 | | December 31, 2016 |
| 5.75% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $1,403 and $1,994 at December 30, 2017 and December 31, 2016) due May 1, 2020 | $ | 298,597 |
| | $ | 298,006 |
|
| 4.50% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $1,108 and $1,384 at December 30, 2017 and December 31, 2016) due January 15, 2022 | 298,892 |
| | 298,616 |
|
| 4.50% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $3,162 and $3,673 at December 30, 2017 and December 31, 2016) due December 1, 2023 | 446,838 |
| | 446,327 |
|
| Other | 350 |
| | 306 |
|
| | 1,044,677 |
| | 1,043,255 |
|
| Less: Current portion of long-term debt | (350 | ) | | (306 | ) |
| Long-term debt, excluding current portion | $ | 1,044,327 |
| | $ | 1,042,949 |
|
| | | | |
| Fair value of long-term debt | $ | 1,109,000 |
| | $ | 1,118,000 |
|
Fair Value of Financial Assets and Liabilities
The fair value of the Company’sour senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The Company believesWe believe the carrying value of its other long-term debt approximates fair value. The carrying amounts of the Company’sour cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Bank Debt
On January 31, 2017, the Companywe entered into a new 5 year credit agreement that provides a $1.0 billion unsecured revolving credit facility (the “2017 Credit Agreement”) with Advance Stores, as Borrower, the lenders party thereto, and Bank of America, N.A., as the administrative agent and replaces a prior credit agreement entered into in 2013. The 2017 Credit Agreement provides for the issuance of letters of credit with a sublimit of $200.0 million. The CompanyWe may request that the total revolving commitment be increased by an amount not exceeding $250.0 million during the term of the 2017 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving loan balance, if any, are permitted in whole or in part, at the Company’sour option, in minimum principal amounts as specified in the 2017 Credit Agreement. The
On January 31, 2018, we entered into Amendment No. 1 to the 2017 Credit Agreement terminates(the “Amendment”), among Advance Stores, as Borrower, the lenders party thereto, and Bank of America, N.A., Administrative Agent. The Amendment: (i) provided for LIBOR replacement rates in January 2022; however, the Company may request one or two one-year extensionsevent that LIBOR is unavailable in the future; (ii) modified the definitions of the financial covenants (and the testing level relating thereto) with respect to a maximum leverage ratio and a minimum coverage ratio that we are required to comply with; and (iii) extended the termination date priorof the 2017 Credit Agreement from January 31, 2022 until January 31, 2023. We have the option to make one additional written request of the lenders to extend the termination date then in effect for one additional year.
On January 10, 2019, we entered into Amendment No. 2 to the first or second anniversary of the closing date.
2017 Credit Agreement (the “ Second Amendment”), among Advance Stores Company, Incorporated, as Borrower, Advance Auto Parts, Inc., as Parent, the banks, financial institutions and Subsidiaries
Notesother institutional lenders parties thereto and Bank of America, N.A., as Administrative Agent. The Second Amendment: (i) added a new definition of "Insurance Subsidiary" to the Consolidated Financial Statements
2017 Credit Agreement meaning each wholly owned subsidiary of Parent that is maintained as a special purpose self-insurance subsidiary and any of its subsidiaries; (ii) provided that an Insurance Subsidiary does not serve as a Guarantor of the 2017 Credit Agreement; and (iii) provided that Insurance Subsidiaries are permitted to incur intercompany indebtedness. Insurance Subsidiaries will not be required to serve as Guarantors of the Parent's senior unsecured notes so long as they are not guarantors of the 2017 Credit Agreement.
As of December 30, 2017, the CompanyJanuary 2, 2021, we had no0 outstanding borrowings under the revolver2017 Credit Agreement and borrowing availability was $517.6 million based on$1.0 billion. Under the Company’s leverage ratio. As of December 30, 2017 the CompanyCredit Agreement, we had 0 letters of credit outstanding as of $111.7 million, which generally have a termJanuary 2, 2021.
Interest on any borrowings on the revolver will be based at the Company’sour option, on an adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. After an initial interest period, the Companywe may elect to convert a particular borrowing to a different type. The initial margins per annum for the revolving loan areare 1.10% for the adjusted LIBOR and 0.10% for alternate base rate borrowings. A facility fee of 0.15% per annum is charged on the total revolving facility commitment, payable quarterly in arrears. Under the terms of the 2017 Credit Agreement, the interest rate spread and facility fee are based on the Company’sour credit rating. The interest rate spread ranges from 0.91% to 1.50% for adjusted LIBOR borrowings and 0.00% to 0.50% for alternate base rate borrowings.
The 2017 Credit Agreement contains customary covenants restricting the ability of: (a) Advance Stores and its subsidiaries to, among other things, (i) create, incur or assume additional debt (only with respect to subsidiaries of Advance Stores), (ii) incur liens, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (b) Advance, Advance Stores and their subsidiaries to, among other things (i) enter into certain hedging arrangements, (ii) enter into restrictive agreements limiting their ability to incur liens on any of their property or assets, pay distributions, repay loans, or guarantee indebtedness of their subsidiaries; and (c) Advance, among other things, to change the holding company status of Advance. Advance Stores is required to comply with financial covenants with respect to a maximum leverage ratio and a minimum coverage ratio. The 2017 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults of Advance Stores’ other material indebtedness. The Company wasWe were in compliance with itsour financial covenants with respect to the 2017 Credit Agreement as of December 30, 2017.January 2, 2021.
On January 31, 2018, the Company, entered into Amendment No. 1 to the Credit Agreement dated asAs of January 31, 2017 (the “Amendment”), among Advance Stores, as Borrower, the lenders party thereto,2, 2021 and BankDecember 28, 2019, we had $100.0 million and $111.6 million of America, N.A., Administrative Agent. The Amendment: (i) provided for LIBOR replacement rates in the event that LIBOR is unavailable in the future; (ii) modified the definitionsbilateral letters of the financial covenants (and the testing level relating thereto) with respect to a maximum leverage ratio and a minimum coverage ratio that the Company is required to comply with; and (iii) extended the termination date ofcredit issued separately from the 2017 Credit Agreement, from January 31, 2022 until January 31, 2023. The Company has the option to makenone of which were drawn upon. These bilateral letters of credit generally have a term of one additional written request of the lenders to extend the termination date then in effectyear or less and primarily serve as collateral for one additional year.our self-insurance policies.
Senior Unsecured Notes
The Company’sOur 4.50% senior unsecured notes due January 15, 2022 (the “2022 Notes”) were issued in January 2012 at 99.97% of the principal amount of $300.0 million. The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. Our 4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69% of the principal amount of $450.0 million and are due December 1, 2023 (the “2023 Notes”).million. The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year. The Company’s 4.50%
On April 16, 2020, we issued $500.0 million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued in January 2012 at 99.968%99.65% of the principal amount of $300.0$500.0 million, and are due JanuaryApril 15, 2022 (the “2022 Notes”). The 2022 Notes2030 and bear interest at a rate of 4.50%3.90% per year payable semi-annually in arrears on JanuaryApril 15 and JulyOctober 15 of each year. The Company’s 5.75%year (collectively with the 2023 Notes and 2027 Notes, referred to as our “senior unsecured notes”). During the second quarter of 2020, we commenced an exchange offer to exchange the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 3.90% senior unsecured notes due 2030 (the “Exchange Notes” or “2030 Notes”), which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes. On July 28, 2020, the Original Notes were successfully exchanged for the Exchange Notes.
On September 16, 2020, we redeemed all $300.0 million aggregate principal amount of our outstanding 2022 Notes. In connection with this early redemption, we incurred charges relating to a make-whole provision and debt issuance costs of $15.8 million and $0.3 million.
On September 29, 2020, we issued $350.0 million aggregate principal amount of senior unsecured notes (the “2027 Notes”). The 2027 Notes were issued in April 2010 at 99.587%99.67% of the principal amount of $300.0$350.0 million, and are due MayOctober 1, 2020 (the “2020 Notes” or collectively with the 2023 Notes2027 and the 2022 Notes, “the Notes”). The 2020 Notes bear interest at a rate of 5.75%1.75% per year payable semi-annually in arrears on MayApril 1 and NovemberOctober 1 of each year. Advance served asIn connection with the issuer2027 Notes offering, we incurred $2.9 million of thedebt issuance costs.
Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of our 2023 Notes with certainthe net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges relating to tender premiums and debt issuance costs of Advance’s domestic subsidiaries currently serving as subsidiary guarantors. $30.5 million and $1.4 million.
The terms of the Notessenior unsecured notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among the Company,Advance, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.
The CompanyWe may redeem some or all of the Notessenior unsecured notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in the Indenture for the Notes)senior unsecured notes), the Companywe will be required to offer to repurchase the Notessenior unsecured notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notessenior unsecured notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by each of the subsidiary guarantors. The CompanyWe will be permitted to release guarantees without the consent of holders of the Notessenior unsecured notes under the circumstances described in the Indenture: (i) upon the release of the guarantee of the Company’sour other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon the Company’sour exercise of itsour legal or covenant defeasance option.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The Indenture contains customary provisions for events of default including for: (i) failure to pay principal or interest when due and payable; (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice; (iii) a default under any debt for money borrowed by the Companyus or any of itsour subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25.0$25.0 million without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by the Companyus of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding; and (iv) events of bankruptcy, insolvency or reorganization affecting the Companyus and certain of its subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of the Companyus and itsour subsidiaries to incur debt secured by liens and to enter into sale and lease-back transactions.
Future Payments
As of December 30, 2017,January 2, 2021, the aggregate future annual maturities of long-term debt instruments are as follows:
| | | | | | | | |
Year | | Amount |
| (in thousands) | | |
| 2021 | | | $ | 0 | |
| 2022 | | | 0 | |
| 2023 | | | 193,673 | |
| 2024 | | | 0 | |
| 2025 | | | 0 | |
| Thereafter | | 850,000 | |
| | $ | 1,043,673 | |
|
| | | | | |
Year | | Amount |
| (in thousands) | | |
| 2018 |
| | $ | 350 |
|
| 2019 |
| | — |
|
| 2020 |
| | 300,000 |
|
| 2021 |
| | — |
|
| 2022 |
| | 300,000 |
|
| Thereafter |
| | 450,000 |
|
| | | $ | 1,050,350 |
|
Debt Guarantees
The Company isWe are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of the Companyours totaling $24.8$23.6 million as of December 30, 2017.January 2, 2021. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements is $62.8$57.5 million as of December 30, 2017. The Company believesJanuary 2, 2021. We believe that the likelihood of performance under these guarantees is remote.
| |
8. | Property and Equipment: |
7. Property and Equipment:
Property and equipment consists of the following:
| | | | | | | | | | | | | | | | | |
| (in thousands) |
Useful Lives | | January 2, 2021 | | December 28, 2019 |
| Land and land improvements | 0 - 10 years | | $ | 469,640 | | | $ | 457,960 | |
| Buildings | 30 - 40 years | | 514,199 | | | 498,871 | |
| Building and leasehold improvements | 1 - 15 years | | 560,070 | | | 535,082 | |
| Furniture, fixtures and equipment | 2 - 20 years | | 1,969,011 | | | 1,850,485 | |
| Vehicles | 8 years | | 14,574 | | | 14,612 | |
| Construction in progress | | | 124,273 | | | 114,052 | |
| | | 3,651,767 | | | 3,471,062 | |
| Less - Accumulated depreciation | | | (2,189,165) | | | (2,037,849) | |
| Property and equipment, net | | | $ | 1,462,602 | | | $ | 1,433,213 | |
|
| | | | | | | | | | |
| (in thousands) | |
Useful Lives | | December 30,
2017 | | December 31,
2016 |
| Land and land improvements | | 0 - 10 years | | $ | 451,261 |
| | $ | 444,262 |
|
| Buildings | | 30 - 40 years | | 478,235 |
| | 471,740 |
|
| Building and leasehold improvements | | 3 - 30 years | | 490,635 |
| | 451,979 |
|
| Furniture, fixtures and equipment | | 3 - 20 years | | 1,675,522 |
| | 1,583,096 |
|
| Vehicles | | 2 - 13 years | | 16,587 |
| | 35,133 |
|
| Construction in progress | | | | 65,281 |
| | 120,778 |
|
| | | | | 3,177,521 |
| | 3,106,988 |
|
| Less - Accumulated depreciation | | | | (1,783,383 | ) | | (1,660,648 | ) |
| Property and equipment, net | | | | $ | 1,394,138 |
| | $ | 1,446,340 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Depreciation expense relating to Property and equipment was $206.9$218.5 million, $216.0$206.7 million and $223.7$201.6 million for 2017, 20162020, 2019 and 2015. The Company2018. We capitalized $11.2$58.4 million, $13.0$29.1 million and $13.5$13.0 million incurred for the development of internal use computer software during 2017, 20162020, 2019 and 2015.2018. These costs are includedcurrently classified in the furniture,Construction in progress category above, but once placed into service within the Furniture, fixtures and equipment category, above and arethese costs will be depreciated on the straight-line method over three3 to ten10 years.
In 2017, 20162020, 2019 and 2015, the Company2018 we recognized impairment losses of $13.3$0.2 million, $2.8$2.3 million and $11.0$13.4 million, primarily on various store and corporate assets.
8. Leases and Other Commitments:
Leases
Substantially all of our leases are for facilities and vehicles. The initial term for facilities are typically 5 years to 10 years, with renewal options at 5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically 3 years to 6 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease liabilities consist of the following:
| | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Total operating lease liabilities | $ | 2,477,087 | | | $ | 2,495,141 | |
| Less: Current portion of operating lease liabilities | (462,588) | | | (477,982) | |
| Noncurrent operating lease liabilities | $ | 2,014,499 | | | $ | 2,017,159 | |
The current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheet.
Total lease cost is included in Cost of sales and SG&A in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:
| | | | | | | | | | | |
| Year Ended |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Operating lease cost | $ | 526,005 | | | $ | 522,928 | |
| Variable lease cost | 142,546 | | | 155,892 | |
| Total lease cost | $ | 668,551 | | | $ | 678,820 | |
The future maturity of lease liabilities are as follows:
| | | | | | | | |
| Year | | Amount |
| (in thousands) | | |
| 2021 | | $ | 539,068 | |
| 2022 | | 455,024 | |
| 2023 | | 417,127 | |
| 2024 | | 338,564 | |
| 2025 | | 290,466 | |
| Thereafter | | 791,056 | |
| Total lease payments | | 2,831,305 | |
| Less: Imputed interest | | (354,218) | |
| Total operating lease liabilities | | $ | 2,477,087 | |
Operating lease payments include $97.1 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $50.6 million of legally binding lease payments for leases signed, but not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate for our operating leases are 7.0 years and 3.6% as of January 2, 2021. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.
Other information relating to our lease liabilities is as follows:
| | | | | | | | | | | |
| Year Ended |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 575,186 | | | $ | 517,945 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 424,393 | | | $ | 398,510 | |
Other Commitments
We have entered into certain arrangements which require the future purchase of goods or services. Our obligations primarily consist of payments for the purchase of hardware, software and maintenance. As of January 2, 2021, future payments amount to $122.8 million and are not accrued in our consolidated balance sheet.
9. Accrued Expenses:
Accrued expenses consist of the following:
| | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Payroll and related benefits | $ | 154,388 | | | $ | 109,371 | |
| Taxes payable | 100,487 | | | 96,834 | |
| Self-insurance reserves | 63,990 | | | 64,845 | |
| Warranty reserves | 14,120 | | | 36,820 | |
| Capital expenditures | 4,963 | | | 26,201 | |
| Accrued rebates | 26,096 | | | 24,532 | |
| Accrued interest | 8,441 | | | 10,241 | |
| | | |
| Other | 234,319 | | | 167,019 | |
| Total accrued expenses | $ | 606,804 | | | $ | 535,863 | |
|
| | | | | | | | |
| (in thousands) | | December 30,
2017 | | December 31,
2016 |
| Payroll and related benefits | | $ | 92,106 |
| | $ | 97,496 |
|
| Taxes payable | | 112,930 |
| | 121,860 |
|
| Self-insurance reserves | | 65,463 |
| | 58,743 |
|
| Warranty reserves | | 49,024 |
| | 47,243 |
|
| Capital expenditures | | 14,335 |
| | 21,176 |
|
| Other | | 199,690 |
| | 207,879 |
|
| Total accrued expenses | | $ | 533,548 |
| | $ | 554,397 |
|
The following table presents changes in the Company’sour warranty reserves:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| (in thousands) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Warranty reserve, beginning of period | $ | 36,820 | | | $ | 45,280 | | | $ | 49,024 | |
| | | | | |
| Additions to reserve | 14,907 | | | 34,117 | | | 43,200 | |
| Reduction and utilization of reserve | (37,607) | | | (42,577) | | | (46,944) | |
| Warranty reserve, end of period | $ | 14,120 | | | $ | 36,820 | | | $ | 45,280 | |
10. Share Repurchase Program:
|
| | | | | | | | | | | | |
| | | Year Ended |
| (in thousands) | | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| Warranty reserves, beginning of period | | $ | 47,243 |
| | $ | 44,479 |
| | $ | 47,972 |
|
| Additions to warranty reserves | | 50,895 |
| | 46,903 |
| | 44,367 |
|
| Reserves utilized | | (49,114 | ) | | (44,139 | ) | | (47,860 | ) |
| Warranty reserves, end of period | | $ | 49,024 |
| | $ | 47,243 |
| | $ | 44,479 |
|
The Company’sOn November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time. Our share repurchase program allows itus to repurchase itsour common stock on the open market or in privately negotiated transactions from time to time. The Company’s $500
During 2020, we repurchased 3.0 million stock repurchase program in place as of December 30, 2017 was authorized by its Board of Directors on May 14, 2012. During 2017 and 2016, the Company repurchased no shares of its common stock under its stock repurchase program. The Company had $415.1 million remaining under its stock repurchase program as of December 30, 2017.
The Company repurchased 57 thousand and 116 thousand shares of itsour common stock at an aggregate cost of $6.5 million and $18.4$458.5 million, or an average price of $114.23 and $158.84$150.65 per share, in connection with the net settlementour share repurchase program. We had $432.2 million remaining under our share repurchase program as of January 2, 2021. During 2019, we repurchased 3.4 million shares issued as a result of the vestingour common stock at an aggregate cost of restricted stock units in 2017 and 2016.
$487.4 million, or an average price of $144.23 per share, under our share repurchase program.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| |
11. | 11. Earnings per Share: |
The computation of basic and diluted earnings per share is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| (in thousands, except per share data) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Numerator | | | | | |
| Net income applicable to common shares | $ | 493,021 | | | $ | 486,896 | | | $ | 423,847 | |
| Denominator | | | | | |
| Basic weighted average common shares | 68,748 | | | 70,869 | | | 73,728 | |
| Dilutive impact of share-based awards | 255 | | | 296 | | | 263 | |
Diluted weighted average common shares (1) | 69,003 | | | 71,165 | | | 73,991 | |
| | | | | |
| Basic earnings per common share | $ | 7.17 | | | $ | 6.87 | | | $ | 5.75 | |
| Diluted earnings per common share | $ | 7.14 | | | $ | 6.84 | | | $ | 5.73 | |
(1)For the fifty-three weeks ended January 2, 2021 119 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the fifty-two weeks ended December 28, 2019 115 thousand restricted
stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the fifty-two weeks ended December 29, 2018, these anti-dilutive RSUs were insignificant.
12. Income Taxes:
|
| | | | | | | | | | | | |
| | | Year Ended |
| (in thousands, except per share data) | | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| Numerator | | | | | | |
| Net income applicable to common shares | | $ | 475,505 |
| | $ | 459,622 |
| | $ | 473,398 |
|
| Denominator | | | | | | |
| Basic weighted average common shares | | 73,846 |
| | 73,562 |
| | 73,190 |
|
| Dilutive impact of share-based awards | | 264 |
| | 294 |
| | 543 |
|
| Diluted weighted average common shares | | 74,110 |
| | 73,856 |
| | 73,733 |
|
| | | | | | | |
| Basic earnings per common share | | | | | | |
| Net income applicable to common stockholders | | $ | 6.44 |
| | $ | 6.22 |
| | $ | 6.45 |
|
| Diluted earnings per common share | | | | | | |
| Net income applicable to common stockholders | | $ | 6.42 |
| | $ | 6.20 |
| | $ | 6.40 |
|
U.S. Tax Reform
On December 22,During 2018, in conjunction with the completion of our 2017 U.S. income tax return, we identified a change in estimate to amounts previously estimated in 2017 in relation with the U.S. Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act amendsfor the Internal Revenue Code by, among other things, permanently lowering the corporate tax rate to 21% from the existing maximum rate of 35%, implementing a territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. The Company is required to remeasure deferred income tax assets and liabilities in the reporting period of enactment. The remeasurement of the Company’s net deferred income tax liability resulted in a $155.1 million income tax benefit in 2017.
The Company recorded an estimated charge of $11.3 million to income tax expense primarily for theand nonrecurring repatriation tax on accumulated earnings of foreign subsidiaries and it is the Company’s intention to bring back the accumulated foreign earnings held as cashthat resulted in the near term. Prospectively, any future foreign earnings will be utilized to grow and support the Company’s foreign operations and will be treated as being indefinitely reinvested outside the U.S. The estimated charge and thea net tax benefit from the remeasurement of the net deferred tax liability were recorded based on the Company's initial evaluation of the impact of the Act and are subject to change$5.7 million. Our analysis under Staff Accounting Bulletin No. 118 was completed in 2018 as the Company continues to refine, analyze and update the underlying data, computations and assumptions used to prepare these provisional amounts during the measurement period.
2018.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Provision for Income Taxes
Provision for income taxes consists of the following:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Current | | Deferred | | Total |
| 2020 | | | | | |
| Federal | $ | 112,096 | | | $ | 7,718 | | | $ | 119,814 | |
| State | 23,779 | | | 1,066 | | | 24,845 | |
| Foreign | 13,983 | | | (648) | | | 13,335 | |
| $ | 149,858 | | | $ | 8,136 | | | $ | 157,994 | |
| 2019 | | | | | |
| Federal | $ | 84,490 | | | $ | 13,618 | | | $ | 98,108 | |
| State | 26,924 | | | 8,117 | | | 35,041 | |
| Foreign | 16,288 | | | 1,413 | | | 17,701 | |
| $ | 127,702 | | | $ | 23,148 | | | $ | 150,850 | |
| 2018 | | | | | |
| Federal | $ | 72,598 | | | $ | 14,745 | | | $ | 87,343 | |
| State | 19,571 | | | 3,439 | | | 23,010 | |
| Foreign | 23,292 | | | (2,228) | | | 21,064 | |
| $ | 115,461 | | | $ | 15,956 | | | $ | 131,417 | |
|
| | | | | | | | | | | | |
| (in thousands) | | Current | | Deferred | | Total |
| 2017 | | | | | | |
| Federal | | $ | 146,855 |
| | $ | (146,741 | ) | | $ | 114 |
|
| State | | 31,352 |
| | (3,437 | ) | | 27,915 |
|
| Foreign | | 17,810 |
| | (1,085 | ) | | 16,725 |
|
| | | $ | 196,017 |
| | $ | (151,263 | ) | | $ | 44,754 |
|
| 2016 | | | | | | |
| Federal | | $ | 209,499 |
| | $ | 17,989 |
| | $ | 227,488 |
|
| State | | 29,345 |
| | 1,366 |
| | 30,711 |
|
| Foreign | | 20,156 |
| | 858 |
| | 21,014 |
|
| | | $ | 259,000 |
| | $ | 20,213 |
| | $ | 279,213 |
|
| 2015 | | | | | | |
| Federal | | $ | 242,801 |
| | $ | (6,564 | ) | | $ | 236,237 |
|
| State | | 33,023 |
| | (1,797 | ) | | 31,226 |
|
| Foreign | | 12,885 |
| | (858 | ) | | 12,027 |
|
| | | $ | 288,709 |
| | $ | (9,219 | ) | | $ | 279,490 |
|
The provision for income taxes differed from the amount computed by applying the federal statutory income tax rate due to:
| | | | | Year Ended | | Year Ended |
| (in thousands) | | December 30, 2017 | | December 31, 2016 | | January 2, 2016 | (in thousands) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Income before provision for income taxes at statutory U.S. federal income tax rate (35%) | | $ | 182,091 |
| | $ | 258,592 |
| | $ | 263,511 |
| |
| Income before provision for income taxes at statutory U.S. federal income tax rate (21% for 2020, 2019 and 2018) | | Income before provision for income taxes at statutory U.S. federal income tax rate (21% for 2020, 2019 and 2018) | $ | 136,713 | | | $ | 133,927 | | | $ | 116,605 | |
| State income taxes, net of federal income tax benefit | | 18,145 |
| | 19,962 |
| | 20,297 |
| State income taxes, net of federal income tax benefit | 18,610 | | | 27,682 | | | 18,178 | |
| Impact of the Act, net | | (143,756 | ) | | — |
| | — |
| |
| Impact of the Act | | Impact of the Act | 0 | | | 0 | | | (5,655) | |
| Other, net | | (11,726 | ) | | 659 |
| | (4,318 | ) | Other, net | 2,671 | | | (10,759) | | | 2,289 | |
| | | $ | 44,754 |
| | $ | 279,213 |
| | $ | 279,490 |
| | $ | 157,994 | | | $ | 150,850 | | | $ | 131,417 | |
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Deferred Income Tax Assets (Liabilities)
Temporary differences that give rise to significant deferred income tax assets (liabilities) are as follows:
| | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 |
| Deferred income tax assets: | | | |
| Accrued expenses not currently deductible for tax | $ | 53,433 | | | $ | 38,064 | |
| Share-based compensation | 10,541 | | | 9,540 | |
| Accrued medical and workers compensation | 14,825 | | | 22,202 | |
| Net operating loss carryforwards | 4,348 | | | 5,565 | |
| Operating lease liabilities | 630,267 | | | 627,707 | |
| Other, net | 3,514 | | | 8,430 | |
| Total deferred income tax assets before valuation allowances | 716,928 | | | 711,508 | |
| Less: Valuation allowance | (3,183) | | | (3,592) | |
| Total deferred income tax assets | 713,745 | | | 707,916 | |
| Deferred income tax liabilities: | | | |
| Property and equipment | (123,402) | | | (116,277) | |
| Inventories | (187,559) | | | (183,428) | |
| Intangible assets | (140,094) | | | (136,078) | |
| Operating lease right-of-use assets | (605,135) | | | (606,146) | |
| Total deferred income tax liabilities | (1,056,190) | | | (1,041,929) | |
| Net deferred income tax liabilities | $ | (342,445) | | | $ | (334,013) | |
|
| | | | | | | | |
| (in thousands) | | December 30,
2017 | | December 31,
2016 |
| Deferred income tax assets: | | | | |
| Accrued expenses not currently deductible for tax | | $ | 38,200 |
| | $ | 63,992 |
|
| Share-based compensation | | 9,556 |
| | 11,752 |
|
| Accrued medical and workers compensation | | 33,697 |
| | 46,116 |
|
| Net operating loss carryforwards | | 6,701 |
| | 5,093 |
|
| Straight-line rent | | 21,733 |
| | 31,631 |
|
| Other, net | | 2,973 |
| | 6,274 |
|
| Total deferred income tax assets before valuation allowances | | 112,860 |
| | 164,858 |
|
| Less: Valuation allowance | | (3,778 | ) | | (2,437 | ) |
| Total deferred income tax assets | | 109,082 |
| | 162,421 |
|
| Deferred income tax liabilities: | | | | |
| Property and equipment | | (98,186 | ) | | (168,906 | ) |
| Inventories | | (169,478 | ) | | (222,301 | ) |
| Intangible assets | | (145,038 | ) | | (225,496 | ) |
| Total deferred income tax liabilities | | (412,702 | ) | | (616,703 | ) |
| Net deferred income tax liabilities | | $ | (303,620 | ) | | $ | (454,282 | ) |
As of December 30, 2017January 2, 2021 and December 31, 2016, the Company’s28, 2019, our net operating loss (“NOL”) carryforwards related tocomprised of state NOLs of $177.8$137.9 million and $153.0$159.4 million. These NOLs may be used to reduce future taxable income and expire periodically through 2036.2037. Due to uncertainties related to the realization of these NOLs in certain jurisdictions, the Companyas well as other credits available to us, we have recorded a valuation allowance of $3.8 $3.2 million and $2.4$3.6 million as of December 30, 2017January 2, 2021 and December 31, 2016.28, 2019. The amount of deferred income tax assets realizable, however, could change in the future if projections of future taxable income change.
We have not recorded deferred taxes when earnings from foreign operations are considered to be indefinitely invested outside of the U.S. As of January 2, 2021, these accumulated net earnings generated by our foreign operations were approximately $41.2 million, which did not include earnings deemed to be repatriated as part of the Act. It is not practicable to determine the income tax liability that would be payable if such earnings were repatriated.
Unrecognized Tax Benefits
The following table summarizes the activity of the Company’sour gross unrecognized tax benefits:
| | | | | | | | | | | | | | | | | |
| (in thousands) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Unrecognized tax benefits, beginning of period | $ | 29,762 | | | $ | 30,824 | | | $ | 22,665 | |
| Increases related to prior period tax positions | 1,808 | | | 4,243 | | | 5,435 | |
| Decreases related to prior period tax positions | 0 | | | (2,277) | | | (1,356) | |
| Increases related to current period tax positions | 1,528 | | | 3,741 | | | 5,425 | |
| Settlements | 0 | | | (331) | | | (14) | |
| Expiration of statute of limitations | (7,971) | | | (6,438) | | | (1,331) | |
| Unrecognized tax benefits, end of period | $ | 25,127 | | | $ | 29,762 | | | $ | 30,824 | |
|
| | | | | | | | | | | | |
| (in thousands) | | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| Unrecognized tax benefits, beginning of period | | $ | 13,946 |
| | $ | 13,841 |
| | $ | 14,033 |
|
| Increases related to prior period tax positions | | 8,077 |
| | 8,274 |
| | 412 |
|
| Decreases related to prior period tax positions | | (2,331 | ) | | (1,600 | ) | | (2,120 | ) |
| Increases related to current period tax positions | | 5,644 |
| | 2,105 |
| | 3,137 |
|
| Settlements | | (1,496 | ) | | (6,894 | ) | | (582 | ) |
| Expiration of statute of limitations | | (1,175 | ) | | (1,780 | ) | | (1,039 | ) |
| Unrecognized tax benefits, end of period | | $ | 22,665 |
| | $ | 13,946 |
| | $ | 13,841 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
As of December 30, 2017, December 31, 2016 and January 2, 2016,2021, December 28, 2019 and December 29, 2018, the entire amount of unrecognized tax benefits, if recognized, would reduce the Company’sour annual effective tax rate. During 2017, 20162020 and 2015, the Company2019, we recorded expenses relating to income tax-related interest and penalties of $1.7 million, $1.9$0.2 million and $0.1$1.6 million relateddue to uncertain tax positions included in Provision for income taxes in the accompanying consolidated statements of operations. During 2018, we recorded a gain relating to income tax-related interest and penalties of $0.9 million due to uncertain tax positions included in Provision for income taxes in the accompanying consolidated statements of operations. As of December 30, 2017January 2, 2021 and December 31, 2016, the Company had28, 2019, we recorded a liability for potential interest of $4.2$4.7 million and $2.7$4.9 million and for potential penalties of $0.1 million and $0.2$0.1 million. The Company hasWe did not providedprovide for any penalties associated with tax contingencies unless considered probable of assessment. The Company doesWe do not expect itsour unrecognized tax benefits to change significantly over the next 12 months. With few exceptions, the Company iswe are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2013.2016.
Initial terms for facility leases13. Contingencies:
We are typically 10 to 15 years, with renewal options at five year intervals, and may include rent escalation clauses. As of December 30, 2017, future minimum lease payments due under non-cancelable operating leases with lease terms extending through the year 2059 are as follows:
|
| | | | | |
| Year | | Amount |
| (in thousands) | | |
| 2018 |
| | $ | 484,427 |
|
| 2019 |
| | 445,143 |
|
| 2020 |
| | 401,686 |
|
| 2021 |
| | 340,356 |
|
| 2022 |
| | 279,734 |
|
| Thereafter |
| | 1,008,507 |
|
| | $ | 2,959,853 |
|
Net Rent Expense
The following table summarizes net rent expense:
|
| | | | | | | | | | | | |
| | | Year Ended |
| (in thousands) | | December 30, 2017 | | December 31, 2016 | | January 2, 2016 |
| Minimum facility rentals | | $ | 483,178 |
| | $ | 473,596 |
| | $ | 471,364 |
|
| Equipment rentals | | 24,786 |
| | 26,897 |
| | 24,860 |
|
| Vehicle rentals | | 32,670 |
| | 47,251 |
| | 47,919 |
|
| | | 540,634 |
| | 547,744 |
| | 544,143 |
|
| Less: Sub-lease income | | (7,144 | ) | | (7,379 | ) | | (7,569 | ) |
| | | $ | 533,490 |
| | $ | 540,365 |
| | $ | 536,574 |
|
The Company is currently and from time to time subject to litigation, claims and other disputes, including legal and regulatory proceedings, arising in the normal course of business. The Company recordsWe record a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. Although the final outcome of these legal matters cannot be determined, based on the facts presently known, it is management’s opinion that the final outcome of any pending matters will not have a material adverse effect on the Company’sour consolidated financial position, results of operations or cash flows.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The Company’sOur Western Auto subsidiary, together with other defendants (including the CompanyAdvance and other of its subsidiaries), has been named as a defendant in lawsuits alleging injury as a result of exposure to asbestos-containing products. The plaintiffs have alleged that certain products contained asbestos and were manufactured, distributed and/or sold by the various defendants. Many of the cases pending against the Companyus are in the early stages of litigation. While the damages claimed against the defendants in some of these proceedings are substantial, the Company believeswe believe many of these claims are at least partially covered by insurance and historically asbestos claims against the Companyus have been inconsistent in fact patterns alleged and immaterial. The Company doesWe do not believe the cases currently pending will have a material adverse effect on the Company’sour financial position, results of operations or cash flows.
14. Benefit Plans:
401(k) Plan
The Company maintainsWe maintain a defined contribution benefit plan, which covers substantially all Team Members after one year of service and who have attained the age of 21. The plan allows for Team Member salary deferrals, which are matched at the Company’sour discretion. Company contributions to these plans were$14.2 $21.3 million, $13.9$17.9 million and $14.6$15.0 million in 2017, 20162020, 2019 and 2015.2018.
Deferred Compensation
The Company maintainsWe maintain a non-qualified deferred compensation plan for certain Team Members. This plan provides for a minimum and maximum deferral percentage of the Team Member’s base salary and bonus, as determined by the Retirement Plan Committee. The Company establishesWe established and maintainsmaintained a deferred compensation liability for this plan. As of December 30, 2017January 2, 2021 and December 31, 2016,28, 2019, these liabilities were$16.8 $16.1 million and $17.3 million.$15.0 million.
| |
16. | Share-Based Compensation: |
15. Share-Based Compensation:
Overview
The Company grantsWe grant share-based compensation awards to itsour Team Members and members of itsour Board of Directors as provided for under the Company’sour 2014 Long-Term Incentive Plan (“2014 LTIP”), which was approved by the Company’sour shareholders on May 14, 2014. The Company currently grantsIn 2020, 2019 and 2018, we granted share-based compensation in the form of restricted stock units (“RSUs”) or deferred stock units (“DSUs”). NaN share-based compensation was granted in the form of stock appreciation rights (“SARs”), restricted stock units (“RSUs”) in 2020, 2019 and deferred stock units (“DSUs”). All remaining restricted shares, which were granted prior to the transition to RSUs in 2012, vested during 2015. The Company’s2018. Our grants, which have three methods of measuring fair value, generally include a time-based service, portion, a performance-based portion andor a market-based portion, which collectively represent the target award.
As of January 2, 2021, the aggregate intrinsic value of outstanding and exercisable time-based and performance-based SARs was insignificant. In 2020, 2019 and 2018, all related activity related to SARs, including grants, exercises and forfeitures, was insignificant.
At December 30, 2017,January 2, 2021, there were 5.04.6 million shares of common stock available for future issuance under the 2014 LTIP based on management’s current estimate of the probable vesting outcome for performance-based awards. The Company issuesWe issue new shares of common stock upon exercise of stock options and SARs. Shares forfeited and shares withheld for payment of taxes due become available for reissuance and are included in availability. Availability also includes shares that became available for reissuance in connection with the exercise of SARs.
The fair value of each SAR granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:Restricted Stock Units
|
| | | | | | |
| Black-Scholes Option Valuation Assumptions | | 2016 | | 2015 |
Risk-free interest rate (1) | | 1.2 | % | | 1.3 | % |
| Expected dividend yield | | 0.2 | % | | 0.1 | % |
Expected stock price volatility (2) | | 27.7 | % | | 27.3 | % |
Expected life of awards (in months) (3) | | 55 |
| | 44 |
|
| |
(1)
| The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate having term consistent with the expected life of the award. |
| |
(2)
| Expected volatility is determined using a blend of historical and implied volatility. |
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| |
(3)
| The expected life of the Company’s awards represents the estimated period of time until exercise and is based on historical experience of previously granted awards. |
As no SARs were granted in 2017, the Black-Scholes model was not utilized and no assumptions were created.
For time-based and performance-based RSUs, the fair value of each award was determined based on the market price of the Company’sour common stock on the date of grant adjusted for expected dividends during the vesting period, as applicable.
The fair value of each market-based RSU was determined using a Monte Carlo simulation model. The model uses multiple input variables that determined the probability of satisfying the market condition requirements as follows:
|
| | | |
Monte Carlo Model Assumptions | | 2017 |
Risk-free interest rate (1)
| | 1.6 | % |
Expected dividend yield | | 0.2 | % |
Expected stock price volatility (2)
| | 26.2 | % |
| |
(1)
| The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate having term consistent with the vesting period of the award. |
| |
(2)
| Expected volatility is determined based on historical volatility over a matching look-back period and is consistent with the correlation coefficients between the stock prices of the Company and its peer group. |
Additionally, the Company estimated a liquidity discount of 9.29% using the Chaffe Protective Put Method to adjust the fair value for the post-vest restrictions.
Time-Based Awards
The Company’s outstanding time-vested awards consist of SARs and RSUs. The SARs generally vest over a three-year period in equal annual installments beginning on the first anniversary of the grant date. The SARs granted are non-qualified, terminate on the seventh anniversary of the grant date and contain no post-vesting restrictions other than normal trading black-out periods prescribed by the Company’s corporate governance policies. Thegrant. Time-based RSUs generally vest over a three-year period in equal annual installments beginning on the first anniversary of the grant date. During the vesting period, holders of RSUs are entitled to receive dividend equivalents, but are not entitled to voting rights.
The following table summarizes activity for time-vested SARs andFor performance-based RSUs, in 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | SARs | | RSUs |
| (in thousands, except per share data) | | Number of Awards | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | | Number of Awards | | Weighted-Average Grant Date Fair Value |
| Outstanding SARs / Nonvested RSUs at December 31, 2016 | | 275 |
| | $ | 93.89 |
| | | | | | 211 |
| | $ | 151.70 |
|
| Granted | | — |
| | — |
| | | | | | 287 |
| | 131.01 |
|
| Exercised | | (157 | ) | | 71.57 |
| | | | | | — |
| | — |
|
| Vested | | — |
| | — |
| | | | | | (91 | ) | | 149.26 |
|
| Forfeited | | (5 | ) | | 63.86 |
| | | | | | (61 | ) | | 149.31 |
|
| Outstanding SARs / Nonvested RSUs at December 30, 2017 | | 113 |
| | $ | 126.07 |
| | 3.77 | | $ | 1,222 |
| | 346 |
| | $ | 135.58 |
|
| | | | | | | | | | | | | |
| Vested and expected to vest | | 113 |
| | $ | 126.07 |
| | 3.77 | | $ | — |
| | | | |
| | | | | | | | | | | | | |
| Outstanding and exercisable | | 45 |
| | $ | 72.27 |
| | 1.43 | | $ | 1,222 |
| | | | |
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The aggregate intrinsic value of time-vested SARs reflected in the table above and performance-based SARs reflected in the table below is based on the Company’s closing stock price of $99.69 as of the last trading day of 2017. The fair value of time-based RSUs reflected in the table above and performance-based RSUs reflected in the table below iseach award was determined based on the market price of the Company’sour common stock on the date of grant.
The following table summarizes certain information concerning activity for time-vested SARs, RSUs and restricted shares:
|
| | | | | | | | | | | | |
| | | Year Ended |
| (in thousands, except per share data) | | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| SARs: | | | | | | |
| Weighted average fair value of grants | | $ | — |
| | $ | 43.64 |
| | $ | — |
|
| Aggregate intrinsic value of SARs exercised | | $ | 11,455 |
| | $ | 31,450 |
| | $ | 26,060 |
|
| | | | | | | |
| RSUs and restricted shares: | | | | | | |
| Weighted average fair value of grants | | $ | 131.01 |
| | $ | 155.51 |
| | $ | 153.61 |
|
| Total grant date fair value of RSUs and restricted shares vested | | $ | 13,578 |
| | $ | 16,089 |
| | $ | 15,268 |
|
There were no time-vested SARs granted in 2017 or 2015.
Performance-Based Awards
The Company’s outstanding performance-based awards consist of SARs and RSUs. Performance Performance-based awards generally may vest following a three-year period subject to the Company’sour achievement of certain financial goals as specified in the grant agreements. Depending on the Company’sour results during the three-year performance period, the actual number of awards vesting at the end of the period generally ranges from 0% to 200% of the performance award. The performancePerformance-based RSUs generally do not have dividend equivalent rights and do not have voting rights until the shares are earned and issued following the applicable performance period. During 2016, the Company also granted broad-based incentive awards to store and field team members that will vest over a one-year service period based on the achievement of performance goals during 2016.
The number of performance-based awards outstanding is reflected in the following tables based on the number of awards that the Companywe believed were probable of vesting at December 30, 2017.January 2, 2021. Performance-based SARs and performance-based RSU’s granted during 20172020 are presented as grants in the table at their respective target levels. The change in units based on performance represents the change in the number of granted awards expected to vest based on the Company’s updated probability assessment as of December 30, 2017.
January 2, 2021. Compensation expense for performance-based awards of $13.6$9.4 million, $0.8$7.8 million,, and $14.7$5.4 million in 2017, 20162020, 2019 and 2015,2018, was determined based on management’s estimate of the probable vesting outcome.
For market-based RSUs, the fair value of each award was determined using a Monte Carlo simulation model. The model uses multiple input variables that determined the probability of satisfying the market condition requirements as follows:
| | | | | | | | | | | | | | | | | | | | |
| Monte Carlo Simulation Model Assumptions | | 2021 | | 2019 | | 2018 |
Risk-free interest rate (1) | | 0.9 | % | | 2.5 | % | | 2.4 | % |
| Expected dividend yield | | 0.8 | % | | 0.2 | % | | 0.2 | % |
Expected stock price volatility (2) | | 34.0 | % | | 33.5 | % | | 34.0 | % |
F-26
Advance Auto Parts, Inc.(2)Expected volatility is determined based on historical volatility over a matching look-back period and Subsidiariesis consistent with the correlation coefficients between our stock prices and our peer group.
Notes
Additionally, we estimated a liquidity discount of 10.1% using the Chaffe Protective Put Method to adjust the Consolidated Financial Statements
The following table summarizes activityfair value for performance-based SARs and RSUs in 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | | SARs | | RSUs |
| (in thousands, except per share data) | | Number of Awards | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | | Number of Awards | | Weighted-Average Grant Date Fair Value |
| Outstanding SARs / Nonvested RSUs at December 31, 2016 | | 114 |
| | $ | 86.95 |
| | | | | | 138 |
| | $ | 162.71 |
|
| Granted | | — |
| | — |
| | | | | | 53 |
| | 146.42 |
|
| Change in units based on performance | | 5 |
| | 108.36 |
| | | | | | — |
| | — |
|
| Exercised | | (81 | ) | | 85.14 |
| | | | | | — |
| | — |
|
| Vested | | — |
| | — |
| | | | | | (48 | ) | | 162.02 |
|
| Forfeited | | (9 | ) | | 101.63 |
| | | | | | (18 | ) | | 160.79 |
|
| Outstanding SARs / Nonvested RSUs at December 30, 2017 | | 29 |
| | $ | 90.90 |
| | 2.16 | | $ | 423 |
| | 125 |
| | $ | 156.36 |
|
| | | | | | | | | | | | | |
| Vested and expected to vest | | 29 |
| | $ | 90.90 |
| | 2.16 | | $ | — |
| | | | |
| | | | | | | | | | | | | |
| Outstanding and exercisable | | 29 |
| | $ | 90.90 |
| | 2.16 | | $ | 423 |
| | | | |
The following table summarizes certain information concerning activity for performance-based SARs and RSUs:
|
| | | | | | | | | | | | |
| | | Year Ended |
| (in thousands, except per share data) | | December 30,
2017 | | December 31,
2016 | | January 2,
2016 |
| SARs: | | | | | | |
| Weighted average fair value of grants | | $ | — |
| | $ | 36.78 |
| | $ | 43.38 |
|
| Aggregate intrinsic value of SARs exercised | | $ | 5,221 |
| | $ | 11,556 |
| | $ | 8,475 |
|
| | | | | | | |
| RSUs: | | | | | | |
| Weighted average fair value of grants | | $ | 146.42 |
| | $ | 163.76 |
| | $ | — |
|
| Total grant date fair value of RSUs vested | | $ | 7,823 |
| | $ | 13,512 |
| | $ | 1,763 |
|
There were no performance-based SARs granted in 2017 or performance based RSUs granted in 2015. As of December 30, 2017, the maximum potential payout under the Company’s currently outstanding performance-based SARs and RSUs was 663 thousand and 173 thousand units.
Market-Based Awards
The Company’s outstanding market-based awards consist of RSUs.post-vest restrictions. Market-based RSU’s vesting depends on the Company’sour relative total shareholder return among a designated group of peer companies during a three-year period and will be subject to a one-year holding period after vesting.
The following table summarizes activity for time-based, performance-based and market-based RSUs in 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Time-Based | | Performance-Based | | Market-Based |
| (in thousands, except per share data) | Number of Awards | | Weighted-Average
Grant Date Fair Value | | Number of Awards | | Weighted-Average
Grant Date Fair Value | | Number of Awards | | Weighted-Average
Grant Date Fair Value |
| Nonvested at December 28, 2019 | 460 | | | $ | 145.95 | | | 127 | | | $ | 132.03 | | | 73 | | | $ | 145.08 | |
| Granted | 343 | | | $ | 137.47 | | | 74 | | | $ | 130.03 | | | 37 | | | $ | 145.04 | |
| Change in units based on performance | 0 | | | $ | 0 | | | (24) | | | $ | 139.46 | | | 0 | | | $ | 0 | |
Vested (1) | (213) | | | $ | 141.99 | | | (8) | | | $ | 143.03 | | | (19) | | | $ | 138.81 | |
| Forfeited | (50) | | | $ | 142.27 | | | (7) | | | $ | 124.20 | | | (2) | | | $ | 146.34 | |
| Nonvested at January 2, 2021 | 540 | | | $ | 142.47 | | | 162 | | | $ | 129.74 | | | 89 | | | $ | 146.34 | |
| | | | | | | | | | | |
(1)The vested shares of Market-Based RSUs were not exercised due to low multiplier effect for 2017 awards.
The following table summarizes certain information concerning activity for time-based, performance-based and market-based RSUs:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| (in thousands, except per share data) | January 2, 2021 | | December 28, 2019 | | December 29, 2018 |
| Time-based: | | | | | |
| Weighted average fair value of RSUs granted | $ | 137.47 | | | $ | 157.31 | | | $ | 130.12 | |
| Total grant date fair value of RSUs vested | $ | 30,231 | | | $ | 21,955 | | | $ | 17,527 | |
| Performance-based: | | | | | |
| Weighted average fair value of RSUs granted | $ | 130.03 | | | $ | 159.80 | | | $ | 119.08 | |
| Total grant date fair value of RSUs vested | $ | 1,123 | | | $ | 2,666 | | | $ | 9,224 | |
| Market-based: | | | | | |
| Weighted average fair value of RSUs granted | $ | 145.04 | | | $ | 165.70 | | | $ | 131.48 | |
| Total grant date fair value of RSUs vested | $ | 2,646 | | | $ | 0 | | | $ | 0 | |
As of January 2, 2021, the beginning of 2017, zeromaximum potential payout under our currently outstanding performance-based and market-based RSUs were outstanding. During 2017, a total of 27350 thousand market-based RSUs were granted at a weighted average fair value of $139.33 per unit and 3178 thousand market-based RSUs were forfeited at a weighted average fair value of $145.83.units.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Other Considerations
Total income tax benefit related to share-based compensation expense for 2017, 20162020, 2019 and 20152018 was $15.3$11.5 million, $7.5$9.4 million and $13.6$6.8 million.
As of December 30, 2017,January 2, 2021, there was $44.3$67.1 million of unrecognized compensation expense related to all share-based awards that was expected to be recognized over a weighted average period of 1.81.5 years.
The Company modified selected awards for certain terminated employees during 2015 such that the employees would vest in awards that would have otherwise been forfeited, which resulted in incremental expense recognized in 201560
Deferred Stock Units (“DSUs”)
The Company grantsWe grant share-based awards annually to itsour Board of Directors in connection with its annual meeting of stockholders. These awards are granted in the form of DSUs as provided for in the Advance Auto Parts, Inc. Deferred Stock Unit Plan for Non-Employee Directors and Selected Executives (“DSU Plan”). Each DSU is equivalent to one share of our common stock of the Company and will be distributed in common shares after the director’s service on the Board ends. DSUs granted in 2017 and 2016 vest over a one year service period, while DSUs granted in 2015 were fully vested on the grant date.period. Additionally, the DSU Plan provides for the deferral of compensation earned in the form of (i) an annual retainer for directors, and (ii) wages for certain highly compensated Team Members of the Company.Members. These DSUs are settled in common stock with the participants at a future date, or over a specified time period, as elected by the participants in accordance with the DSU Plan.
The CompanyWe granted 12 thousand DSUs in 2017.2020. The weighted average fair value of DSUs granted during 2017, 20162020, 2019 and 20152018 was $125.34, $146.30,$130.14, $156.47, and $156.83.$127.14. The DSUs are awarded at a price equal to the market price of the Company’sour underlying common stock on the date of the grant. For 2017, 20162020, 2019 and 2015, the Company2018, we recognized $1.5$1.6 million, $0.9$1.9 million and $2.1$1.9 million of share-based compensation expense for these DSU grants.
Employee Stock Purchase Plan
The CompanyWe also offersoffer an employee stock purchase plan (“ESPP”). Under the ESPP, eligible Team Members may elect salary deferrals to purchase the Company’sour common stock at a discount of 10% from its fair market value on the date of purchase. There are annual limitations on the amounts a Team Member may elect of either $25 thousand per Team Member or 10% of compensation, whichever is less. As of December 30, 2017,January 2, 2021, there were 1.00.9 million shares available to be issued under the ESPP.
| |
17. | Accumulated Other Comprehensive Loss: |
16. Accumulated Other Comprehensive Loss:
Accumulated other comprehensive loss, net of tax, consisted of the following:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Unrealized Gain (Loss) on
Postretirement Plan | | Foreign Currency Translation | | Accumulated Other Comprehensive
(Loss) Income |
| Balance, December 30, 2017 | $ | 1,758 | | | $ | (26,712) | | | $ | (24,954) | |
| 2018 activity | (294) | | | (18,945) | | | (19,239) | |
| Balance, December 29, 2018 | 1,464 | | | (45,657) | | | (44,193) | |
| 2019 activity | (142) | | | 9,766 | | | 9,624 | |
| Balance, December 28, 2019 | 1,322 | | | (35,891) | | | (34,569) | |
| 2020 activity | (152) | | | 7,962 | | | 7,810 | |
| Balance, January 2, 2021 | $ | 1,170 | | | $ | (27,929) | | | $ | (26,759) | |
|
| | | | | | | | | | | | |
| (in thousands) | | Unrealized Gain (Loss)
on Postretirement
Plan | | Foreign Currency Translation | | Accumulated
Other
Comprehensive Income (Loss) |
| Balance, January 3, 2015 | | $ | 2,931 |
| | $ | (15,268 | ) | | $ | (12,337 | ) |
| 2015 activity | | (445 | ) | | (31,277 | ) | | (31,722 | ) |
| Balance, January 2, 2016 | | 2,486 |
| | (46,545 | ) | | (44,059 | ) |
| 2016 activity | | (534 | ) | | 4,892 |
| | 4,358 |
|
| Balance, December 31, 2016 | | 1,952 |
| | (41,653 | ) | | (39,701 | ) |
| 2017 activity | | (194 | ) | | 14,941 |
| | 14,747 |
|
| Balance, December 30, 2017 | | $ | 1,758 |
| | $ | (26,712 | ) | | $ | (24,954 | ) |
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| |
18. | Condensed Consolidating Financial Statements: |
17. Quarterly Financial Data (unaudited):
Certain 100% wholly owned domestic subsidiaries of Advance, including its Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors of Advance’s senior unsecured notes (“Guarantor Subsidiaries”). The subsidiary guarantees related to Advance’s senior unsecured notes are full and unconditional, joint and several and there are no restrictions on the ability of Advance to obtain funds from its Guarantor Subsidiaries. Certain of Advance’s wholly owned subsidiaries, including all of its foreign subsidiaries, do not serve as guarantors of Advance’s senior unsecured notes (“Non-Guarantor Subsidiaries”).
Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, and cash flows of (i) Advance, (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries, and (iv) the eliminations necessary to arrive at consolidated information for the Company. Investments in subsidiaries of the Company are presented under the equity method. The statement of operations eliminations relate primarily to the sale of inventory from a Non-Guarantor Subsidiary to a Guarantor Subsidiary. The balance sheet eliminations relate primarily to the elimination of intercompany receivables and payables and subsidiary investment accounts.
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The following tables present condensed consolidating balance sheets, condensed consolidating statements of operations, comprehensive income and cash flows, and should be read in conjunction with the consolidated financial statements herein.
Condensed Consolidating Balance Sheet
As of December 30, 2017
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 23 |
| | $ | 482,620 |
| | $ | 64,317 |
| | $ | (23 | ) | | $ | 546,937 |
|
| Receivables, net | — |
| | 567,460 |
| | 38,897 |
| | — |
| | 606,357 |
|
| Inventories | — |
| | 3,986,724 |
| | 181,768 |
| | — |
| | 4,168,492 |
|
| Other current assets | — |
| | 103,118 |
| | 2,063 |
| | (75 | ) | | 105,106 |
|
| Total current assets | 23 |
| | 5,139,922 |
| | 287,045 |
| | (98 | ) | | 5,426,892 |
|
| Property and equipment, net of accumulated depreciation | 103 |
| | 1,384,115 |
| | 9,920 |
| | — |
| | 1,394,138 |
|
| Goodwill | — |
| | 943,359 |
| | 50,934 |
| | — |
| | 994,293 |
|
| Intangible assets, net | — |
| | 551,781 |
| | 45,893 |
| | — |
| | 597,674 |
|
| Other assets, net | 3,224 |
| | 68,749 |
| | 554 |
| | (3,223 | ) | | 69,304 |
|
| Investment in subsidiaries | 3,521,330 |
| | 448,462 |
| | — |
| | (3,969,792 | ) | | — |
|
| Intercompany note receivable | 1,048,700 |
| | — |
| | — |
| | (1,048,700 | ) | | — |
|
| Due from intercompany, net | — |
| | — |
| | 332,467 |
| | (332,467 | ) | | — |
|
| | $ | 4,573,380 |
| | $ | 8,536,388 |
| | $ | 726,813 |
| | $ | (5,354,280 | ) | | $ | 8,482,301 |
|
| Liabilities and Stockholders' Equity | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 2,657,792 |
| | $ | 236,790 |
| | $ | — |
| | $ | 2,894,582 |
|
| Accrued expenses | 1,134 |
| | 511,841 |
| | 20,648 |
| | (75 | ) | | 533,548 |
|
| Other current liabilities | — |
| | 50,963 |
| | 1,027 |
| | (23 | ) | | 51,967 |
|
| Total current liabilities | 1,134 |
| | 3,220,596 |
| | 258,465 |
| | (98 | ) | | 3,480,097 |
|
| Long-term debt | 1,044,327 |
| | — |
| | — |
| | — |
| | 1,044,327 |
|
| Deferred income taxes | — |
| | 288,999 |
| | 17,844 |
| | (3,223 | ) | | 303,620 |
|
| Other long-term liabilities | — |
| | 237,019 |
| | 2,042 |
| | — |
| | 239,061 |
|
| Intercompany note payable | — |
| | 1,048,700 |
| | — |
| | (1,048,700 | ) | | — |
|
| Due to intercompany, net | 112,723 |
| | 219,744 |
| | — |
| | (332,467 | ) | | — |
|
| Commitments and contingencies |
| |
| |
| |
| |
|
| Stockholders' equity | 3,415,196 |
| | 3,521,330 |
| | 448,462 |
| | (3,969,792 | ) | | 3,415,196 |
|
| | $ | 4,573,380 |
| | $ | 8,536,388 |
| | $ | 726,813 |
| | $ | (5,354,280 | ) | | $ | 8,482,301 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Balance Sheet
As of December 31, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 22 |
| | $ | 78,543 |
| | $ | 56,635 |
| | $ | (22 | ) | | $ | 135,178 |
|
| Receivables, net | — |
| | 619,229 |
| | 22,023 |
| | — |
| | 641,252 |
|
| Inventories | — |
| | 4,126,465 |
| | 199,403 |
| | — |
| | 4,325,868 |
|
| Other current assets | — |
| | 69,385 |
| | 1,153 |
| | (72 | ) | | 70,466 |
|
| Total current assets | 22 |
| | 4,893,622 |
| | 279,214 |
| | (94 | ) | | 5,172,764 |
|
| Property and equipment, net of accumulated depreciation | 128 |
| | 1,436,459 |
| | 9,753 |
| | — |
| | 1,446,340 |
|
| Goodwill | — |
| | 943,359 |
| | 47,518 |
| | — |
| | 990,877 |
|
| Intangible assets, net | — |
| | 595,596 |
| | 45,307 |
| | — |
| | 640,903 |
|
| Other assets, net | 4,634 |
| | 63,376 |
| | 773 |
| | (4,634 | ) | | 64,149 |
|
| Investment in subsidiaries | 3,008,856 |
| | 375,420 |
| | — |
| | (3,384,276 | ) | | — |
|
| Intercompany note receivable | 1,048,424 |
| | — |
| | — |
| | (1,048,424 | ) | | — |
|
| Due from intercompany, net | — |
| | — |
| | 316,109 |
| | (316,109 | ) | | — |
|
| | $ | 4,062,064 |
| | $ | 8,307,832 |
| | $ | 698,674 |
| | $ | (4,753,537 | ) | | $ | 8,315,033 |
|
| Liabilities and Stockholders' Equity | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 2,813,937 |
| | $ | 272,240 |
| | $ | — |
| | $ | 3,086,177 |
|
| Accrued expenses | 1,505 |
| | 526,652 |
| | 26,312 |
| | (72 | ) | | 554,397 |
|
| Other current liabilities | — |
| | 32,508 |
| | 2,986 |
| | (22 | ) | | 35,472 |
|
| Total current liabilities | 1,505 |
| | 3,373,097 |
| | 301,538 |
| | (94 | ) | | 3,676,046 |
|
| Long-term debt | 1,042,949 |
| | — |
| | — |
| | — |
| | 1,042,949 |
|
| Deferred income taxes | — |
| | 439,283 |
| | 19,633 |
| | (4,634 | ) | | 454,282 |
|
| Other long-term liabilities | — |
| | 223,481 |
| | 2,083 |
| | — |
| | 225,564 |
|
| Intercompany note payable | — |
| | 1,048,424 |
| | — |
| | (1,048,424 | ) | | — |
|
| Due to intercompany, net | 101,418 |
| | 214,691 |
| | — |
| | (316,109 | ) | | — |
|
| Commitments and contingencies | | | | | | | | | |
| Stockholders' equity | 2,916,192 |
| | 3,008,856 |
| | 375,420 |
| | (3,384,276 | ) | | 2,916,192 |
|
| | $ | 4,062,064 |
| | $ | 8,307,832 |
| | $ | 698,674 |
| | $ | (4,753,537 | ) | | $ | 8,315,033 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Statement of Operations
For the Year Ended December 30, 2017
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 9,034,790 |
| | $ | 550,450 |
| | $ | (211,456 | ) | | $ | 9,373,784 |
|
Cost of sales, including purchasing and warehousing costs | — |
| | 5,107,063 |
| | 393,128 |
| | (211,456 | ) | | 5,288,735 |
|
| Gross profit | — |
| | 3,927,727 |
| | 157,322 |
| | — |
| | 4,085,049 |
|
| Selling, general and administrative expenses | 30,478 |
| | 3,453,406 |
| | 82,155 |
| | (51,202 | ) | | 3,514,837 |
|
| Operating (loss) income | (30,478 | ) | | 474,321 |
| | 75,167 |
| | 51,202 |
| | 570,212 |
|
| Other, net: | | | | | | | | | |
| Interest (expense) income | (52,305 | ) | | (6,496 | ) | | — |
| | — |
| | (58,801 | ) |
| Other income (expense), net | 83,840 |
| | (17,729 | ) | | (6,061 | ) | | (51,202 | ) | | 8,848 |
|
| Total other, net | 31,535 |
| | (24,225 | ) | | (6,061 | ) | | (51,202 | ) | | (49,953 | ) |
| Income before provision for income taxes | 1,057 |
| | 450,096 |
| | 69,106 |
| | — |
| | 520,259 |
|
| Provision for income taxes | 641 |
| | 32,623 |
| | 11,490 |
| | — |
| | 44,754 |
|
| Income before equity in earnings of subsidiaries | 416 |
| | 417,473 |
| | 57,616 |
| | — |
| | 475,505 |
|
| Equity in earnings of subsidiaries | 475,089 |
| | 57,616 |
| | — |
| | (532,705 | ) | | — |
|
| Net income | $ | 475,505 |
| | $ | 475,089 |
| | $ | 57,616 |
| | $ | (532,705 | ) | | $ | 475,505 |
|
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 9,254,477 |
| | $ | 556,747 |
| | $ | (243,545 | ) | | $ | 9,567,679 |
|
Cost of sales, including purchasing and warehousing costs | — |
| | 5,171,953 |
| | 383,356 |
| | (243,545 | ) | | 5,311,764 |
|
| Gross profit | — |
| | 4,082,524 |
| | 173,391 |
| | — |
| | 4,255,915 |
|
| Selling, general and administrative expenses | 28,695 |
| | 3,402,323 |
| | 92,287 |
| | (54,988 | ) | | 3,468,317 |
|
| Operating (loss) income | (28,695 | ) | | 680,201 |
| | 81,104 |
| | 54,988 |
| | 787,598 |
|
| Other, net: | | | | | | | | | |
| Interest (expense) income | (52,081 | ) | | (7,897 | ) | | 68 |
| | — |
| | (59,910 | ) |
| Other income (expense), net | 81,683 |
| | (19,558 | ) | | 4,010 |
| | (54,988 | ) | | 11,147 |
|
| Total other, net | 29,602 |
| | (27,455 | ) | | 4,078 |
| | (54,988 | ) | | (48,763 | ) |
| Income before provision for income taxes | 907 |
| | 652,746 |
| | 85,182 |
| | — |
| | 738,835 |
|
| Provision for income taxes | 1,588 |
| | 260,155 |
| | 17,470 |
| | — |
| | 279,213 |
|
| (Loss) income before equity in earnings of subsidiaries | (681 | ) | | 392,591 |
| | 67,712 |
| | — |
| | 459,622 |
|
| Equity in earnings of subsidiaries | 460,303 |
| | 67,712 |
| | — |
| | (528,015 | ) | | — |
|
| Net income | $ | 459,622 |
| | $ | 460,303 |
| | $ | 67,712 |
| | $ | (528,015 | ) | | $ | 459,622 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Statement of Operations
For the Year Ended January 2, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 9,432,116 |
| | $ | 593,606 |
| | $ | (288,704 | ) | | $ | 9,737,018 |
|
Cost of sales, including purchasing and warehousing costs | — |
| | 5,172,938 |
| | 430,012 |
| | (288,704 | ) | | 5,314,246 |
|
| Gross profit | — |
| | 4,259,178 |
| | 163,594 |
| | — |
| | 4,422,772 |
|
| Selling, general and administrative expenses | 24,186 |
| | 3,536,697 |
| | 93,852 |
| | (57,743 | ) | | 3,596,992 |
|
| Operating (loss) income | (24,186 | ) | | 722,481 |
| | 69,742 |
| | 57,743 |
| | 825,780 |
|
| Other, net: | | | | | | | | | |
| Interest expense | (52,210 | ) | | (13,378 | ) | | 180 |
| | — |
| | (65,408 | ) |
| Other income (expense), net | 76,987 |
| | (19,699 | ) | | (7,029 | ) | | (57,743 | ) | | (7,484 | ) |
| Total other, net | 24,777 |
| | (33,077 | ) | | (6,849 | ) | | (57,743 | ) | | (72,892 | ) |
| Income before provision for income taxes | 591 |
| | 689,404 |
| | 62,893 |
| | — |
| | 752,888 |
|
| Provision for income taxes | 1,220 |
| | 268,571 |
| | 9,699 |
| | — |
| | 279,490 |
|
| (Loss) income before equity in earnings of subsidiaries | (629 | ) | | 420,833 |
| | 53,194 |
| | — |
| | 473,398 |
|
| Equity in earnings of subsidiaries | 474,027 |
| | 53,194 |
| | — |
| | (527,221 | ) | | — |
|
| Net income | $ | 473,398 |
| | $ | 474,027 |
| | $ | 53,194 |
| | $ | (527,221 | ) | | $ | 473,398 |
|
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended December 30, 2017
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net income | $ | 475,505 |
| | $ | 475,089 |
| | $ | 57,616 |
| | $ | (532,705 | ) | | $ | 475,505 |
|
| Other comprehensive income: | | | | | | | | | |
| Changes in net unrecognized other postretirement benefit costs | — |
| | (194 | ) | | — |
| | — |
| | (194 | ) |
| Currency translation adjustments | — |
| | — |
| | 14,941 |
| | — |
| | 14,941 |
|
| Equity in other comprehensive income of subsidiaries | 14,747 |
| | 14,941 |
| | — |
| | (29,688 | ) | | — |
|
| Total other comprehensive income | 14,747 |
| | 14,747 |
| | 14,941 |
| | (29,688 | ) | | 14,747 |
|
| Comprehensive income | $ | 490,252 |
| | $ | 489,836 |
| | $ | 72,557 |
| | $ | (562,393 | ) | | $ | 490,252 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net income | $ | 459,622 |
| | $ | 460,303 |
| | $ | 67,712 |
| | $ | (528,015 | ) | | $ | 459,622 |
|
| Other comprehensive income: | | | | | | | | | |
| Changes in net unrecognized other postretirement benefit costs | — |
| | (534 | ) | | — |
| | — |
| | (534 | ) |
| Currency translation adjustments | — |
| | — |
| | 4,892 |
| | — |
| | 4,892 |
|
| Equity in other comprehensive income of subsidiaries | 4,358 |
| | 4,892 |
| | — |
| | (9,250 | ) | | — |
|
| Total other comprehensive income | 4,358 |
| | 4,358 |
| | 4,892 |
| | (9,250 | ) | | 4,358 |
|
| Comprehensive income | $ | 463,980 |
| | $ | 464,661 |
| | $ | 72,604 |
| | $ | (537,265 | ) | | $ | 463,980 |
|
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended January 2, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net income | $ | 473,398 |
| | $ | 474,027 |
| | $ | 53,194 |
| | $ | (527,221 | ) | | $ | 473,398 |
|
| Other comprehensive loss: | | | | | | | | | |
| Changes in net unrecognized other postretirement benefit costs | — |
| | (445 | ) | | — |
| | — |
| | (445 | ) |
| Currency translation adjustments | — |
| | — |
| | (31,277 | ) | | — |
| | (31,277 | ) |
| Equity in other comprehensive loss of subsidiaries | (31,722 | ) | | (31,277 | ) | | — |
| | 62,999 |
| | — |
|
| Other comprehensive loss | (31,722 | ) | | (31,722 | ) | | (31,277 | ) | | 62,999 |
| | (31,722 | ) |
| Comprehensive income | $ | 441,676 |
| | $ | 442,305 |
| | $ | 21,917 |
| | $ | (464,222 | ) | | $ | 441,676 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 30, 2017
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided by operating activities | $ | — |
| | $ | 593,091 |
| | $ | 7,714 |
| | $ | — |
| | $ | 600,805 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Purchases of property and equipment | — |
| | (187,993 | ) | | (1,765 | ) | | — |
| | (189,758 | ) |
| Proceeds from sales of property and equipment | — |
| | 11,085 |
| | 14 |
| | — |
| | 11,099 |
|
| Other, net | — |
| | 480 |
| | (460 | ) | | — |
| | 20 |
|
| Net cash used in investing activities | — |
| | (176,428 | ) | | (2,211 | ) | | — |
| | (178,639 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Increase (decrease) in bank overdrafts | — |
| | 16,290 |
| | (2,286 | ) | | — |
| | 14,004 |
|
| Borrowings under credit facilities | — |
| | 534,400 |
| | — |
| | — |
| | 534,400 |
|
| Payments on credit facilities | — |
| | (534,400 | ) | | — |
| | — |
| | (534,400 | ) |
| Dividends paid | — |
| | (17,854 | ) | | — |
| | — |
| | (17,854 | ) |
| Proceeds from the issuance of common stock | — |
| | 4,076 |
| | — |
| | — |
| | 4,076 |
|
| Tax withholdings related to the exercise of stock appreciation rights | — |
| | (6,531 | ) | | — |
| | — |
| | (6,531 | ) |
| Repurchase of common stock | — |
| | (6,498 | ) | | — |
| | — |
| | (6,498 | ) |
| Other, net | 1 |
| | (2,069 | ) | | — |
| | (1 | ) | | (2,069 | ) |
| Net cash provided by (used in) financing activities | 1 |
| | (12,586 | ) | | (2,286 | ) | | (1 | ) | | (14,872 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 4,465 |
| | — |
| | 4,465 |
|
| Net increase in cash and cash equivalents | 1 |
| | 404,077 |
| | 7,682 |
| | (1 | ) | | 411,759 |
|
Cash and cash equivalents, beginning of period | 22 |
| | 78,543 |
| | 56,635 |
| | (22 | ) | | 135,178 |
|
Cash and cash equivalents, end of period | $ | 23 |
| | $ | 482,620 |
| | $ | 64,317 |
| | $ | (23 | ) | | $ | 546,937 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash provided by operating activities | $ | 14 |
| | $ | 491,180 |
| | $ | 32,109 |
| | $ | — |
| | $ | 523,303 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Purchases of property and equipment | — |
| | (257,159 | ) | | (2,400 | ) | | — |
| | (259,559 | ) |
| Proceeds from sales of property and equipment | — |
| | 2,210 |
| | 2 |
| | — |
| | 2,212 |
|
| Other, net | — |
| | (4,697 | ) | | — |
| | — |
| | (4,697 | ) |
| Net cash used in investing activities | — |
| | (259,646 | ) | | (2,398 | ) | | — |
| | (262,044 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| Decrease in bank overdrafts | — |
| | (4,902 | ) | | (657 | ) | | (14 | ) | | (5,573 | ) |
| Borrowings under credit facilities | — |
| | 799,600 |
| | — |
| | — |
| | 799,600 |
|
| Payments on credit facilities | — |
| | (959,600 | ) | | — |
| | — |
| | (959,600 | ) |
| Dividends paid | — |
| | (17,738 | ) | | — |
| | — |
| | (17,738 | ) |
| Proceeds from the issuance of common stock | — |
| | 4,532 |
| | — |
| | — |
| | 4,532 |
|
| Tax withholdings related to the exercise of stock appreciation rights | — |
| | (19,558 | ) | | — |
| | — |
| | (19,558 | ) |
| Repurchase of common stock | — |
| | (18,393 | ) | | — |
| | — |
| | (18,393 | ) |
| Other, net | — |
| | (390 | ) | | — |
| | — |
| | (390 | ) |
| Net cash used in financing activities | — |
| | (216,449 | ) | | (657 | ) | | (14 | ) | | (217,120 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 257 |
| | — |
| | 257 |
|
| Net increase in cash and cash equivalents | 14 |
| | 15,085 |
| | 29,311 |
| | (14 | ) | | 44,396 |
|
Cash and cash equivalents, beginning of period | 8 |
| | 63,458 |
| | 27,324 |
| | (8 | ) | | 90,782 |
|
Cash and cash equivalents, end of period | $ | 22 |
| | $ | 78,543 |
| | $ | 56,635 |
| | $ | (22 | ) | | $ | 135,178 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Condensed Consolidating Statement of Cash Flows
For the Year Ended January 2, 2016
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Advance Auto Parts, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
| Net cash (used in) provided by operating activities | $ | (1 | ) | | $ | 709,582 |
| | $ | (6,937 | ) | | $ | — |
| | $ | 702,644 |
|
| Cash flows from investing activities: | | | | | | | | | |
| Purchases of property and equipment | — |
| | (232,591 | ) | | (2,156 | ) | | — |
| | (234,747 | ) |
| Proceeds from sales of property and equipment | — |
| | 266 |
| | 4 |
| | — |
| | 270 |
|
| Other, net | — |
| | (18,583 | ) | | (306 | ) | | — |
| | (18,889 | ) |
| Net cash used in investing activities | — |
| | (250,908 | ) | | (2,458 | ) | | — |
| | (253,366 | ) |
| Cash flows from financing activities: | | | | | | | | | |
| (Decrease) increase in bank overdrafts | — |
| | (4,529 | ) | | 1,606 |
| | 1 |
| | (2,922 | ) |
| Borrowings under credit facilities | — |
| | 618,300 |
| | — |
| | — |
| | 618,300 |
|
| Payments on credit facilities | — |
| | (1,041,700 | ) | | — |
| | — |
| | (1,041,700 | ) |
| Dividends paid | — |
| | (17,649 | ) | | — |
| | — |
| | (17,649 | ) |
| Proceeds from the issuance of common stock | — |
| | 5,174 |
| | — |
| | — |
| | 5,174 |
|
| Tax withholdings related to the exercise of stock appreciation rights | — |
| | (13,112 | ) | | — |
| | — |
| | (13,112 | ) |
| Repurchase of common stock | — |
| | (6,665 | ) | | — |
| | — |
| | (6,665 | ) |
| Other, net | — |
| | (380 | ) | | — |
| | — |
| | (380 | ) |
| Net cash (used in) provided by financing activities | — |
| | (460,561 | ) | | 1,606 |
| | 1 |
| | (458,954 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | (4,213 | ) | | — |
| | (4,213 | ) |
| Net decrease in cash and cash equivalents | (1 | ) | | (1,887 | ) | | (12,002 | ) | | 1 |
| | (13,889 | ) |
Cash and cash equivalents, beginning of period | 9 |
| | 65,345 |
| | 39,326 |
| | (9 | ) | | 104,671 |
|
Cash and cash equivalents, end of period | $ | 8 |
| | $ | 63,458 |
| | $ | 27,324 |
| | $ | (8 | ) | | $ | 90,782 |
|
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| |
19. | Quarterly Financial Data (unaudited): |
The following table summarizes quarterly financial data for 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | First | | Second | | Third | | Fourth |
| (in thousands, except per share data) | (16 weeks) | | (12 weeks) | | (12 weeks) | | (13 weeks) |
| Net sales | $ | 2,697,882 | | | $ | 2,501,380 | | | $ | 2,541,928 | | | $ | 2,365,131 | |
| Gross profit | $ | 1,172,733 | | | $ | 1,096,714 | | | $ | 1,128,471 | | | $ | 1,083,696 | |
| Net income | $ | 43,588 | | | $ | 189,960 | | | $ | 147,476 | | | $ | 111,996 | |
| | | | | | | |
| Basic earnings per common share | $ | 0.63 | | | $ | 2.75 | | | $ | 2.14 | | | $ | 1.66 | |
| Diluted earnings per common share | $ | 0.63 | | | $ | 2.74 | | | $ | 2.13 | | | $ | 1.65 | |
| | | | | | | |
| 2019 | First | | Second | | Third | | Fourth |
| (in thousands, except per share data) | (16 weeks) | | (12 weeks) | | (12 weeks) | | (12 weeks) |
| Net sales | $ | 2,952,036 | | | $ | 2,332,246 | | | $ | 2,312,106 | | | $ | 2,112,614 | |
| Gross profit | $ | 1,304,612 | | | $ | 1,009,438 | | | $ | 1,011,926 | | | $ | 928,769 | |
| Net income | $ | 142,500 | | | $ | 124,820 | | | $ | 123,669 | | | $ | 95,907 | |
| | | | | | | |
| Basic earnings per common share | $ | 1.99 | | | $ | 1.74 | | | $ | 1.76 | | | $ | 1.39 | |
| Diluted earnings per common share | $ | 1.98 | | | $ | 1.73 | | | $ | 1.75 | | | $ | 1.38 | |
|
| | | | | | | | | | | | | | | | |
| 2017 | | First | | Second | | Third | | Fourth |
| (in thousands, except per share data) | | (16 weeks) | | (12 weeks) | | (12 weeks) | | (12 weeks) |
| Net sales | | $ | 2,890,838 |
| | $ | 2,263,727 |
| | $ | 2,182,233 |
| | $ | 2,036,986 |
|
| Gross profit | | $ | 1,270,684 |
| | $ | 993,088 |
| | $ | 947,708 |
| | $ | 873,569 |
|
| Net income | | $ | 107,960 |
| | $ | 87,049 |
| | $ | 95,996 |
| | $ | 184,500 |
|
| | | | | | | | | |
| Basic earnings per common share | | $ | 1.46 |
| | $ | 1.18 |
| | $ | 1.30 |
| | $ | 2.50 |
|
| Diluted earnings per common share | | $ | 1.46 |
| | $ | 1.17 |
| | $ | 1.30 |
| | $ | 2.49 |
|
| | | | | | | | | |
| 2016 | | First | | Second | | Third | | Fourth |
| (in thousands, except per share data) | | (16 weeks) | | (12 weeks) | | (12 weeks) | | (12 weeks) |
| Net sales | | $ | 2,979,778 |
| | $ | 2,256,155 |
| | $ | 2,248,855 |
| | $ | 2,082,891 |
|
| Gross profit | | $ | 1,349,889 |
| | $ | 1,010,257 |
| | $ | 988,205 |
| | $ | 907,564 |
|
| Net income | | $ | 158,813 |
| | $ | 124,600 |
| | $ | 113,844 |
| | $ | 62,365 |
|
| | | | | | | | | |
| Basic earnings per common share | | $ | 2.16 |
| | $ | 1.69 |
| | $ | 1.54 |
| | $ | 0.84 |
|
| Diluted earnings per common share | | $ | 2.14 |
| | $ | 1.68 |
| | $ | 1.53 |
| | $ | 0.84 |
|
Note: Due to 2020 having 53 weeks, Q4 2020 included 13 weeks of operations, while the comparable prior year period included 12 weeks.
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not be equal to the per share amountamounts for the year.
Advance Auto Parts, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | Balance at Beginning of Period | | Charges to Expenses | | Deductions(1) | | Balance at End of Period |
| December 29, 2018 | | $ | 18,219 | | | $ | 18,445 | | | $ | (18,622) | | | $ | 18,042 | |
| December 28, 2019 | | $ | 18,042 | | | $ | 11,949 | | | $ | (15,742) | | | $ | 14,249 | |
| January 2, 2021 | | $ | 14,249 | | | $ | 14,933 | | | $ | (17,253) | | | $ | 11,929 | |
|
| | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts receivable | | Balance at Beginning of Period | | Charges to Expenses | | Deductions | | Balance at End of Period |
| January 2, 2016 | | $ | 16,152 |
| | $ | 22,067 |
| | $ | (12,461 | ) | (1) | $ | 25,758 |
|
| December 31, 2016 | | $ | 25,758 |
| | $ | 24,597 |
| | $ | (21,191 | ) | (1) | $ | 29,164 |
|
| December 30, 2017 | | $ | 29,164 |
| | $ | 20,110 |
| | $ | (31,055 | ) | (1) | $ | 18,219 |
|
| |
(1)
| Accounts written off during the period. These amounts did not impact the Company’s statement of operations for any year presented. |
(1)Accounts written off during the period. These amounts did not impact our statement of operations for any year presented.
Other valuation and qualifying accounts have not been reported in this schedule because they are either not applicable or because the information has been included elsewhere in this report.
EXHIBITSEXHIBIT INDEX
| | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 3.1 | | 10-Q | 3.1 | | 8/14/2018 | |
| 3.2 | | 10-Q | 3.2 | | 8/18/2020 | |
| 4.0 | | 10-Q | 4.7 | 11/10/2020 | |
| 4.1 | | 8-K | 4.1 | | 4/29/2010 | |
| 4.2 | | 8-K | 10.45 | | 6/3/2011 | |
| 4.3 | | 8-K | 4.4 | | 1/17/2012 | |
| 4.4 | | 8-K | 4.5 | | 12/21/2012 | |
| 4.5 | | 8-K | 4.6 | | 4/19/2013 | |
| 4.6 | | 8-K | 4.7 | | 12/9/2013 | |
| 4.7 | | 8-K | 4.5 | | 1/17/2012 | |
| 4.8 | | 8-K | 4.7 | | 12/9/2013 | |
| 4.9 | | 10-Q | 4.11 | | 5/28/2014 | |
| 4.10 | | 8-K | 4.1 | | 4/17/2020 | |
| 4.11 | | 8-K | 4.6 | | 9/30/2020 | |
| 10.1 | | 8-K | 10.19 | | 5/20/2004 | |
| 10.2 | | 10-Q | 10.19 | | 5/29/2008 | |
|
| | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 2.1 | | 10-K | 2.1 |
| 2/25/2014 | |
| 3.1 | | 8-K | 3.1 |
| 5/31/2017 | |
| 3.2 | | 8-K | 3.2 |
| 5/31/2017 | |
| 4.1 | | 8-K | 4.1 |
| 4/29/2010 | |
| 4.2 | | 8-K | 4.2 |
| 4/29/2010 | |
| 4.3 | | 8-K | 10.45 |
| 6/3/2011 | |
| 4.4 | | 8-K | 4.4 |
| 1/17/2012 | |
| 4.5 | | 8-K | 4.5 |
| 12/21/2012 | |
| 4.6 | | 8-K | 4.6 |
| 4/19/2013 | |
| 4.7 | | 8-K | 4.7 |
| 12/9/2013 | |
| 4.8 | | 8-K | 4.3 |
| 4/29/2010 | |
| 4.9 | | 8-K | 4.5 |
| 1/17/2012 | |
| 4.10 | | 8-K | 4.7 |
| 12/9/2013 | |
| 4.11 | | 10-Q | 4.11 |
| 5/28/2014 | |
| 10.1 | | 8-K | 10.19 |
| 5/20/2004 | |
| 10.2 | | 10-Q | 10.19 |
| 5/29/2008 | |
| | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 10.3 | | 10-K | 10.17 | | 3/1/2011 | |
| 10.5 | | 10-K | 10.33 | | 2/28/2012 | |
| 10.6 | | 8-K | 10.1 | | 12/21/2012 | |
| 10.8 | | 10-K | 10.34 | | 2/25/2013 | |
| 10.9 | | 10-K | 10.36 | | 2/25/2013 | |
| 10.10 | | 8-K | 10.1 | | 12/9/2013 | |
| 10.11 | | 8-K | 10.2 | | 12/9/2013 | |
| 10.12 | | 10-K | 10.45 | | 2/25/2014 | |
| 10.13 | | 10-K | 10.48 | | 2/25/2014 | |
| 10.15 | | 10-K | 10.52 | | 3/3/2015 | |
| 10.17 | | 10-K | 10.54 | | 3/3/2015 | |
| 10.18 | | 8-K | 10.1 | | 11/13/2015 | |
| 10.19 | | 10-Q | 10.1 | | 5/31/2016 | |
| 10.20 | | 10-Q | 10.2 | | 5/31/2016 | |
| 10.22 | | 10-Q | 10.5 | | 5/31/2016 | |
| 10.23 | | 10-Q | 10.7 | | 5/31/2016 | |
| 10.24 | Credit Agreement, dated as January 31, 2017, among Advance Auto Parts, Inc., Advance Stores Company, Incorporated, the lenders party thereto, and Bank of America, N.A., as Administrative Agent. | 8-K | 10.1 | | 2/6/2017 | |
|
| | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 10.3 | | 10-K | 10.17 |
| 3/1/2011 | |
| 10.4 | | DEF 14A | Appendix C |
| 4/16/2012 | |
| 10.5 | | 10-K | 10.19 |
| 3/1/2011 | |
| 10.6 | | DEF 14A | Appendix B |
| 4/11/2007 | |
| 10.7 | | 8-K | 10.33 |
| 6/4/2008 | |
| 10.8 | | 8-K | 10.35 |
| 6/4/2008 | |
| 10.9 | | 8-K | 10.39 |
| 11/21/2008 | |
| 10.10 | | 10-Q | 10.44 |
| 6/2/2010 | |
| 10.11 | | 10-K | 10.33 |
| 2/28/2012 | |
| 10.12 | | 10-K | 10.34 |
| 2/28/2012 | |
| 10.13 | | 10-Q | 10.37 |
| 11/13/2012 | |
| 10.14 | | 8-K | 10.1 |
| 12/21/2012 | |
| 10.15 | | 10-K | 10.33 |
| 2/25/2013 | |
| 10.16 | | 10-K | 10.34 |
| 2/25/2013 | |
| 10.17 | | 10-K | 10.36 |
| 2/25/2013 | |
| 10.18 | | 8-K | 10.38 |
| 3/7/2013 | |
| 10.19 | | 8-K | 10.39 |
| 4/30/2013 | |
| 10.20 | | 8-K | 10.40 |
| 6/6/2013 | |
| | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 10.25 | | 8-K | 10.2 | | 2/6/2017 | |
| 10.26 | | 10-K | 10.50 | | 2/28/2017 | |
| 10.28 | | 10-K | 10.55 | | 2/28/2017 | |
| 10.29 | | 10-K | 10.56 | | 2/28/2017 | |
| 10.30 | | 10-K | 10.58 | | 2/28/2017 | |
| 10.31 | | DEF14A | Appendix A | 4/6/2017 | |
| 10.32 | Amendment No. 1 to Credit Agreement, dated as of January 31, 2018, among Advance Auto Parts, Inc., Advance Stores Company, Incorporated, the lenders party thereto, and Bank of America, N.A., as Administrative Agent. | 8-K | 10.1 | | 2/6/2018 | |
| 10.34 | | 10-K | 10.58 | | 2/21/2018 | |
| 10.35 | | 10-Q | 10.1 | | 11/13/2018 | |
| 10.36 | Amendment No. 2 to the Credit Agreement, dated as of January 10, 2019, among Advance Auto Parts, Inc., Advance Stores Company, Incorporated, the lenders party thereto, and Bank of America, N.A., as Administrative Agent. | 8-K | 10.1 | | 10/15/2018 | |
| 10.37 | | 10-K | 10.52 | | 2/9/2019 | |
| 10.38 | | 10-K | 10.53 | | 2/9/2019 | |
| 10.39 | | 10-K | 10.54 | | 2/9/2019 | |
| 10.40 | | 10-K | 10.55 | | 2/9/2019 | |
| 10.41 | | 10-K | 10.56 | | 2/9/2019 | |
| 10.42 | | 10-K | 10.57 | | 2/9/2019 | |
| 10.43 | | 10-K | 10.58 | | 2/9/2019 | |
| 10.44 | | | | | X |
| 10.45 | | | | | X |
| 21.1 | | 10-K | 21.1 | | 2/18/2020 | |
|
| | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 10.21 | | 8-K | 10.1 |
| 12/9/2013 | |
| 10.22 | | 8-K | 10.2 |
| 12/9/2013 | |
| 10.23 | | 10-K | 10.45 |
| 2/25/2014 | |
| 10.24 | | 10-K | 10.46 |
| 2/25/2014 | |
| 10.25 | | 10-K | 10.48 |
| 2/25/2014 | |
| 10.26 | | 10-Q | 10.51 |
| 11/12/2014 | |
| 10.27 | | 10-Q | 10.52 |
| 11/12/2014 | |
| 10.28 | | 10-K | 10.50 |
| 3/3/2015 | |
| 10.29 | | 10-K | 10.51 |
| 3/3/2015 | |
| 10.30 | | 10-K | 10.52 |
| 3/3/2015 | |
| 10.31 | | 10-K | 10.53 |
| 3/3/2015 | |
| 10.32 | | 10-K | 10.54 |
| 3/3/2015 | |
| 10.33 | | 8-K | 10.1 |
| 11/13/2015 | |
| 10.34 | | 10-K | 10.58 |
| 3/1/2016 | |
| 10.35 | | 10-Q | 10.1 |
| 5/31/2016 | |
| 10.36 | | 10-Q | 10.2 |
| 5/31/2016 | |
| 10.37 | | 10-Q | 10.3 |
| 5/31/2016 | |
| 10.38 | | 10-Q | 10.4 |
| 5/31/2016 | |
| 10.39 | | 10-Q | 10.5 |
| 5/31/2016 | |
| | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 22.1 | | 10-Q | 22.1 | 11/10/2020 | |
| 23.1 | | | | | X |
| 31.1 | | | | | X |
| 31.2 | | | | | X |
| 32.1 | | | | | X |
| 101.INS | XBRL Instance Document. | | | | X |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | | | | X |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | X |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | | | | X |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. | | | | X |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | X |
| 104.1 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit. | | | | X |
|
| | | | | | |
| | | Incorporated by Reference | Filed |
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
| 10.40 | | 10-Q | 10.6 |
| 5/31/2016 | |
| 10.41 | | 10-Q | 10.7 |
| 5/31/2016 | |
| 10.42 | | 10-Q | 10.1 |
| 11/15/2016 | |
| 10.43 | Credit Agreement, dated as January 31, 2017, among Advance Auto Parts, Inc., Advance Stores Company, Incorporated, the lenders party thereto, and Bank of America, N.A., as Administrative Agent. | 8-K | 10.1 |
| 2/6/2017 | |
| 10.44 | | 8-K | 10.2 |
| 2/6/2017 | |
| 10.45 | | 10-K | 10.5 |
| 2/28/2017 | |
| 10.46 | | 10-K | 10.51 |
| 2/28/2017 | |
| 10.47 | | 10-K | 10.52 |
| 2/28/2017 | |
| 10.48 | | 10-K | 10.53 |
| 2/28/2017 | |
| 10.49 | | 10-K | 10.54 |
| 2/28/2017 | |
| 10.50 | | 10-K | 10.55 |
| 2/28/2017 | |
| 10.51 | | 10-K | 10.56 |
| 2/28/2017 | |
| 10.52 | | 10-K | 10.57 |
| 2/28/2017 | |
| 10.53 | | 10-K | 10.58 |
| 2/28/2017 | |
| 10.54 | | DEF14A | Appendix A |
| 4/6/2017 | |
| 10.55 | | 10-Q | 10.1 |
| 5/24/2017 | |
| 10.56 | Amendment No. 1 to Credit Agreement, dated as of January 31, 2018, among Advance Auto Parts, Inc., Advance Stores Company, Incorporated, the lenders party thereto, and Bank of America, N.A., as Administrative Agent. | 8-K | 10.1 |
| 2/6/2018 | |
| 10.57 | | | | | X |
| 10.58 |
| | | | X |
Item 16. Form 10-K Summary.
None.
|
| | | | | | |
| | Incorporated by Reference | Filed |
Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith |
12.1 |
| | | | X |
21.1 | | | | | X |
23.1 | | | | | X |
31.1 | | | | | X |
31.2 | | | | | X |
32.1 | | | | | X |
101.INS | XBRL Instance Document | | | | |
101.SCH | XBRL Taxonomy Extension Schema Document | | | | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | | | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | | | | |
| | ADVANCE AUTO PARTS, INC. |
| Dated: | February 21, 201822, 2021 | | By: | /s/ Thomas B. OkrayJeffrey W. Shepherd |
| | | | Thomas B. OkrayJeffrey W. Shepherd |
| | | | Executive Vice President, and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ Thomas R. Greco | | President and Chief Executive Officer and Director | | February 22, 2021 |
| Thomas R. Greco | | (Principal Executive Officer) | | |
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ Thomas R. Greco | | President and Chief Executive Officer and Director | | February 21, 2018 |
Thomas R. Greco | | (Principal Executive Officer) | | |
| | | | |
/s/ Thomas B. Okray | | Executive Vice President and Chief Financial Officer | | February 21, 2018 |
Thomas B. Okray | | (Principal Financial Officer) | | |
| | | | |
| /s/ Jeffrey W. Shepherd | | Executive Vice President, Chief Financial Officer | | February 22, 2021 |
| Jeffrey W. Shepherd | | (Principal Financial Officer) | | |
| | | | |
| /s/ Andrew E. Page | | Senior Vice President, Controller and Chief Accounting Officer | | February 21, 201822, 2021 |
Jeffrey W. ShepherdAndrew E. Page | | (Principal Accounting Officer) | | |
| | | | |
/s/ Jeffrey C. Smith | | Chairman and Director | | February 21, 2018 |
Jeffrey C. Smith | | | | |
| | | | |
/s/ John F. Bergstrom | | Director | | February 21, 2018 |
John F. Bergstrom | | | | |
| | | | |
/s/ John C. Brouillard | | Director | | February 21, 2018 |
John C. Brouillard | | | | |
| | | | |
/s/ Brad W. Buss | | Director | | February 21, 2018 |
Brad W. Buss | | | | |
| | | | |
/s/ Fiona P. Dias | | Director | | February 21, 2018 |
Fiona P. Dias | | | | |
| | | | |
/s/ John F. Ferraro | | Director | | February 21, 2018 |
John F. Ferraro | | | | |
| | | | |
/s/ Adriana Karaboutis | | Director | | February 21, 2018 |
Adriana Karaboutis | | | | |
| | | | |
| /s/ Eugene I. Lee, Jr. | | Chairman and Director | | February 21, 201822, 2021 |
| Eugene I. Lee, Jr. | | | | |
| | | | |
/s/ William S. OglesbyCarla J. Bailo | | Director | | February 21, 201822, 2021 |
William S. OglesbyCarla J. Bailo | | | | |
| | | | |
/s/ Reuben E. SloneJohn F. Bergstrom | | Director | | February 21, 201822, 2021 |
Reuben E. SloneJohn F. Bergstrom | | | | |
| | | | |
| /s/ Brad W. Buss | | Director | | February 22, 2021 |
| Brad W. Buss | | | | |
| | | | |
| /s/ John F. Ferraro | | Director | | February 22, 2021 |
| John F. Ferraro | | | | |
| | | | |
| /s/ Jeffrey J. Jones II | | Director | | February 22, 2021 |
| Jeffrey J. Jones II | | | | |
| | | | |
| /s/ Sharon L. McCollam | | Director | | February 22, 2021 |
| Sharon L. McCollam | | | | |
| | | | |
| /s/ Douglas A. Pertz | | Director | | February 22, 2021 |
| Douglas A. Pertz | | | | |
| | | | |
| /s/ Nigel Travis | | Director | | February 22, 2021 |
| Nigel Travis | | | | |
| | | | |
| /s/ Arthur L. Valdez Jr. | | Director | | February 22, 2021 |
| Arthur L. Valdez Jr. | | | | |
