Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 14, 2018
OR
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
________________________

AAPLOGOCOLORNOTAGA27.JPG
ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

  Delaware
(State or other jurisdiction of
incorporation or organization)
   54-2049910
(I.R.S. Employer
Identification No.)
  5008 Airport Road
Roanoke, VA
(Address of Principal Executive Offices)
    24012
(Zip Code)


 
(540) 362-4911
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company o
 
Emerging growth company o

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 10, 2018 , the number of shares of the registrant’s common stock outstanding was 74,081,258 shares.
 



Table of Contents

 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I.  FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data) (Unaudited)
 
July 14, 2018
 
December 30, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
902,249

 
$
546,937

Receivables, net
664,149

 
606,357

Inventories
4,159,756

 
4,168,492

Other current assets
151,662

 
105,106

Total current assets
5,877,816

 
5,426,892

Property and equipment, net of accumulated depreciation of $1,874,396 and $1,783,383
1,338,931

 
1,394,138

Goodwill
991,934

 
994,293

Intangible assets, net
571,953

 
597,674

Other assets
54,922

 
69,304

 
$
8,835,556

 
$
8,482,301

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
2,909,990

 
$
2,894,582

Accrued expenses
635,896

 
533,548

Other current liabilities
52,331

 
51,967

Total current liabilities
3,598,217

 
3,480,097

Long-term debt
1,045,077

 
1,044,327

Deferred income taxes
314,091

 
303,620

Other long-term liabilities
220,222

 
239,061

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Preferred stock, nonvoting, $0.0001 par value

 

Common stock, voting, $0.0001 par value
8

 
8

Additional paid-in capital
678,416

 
664,646

Treasury stock, at cost
(150,257
)
 
(144,600
)
Accumulated other comprehensive loss
(35,914
)
 
(24,954
)
Retained earnings
3,165,696

 
2,920,096

Total stockholders’ equity
3,657,949

 
3,415,196

 
$
8,835,556

 
$
8,482,301




The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
 
July 14, 2018
 
July 15, 2017
 
July 14, 2018
 
July 15, 2017
Net sales
$
2,326,652

 
$
2,263,727

 
$
5,200,500

 
$
5,154,565

Cost of sales,  including purchasing and warehousing costs
1,315,093

 
1,270,639

 
2,916,658

 
2,890,793

Gross profit
1,011,559

 
993,088

 
2,283,842

 
2,263,772

Selling, general and administrative expenses
844,018

 
846,377

 
1,918,061

 
1,937,281

Operating income
167,541

 
146,711

 
365,781

 
326,491

Other, net:
 

 
 

 
 
 
 
Interest expense
(12,855
)
 
(13,921
)
 
(30,537
)
 
(32,351
)
Other income, net
2,785

 
3,169

 
3,243

 
7,982

Total other, net
(10,070
)
 
(10,752
)
 
(27,294
)
 
(24,369
)
Income before provision for income taxes
157,471

 
135,959

 
338,487

 
302,122

Provision for income taxes
39,635

 
48,910

 
83,925

 
107,113

Net income
$
117,836

 
$
87,049

 
$
254,562

 
$
195,009

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.59

 
$
1.18

 
$
3.44

 
$
2.64

Weighted average common shares outstanding
74,054

 
73,848

 
74,011

 
73,810

Diluted earnings per common share
$
1.59

 
$
1.17

 
$
3.43

 
$
2.63

Weighted average common shares outstanding
74,244

 
74,093

 
74,222

 
74,093

Dividends declared per common share
$
0.06

 
$
0.06

 
$
0.12

 
$
0.12



Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
 
July 14, 2018
 
July 15, 2017
 
July 14, 2018
 
July 15, 2017
Net income
$
117,836

 
$
87,049

 
$
254,562

 
$
195,009

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs, net of tax of $24, $41, $56 and $95
(67
)
 
(63
)
 
(158
)
 
(148
)
Currency translation adjustments
(7,035
)
 
13,973

 
(10,802
)
 
13,185

Total other comprehensive (loss) income
(7,102
)
 
13,910

 
(10,960
)
 
13,037

Comprehensive income
$
110,734

 
$
100,959

 
$
243,602

 
$
208,046





The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

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Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 
Twenty-Eight Weeks Ended
 
July 14, 2018
 
July 15, 2017
Cash flows from operating activities:
 
 
 
Net income
$
254,562

 
$
195,009

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
128,244

 
135,200

Share-based compensation
12,413

 
19,938

Loss on disposal and impairment of property and equipment
4,757

 
4,361

Provision (benefit) for deferred income taxes
11,195

 
(16,006
)
Other
1,180

 
1,851

Net change in:
 
 
 
Receivables, net
(59,995
)
 
(37,012
)
Inventories
2,140

 
41,923

Accounts payable
19,083

 
(153,750
)
Accrued expenses
112,214

 
91,333

Other assets and liabilities, net
(41,825
)
 
(15,498
)
Net cash provided by operating activities
443,968

 
267,349

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(61,815
)
 
(122,364
)
Proceeds from sales of property and equipment
578

 
1,311

Other, net

 
20

Net cash used in investing activities
(61,237
)
 
(121,033
)
Cash flows from financing activities:
 

 
 

Decrease in bank overdrafts
(8,362
)
 
(4,202
)
Borrowings under credit facilities

 
534,400

Payments on credit facilities

 
(534,400
)
Dividends paid
(13,398
)
 
(13,363
)
Proceeds from the issuance of common stock
1,697

 
2,281

Tax withholdings related to the exercise of stock appreciation rights
(304
)
 
(6,230
)
Repurchase of common stock
(5,657
)
 
(3,303
)
Other, net
784

 
(2,027
)
Net cash used in financing activities
(25,240
)
 
(26,844
)
Effect of exchange rate changes on cash
(2,179
)
 
2,580

Net increase in cash and cash equivalents
355,312

 
122,052

Cash and cash equivalents , beginning of period
546,937

 
135,178

Cash and cash equivalents , end of period
$
902,249

 
$
257,230

 
 
 
 
Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
$
9,075

 
$
10,205



The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.

3

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)




1.
Nature of Operations and Basis of Presentation:

Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“Professional”), and “do-it-yourself” (“DIY”), customers. The accompanying condensed consolidated financial statements include the accounts of Advance Auto Parts, Inc. (“Advance”), its wholly owned subsidiary, Advance Stores Company, Incorporated (“Advance Stores”) and its subsidiaries (collectively referred to as “Advance,” “we,” “us,” “our” or “the Company”) and have been prepared by the Company.

As of July 14, 2018 , we operated a total of 5,026 stores and 133 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of July 14, 2018 , we served 1,219 independently owned Carquest branded stores (“independent stores”) across the same geographic locations served by our stores in addition to Mexico, the Bahamas, Turks and Caicos, the British Virgin Islands and the Pacific Islands.

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting guidance. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2017 as filed with the SEC on February 21, 2018 .

The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Our first quarter of the year contains sixteen weeks. Our remaining three quarters consist of twelve weeks.

2.
Significant Accounting Policies:

Revenues

Revenue for periods through December 30, 2017 was reported under Accounting Standards Codification (“ASC”) 605, Revenue Recognition (Topic 605) , as described in our accounting policies in our 2017 Form 10-K. Effective December 31, 2017, we adopted ASC 606, Revenue From 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. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

In accordance with ASC 606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate possession of the merchandise or same-day delivery is made to our Professional delivery customers, which include certain independently-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 our store locations or at the time of shipment depending on the customer's order designation. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to Net sales and Cost of sales for returns based on current sales levels and our 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.

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 majority 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.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



We had no material contract assets, contract liabilities or costs to obtain and fulfill contracts recorded on the Condensed Consolidated Balance Sheet as of July 14, 2018 . For the twelve and twenty-eight weeks ended July 14, 2018 , revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was insignificant. Revenue expected to be recognized in future periods related to remaining performance obligations is insignificant.

The following table summarizes disaggregated revenue from contracts with customers by product group:
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
 
July 14, 2018
 
July 15, 2017
 
July 14, 2018
 
July 15, 2017
Percentage of Sales, by Product Group
 
 
 
 
 
 
 
Parts and Batteries
66
%
 
64
%
 
65
%
 
65
%
Accessories and Chemicals
20

 
21

 
20

 
20

Engine Maintenance
13

 
14

 
14

 
14

Other
1

 
1

 
1

 
1

Total
100
%
 
100
%
 
100
%
 
100
%

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU is a comprehensive new accounting standard with respect to leases 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. ASU 2016-02 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 previous lease guidance. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those years; earlier adoption is permitted.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements , which provides clarifications and improvements to ASU 2016-02 including allowing entities to elect an additional transition method with which to adopt ASU 2016-02. The approved transition method enables entities to apply the transition requirements in this ASU at the effective date of ASU 2016-02 (rather than at the beginning of the earliest comparative period presented as currently required) with the effect of initially applying ASU 2016-02 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 ASC 840, Leases (Topic 840) (“ASC 840”), including the disclosure requirements of ASC 840. We plan to adopt ASU 2016-02 effective at the beginning of 2019 using the modified retrospective approach. Practical expedients are available for election as a package and if applied consistently to all leases.

We have selected our leasing software solution and are in the process of identifying changes to our business processes, systems and controls to support adoption of the new standard in 2019. We are evaluating the impact that the new standard will have on the condensed consolidated financial statements. While we are unable to quantify the impact at this time, we expect the adoption of the new standard to result in a material increase in the assets and liabilities in the condensed consolidated financial statements. At this time, we do not expect adoption of ASU 2016-02 to have a material impact on our condensed consolidated statements of operations as the majority of our leases will remain operating in nature. As such, the expense recognition will be similar to previously required straight-line expense treatment.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 . ASU 2018-05 provides guidance on accounting for the tax effects of the U.S. Tax Cuts and Jobs Act (the “Act”) pursuant to the Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740, Income Taxes (Topic 740) within a one-year measurement period from the Act enactment date, which occurred in the financial statements for the year ended December 30, 2017. Until the completion of our 2017 U.S. income tax return in the third quarter of 2018, we may identify additional remeasurement adjustments to amounts previously recorded for the nonrecurring repatriation tax on accumulated earnings of foreign subsidiaries and remeasurement of the net deferred tax liability. We will continue to assess our provision for income taxes as future guidance is issued.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)




In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) to expand the scope of ASC 718, Compensation - Stock Compensation (Topic 718) (“ASU 2018-07”), to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We elected to early adopt ASU 2018-07 in the second quarter of 2018. The results of applying ASU 2018-07 were insignificant and did not have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems.

3.
Inventories

Inventories are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 88% of inventories as of July 14, 2018 and December 30, 2017 . Under the LIFO method, our Cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in the twenty-eight weeks ended July 14, 2018 and prior years. We recorded a reduction to Cost of sales of $12.3 million and an increase of $12.5 million for the twelve weeks ended July 14, 2018 and July 15, 2017 and reductions to Cost of sales of $32.3 million and $5.5 million for the twenty-eight weeks ended July 14, 2018 and July 15, 2017 to state inventories at LIFO.

An actual valuation of inventory under the LIFO method is performed by us at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected year-end inventory levels and costs.

Inventory balances were as follows:
(in thousands)
July 14, 2018
 
December 30, 2017
Inventories at first in, first out (“FIFO”)
$
3,924,331

 
$
3,965,370

Adjustments to state inventories at LIFO
235,425

 
203,122

Inventories at LIFO
$
4,159,756

 
$
4,168,492


4.
Exit Activities and Other Initiatives

Integration of Carquest stores

We are in the process of a multi-year integration, which includes the consolidation and conversion of certain Carquest stores acquired with General Parts International, Inc. (“GPI”) in 2014. As of July 14, 2018 , 352 Carquest stores acquired with GPI had been consolidated into existing Advance Auto Parts stores and 423 stores had been converted to the Advance Auto Parts format. During the twelve weeks ended July 14, 2018 , a total of 4 Carquest stores were consolidated and no Carquest stores were converted. During the twenty-eight weeks ended July 14, 2018 , a total of 6 Carquest stores were consolidated and 1 Carquest store was converted. As of July 14, 2018 , we had 419 stores still operating under the Carquest name.

We generated $0.5 million of income related to the consolidations and conversions during the twelve weeks ended July 14, 2018 . No exit costs related to the consolidations and conversions were incurred during the twelve weeks ended July 15, 2017 . We generated $0.1 million of income and incurred $1.1 million of exit costs related to the consolidations and conversions during the twenty-eight weeks ended July 14, 2018 and July 15, 2017 , primarily related to closed store lease obligations. These costs are included in Selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations.

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)




Store and Supply Chain Rationalization

During the fourth quarter of 2017, the Board of Directors approved a plan to close certain underperforming stores and begin to rationalize our supply chain costs as part of our strategy to transform the enterprise. As of July 14, 2018 , we expect these actions to result in estimated charges of up to $70.0 million in 2018, which consist of $35.0 million relating to the early termination of lease obligations, $15.0 million of inventory and supply chain asset impairment charges, $15.0 million of other facility closure costs and $5.0 million of severance.

During the twelve weeks ended July 14, 2018 , we incurred $3.9 million of early termination of lease obligations charges, $5.3 million of inventory and supply chain asset impairment charges, $ 2.1 million of facility closure costs and $1.1 million of severance relating to the store and supply chain rationalization. Of these costs, $7.1 million are included in SG&A and $5.3 million are included in Cost of sales in the accompanying condensed consolidated statements of operations.

During the twenty-eight weeks ended July 14, 2018 , we incurred $5.0 million of early termination of lease obligation charges, $6.8 million of inventory and supply chain asset impairment charges, $2.4 million of facility closure costs and $1.4 million of severance relating to the store and supply chain rationalization. Of these costs, $10.3 million are included in SG&A and $5.3 million are included in Cost of sales in the accompanying condensed consolidated statements of operations.

Total Exit Liabilities

Our total exit liabilities include liabilities recorded in connection with the consolidation of Carquest stores and other initiatives 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 our total exit liabilities as of July 14, 2018 and December 30, 2017 , $17.7 million and $19.8 million is included in Other long-term liabilities and the remainder is included in Accrued expenses in the accompanying condensed consolidated balance sheet. A summary of our exit liabilities is presented in the following table:

(in thousands)
 
Closed Facility Lease Obligations
 
Severance
 
Total
Balance, December 30, 2017
 
$
31,570

 
$
1,645

 
$
33,215

Reserves established
 
5,453

 
3,523

 
8,976

Change in estimates
 
766

 
(381
)
 
385

Cash payments
 
(8,142
)
 
(2,184
)
 
(10,326
)
Balance, July 14, 2018
 
$
29,647

 
$
2,603

 
$
32,250

 
 
 
 
 
 
 
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


5.
Intangible Assets

Our definite-lived intangible assets include customer relationships, favorable leases and non-compete agreements. Amortization expense was $8.5 million and $11.0 million for the twelve weeks ended July 14, 2018 and July 15, 2017 and $21.9 million and $25.6 million for the twenty-eight weeks ended July 14, 2018 and July 15, 2017 .


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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



6.
Receivables, net

Receivables consist of the following:
(in thousands)
July 14, 2018
 
December 30, 2017
Trade
$
466,957

 
$
389,963

Vendor
203,912

 
220,510

Other
14,556

 
14,103

Total receivables
685,425

 
624,576

Less: Allowance for doubtful accounts
(21,276
)
 
(18,219
)
Receivables, net
$
664,149

 
$
606,357


7.
Long-term Debt and Fair Value of Financial Instruments

Long-term debt consists of the following:
(in thousands)
July 14, 2018
 
December 30, 2017
Total long-term debt
$
1,045,258

 
$
1,044,677

Less: Current portion of long-term debt
(181
)
 
(350
)
Long-term debt, excluding current portion
$
1,045,077

 
$
1,044,327

 
 
 
 
Fair value of long-term debt
$
1,080,000

 
$
1,109,000


Fair Value of Financial Assets and Liabilities

The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. We believe the carrying value of our other long-term debt approximates fair value. The carrying amounts of our 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

As of July 14, 2018 and December 30, 2017 we had no outstanding borrowings under the revolver and borrowing availability was $897.5 million and $517.6 million based on our leverage ratio. As of July 14, 2018 and December 30, 2017 , we had letters of credit outstanding of $102.5 million and $111.7 million , which generally have a term of one year or less and primarily serve as collateral for our self-insurance policies. We were in compliance with all financial covenants required by our debt arrangements as of July 14, 2018 .

Debt Guarantees

We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $28.7 million and $24.8 million as of July 14, 2018 and December 30, 2017 . 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 $63.4 million and $62.8 million as of July 14, 2018 and December 30, 2017 . We believe that the likelihood of performance under these guarantees is remote.


8

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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



8.
Warranty Liabilities

The following table presents changes in our warranty reserves:
 
Twenty-Eight Weeks Ended
 
Fifty-Two Weeks Ended
(in thousands)
July 14, 2018
 
December 30, 2017
Warranty reserve, beginning of period
$
49,024

 
$
47,243

Additions to warranty reserves
20,005

 
50,895

Reserves utilized
(22,491
)
 
(49,114
)
Warranty reserve, end of period
$
46,538

 
$
49,024

  
9.
Share Repurchase Program

Our share repurchase program permits the repurchase of our common stock on the open market or in privately negotiated transactions from time to time. The $500.0 million share repurchase program in place as of July 14, 2018 was authorized by our Board of Directors on May 14, 2012. During the twenty-eight weeks ended July 14, 2018 and July 15, 2017 , we repurchased no shares of our common stock under the share repurchase program. We had $415.1 million remaining under its share repurchase program as of July 14, 2018 .

On August 8, 2018, our Board of Directors authorized a $600.0 million share repurchase program. This new authorization replaced the remaining portion of the $500.0 million share repurchase program.

10.
Earnings per Share

The computation of basic and diluted earnings per share are as follows:   
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
(in thousands, except per share data)
July 14, 2018
 
July 15, 2017
 
July 14, 2018
 
July 15, 2017
Numerator
 
 
 
 
 
 
 
Net income applicable to common shares
$
117,836

 
$
87,049

 
$
254,562

 
$
195,009

Denominator
 
 
 
 
 

 
 
Basic weighted average common shares
74,054

 
73,848

 
74,011

 
73,810

Dilutive impact of share-based awards
190

 
245

 
211

 
283

Diluted weighted average common shares
74,244

 
74,093

 
74,222

 
74,093

 
 

 
 

 
 

 
 
Basic earnings per common share
$
1.59

 
$
1.18

 
$
3.44

 
$
2.64

Diluted earnings per common share
$
1.59

 
$
1.17

 
$
3.43

 
$
2.63


11.
Share-Based Compensation

During the twenty-eight weeks ended July 14, 2018 , we granted 200 thousand time-based restricted stock units (“RSUs”), 69 thousand performance-based RSUs and 36 thousand market-based RSUs. The general terms of the time-based, performance-based and market-based RSUs are similar to awards previously granted by us.

The weighted average fair values of the time-based, performance-based and market-based RSUs granted during the twenty-eight weeks ended July 14, 2018 were $119.29 , $116.82 and $130.88 per share. For time-based and performance-based RSUs, the fair value of each award was determined based on the market price of our 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.

9

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)




Total income tax benefit related to share-based compensation expense for the twelve and twenty-eight weeks ended July 14, 2018 was $1.2 million and $3.0 million . Total income tax benefit related to share-based compensation expense for the twelve and twenty-eight weeks ended July 15, 2017 was $2.8 million and $7.5 million . As of July 14, 2018 , there was $54.7 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.8 years .

12.
Condensed Consolidating Financial Statements

Certain 100% wholly owned domestic subsidiaries of Advance, 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 Advance to obtain funds from its Guarantor Subsidiaries. Certain of our wholly owned subsidiaries, including all of its foreign subsidiaries, do not serve as guarantors of our 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 Advance. Investments in subsidiaries of Advance 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.


10

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Condensed Consolidating Balance Sheet
As of July 14, 2018
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23

 
$
834,069

 
$
68,180

 
$
(23
)
 
$
902,249

Receivables, net

 
617,483

 
46,666

 

 
664,149

Inventories

 
3,999,663

 
160,093

 

 
4,159,756

Other current assets
16,977

 
148,469

 
3,313

 
(17,097
)
 
151,662

Total current assets
17,000

 
5,599,684

 
278,252

 
(17,120
)
 
5,877,816

Property and equipment, net of accumulated depreciation
89

 
1,329,863

 
8,979

 

 
1,338,931

Goodwill

 
943,359

 
48,575

 

 
991,934

Intangible assets, net

 
529,429

 
42,524

 

 
571,953

Other assets, net
2,152

 
54,300

 
622

 
(2,152
)
 
54,922

Investment in subsidiaries
3,774,360

 
465,487

 

 
(4,239,847
)
 

Intercompany note receivable
1,048,856

 

 

 
(1,048,856
)
 

Due from intercompany, net

 

 
310,933

 
(310,933
)
 

 
$
4,842,457

 
$
8,922,122

 
$
689,885

 
$
(5,618,908
)
 
$
8,835,556

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
2,719,226

 
$
190,764

 
$

 
$
2,909,990

Accrued expenses

 
636,949

 
16,045

 
(17,098
)
 
635,896

Other current liabilities

 
52,767

 
(412
)
 
(24
)
 
52,331

Total current liabilities

 
3,408,942

 
206,397

 
(17,122
)
 
3,598,217

Long-term debt
1,045,077

 

 

 

 
1,045,077

Deferred income taxes

 
299,516

 
16,725

 
(2,150
)
 
314,091

Other long-term liabilities

 
218,946

 
1,276

 

 
220,222

Intercompany note payable

 
1,048,856

 

 
(1,048,856
)
 

Due to intercompany, net
139,431

 
171,502

 

 
(310,933
)
 

Commitments and contingencies

 

 

 

 

Stockholders' equity
3,657,949

 
3,774,360

 
465,487

 
(4,239,847
)
 
3,657,949

 
$
4,842,457

 
$
8,922,122

 
$
689,885

 
$
(5,618,908
)
 
$
8,835,556



11

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



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





12

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Condensed Consolidating Statement of Operations
For the Twelve Weeks ended July 14, 2018
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,231,229

 
$
138,070

 
$
(42,647
)
 
$
2,326,652

Cost of sales,  including purchasing and warehousing costs

 
1,263,912

 
93,828

 
(42,647
)
 
1,315,093

Gross profit

 
967,317

 
44,242

 

 
1,011,559

Selling, general and administrative expenses
4,848

 
827,733

 
23,241

 
(11,804
)
 
844,018

Operating (loss) income
(4,848
)
 
139,584

 
21,001

 
11,804

 
167,541

Other, net:
 
 
 
 
 
 
 
 
 
Interest expense
(12,059
)
 
(796
)
 

 

 
(12,855
)
Other income (expense), net
16,991

 
(1,211
)
 
(1,191
)
 
(11,804
)
 
2,785

Total other, net
4,932

 
(2,007
)
 
(1,191
)
 
(11,804
)
 
(10,070
)
Income before provision for income taxes
84

 
137,577

 
19,810

 

 
157,471

(Benefit) provision for income taxes
(204
)
 
35,512

 
4,327

 

 
39,635

Income before equity in earnings of subsidiaries
288

 
102,065

 
15,483

 

 
117,836

Equity in earnings of subsidiaries
117,548

 
15,483

 

 
(133,031
)
 

Net income
$
117,836

 
$
117,548

 
$
15,483

 
$
(133,031
)
 
$
117,836


Condensed Consolidating Statement of Operations
For the Twelve Weeks ended July 15, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,175,274

 
$
138,291

 
$
(49,838
)
 
$
2,263,727

Cost of sales,  including purchasing and warehousing costs

 
1,224,648

 
95,829

 
(49,838
)
 
1,270,639

Gross profit

 
950,626

 
42,462

 

 
993,088

Selling, general and administrative expenses
5,370

 
833,966

 
18,864

 
(11,823
)
 
846,377

Operating (loss) income
(5,370
)
 
116,660

 
23,598

 
11,823

 
146,711

Other, net:
 
 
 
 
 
 
 
 
 
Interest (expense) income
(12,076
)
 
(1,863
)
 
18

 

 
(13,921
)
Other income (expense), net
17,567

 
(5,413
)
 
2,838

 
(11,823
)
 
3,169

Total other, net
5,491

 
(7,276
)
 
2,856

 
(11,823
)
 
(10,752
)
Income before provision for income taxes
121

 
109,384

 
26,454

 

 
135,959

Provision for income taxes
128

 
42,850

 
5,932

 

 
48,910

(Loss) income before equity in earnings of subsidiaries
(7
)
 
66,534

 
20,522

 

 
87,049

Equity in earnings of subsidiaries
87,056

 
20,522

 

 
(107,578
)
 

Net income
$
87,049

 
$
87,056

 
$
20,522

 
$
(107,578
)
 
$
87,049




13

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Condensed Consolidating Statement of Operations
For the Twenty-eight Weeks Ended July 14, 2018
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
5,007,131

 
$
290,190

 
$
(96,821
)
 
$
5,200,500

Cost of sales,  including purchasing and warehousing costs

 
2,814,953

 
198,526

 
(96,821
)
 
2,916,658

Gross profit

 
2,192,178

 
91,664

 

 
2,283,842

Selling, general and administrative expenses
9,658

 
1,882,123

 
53,823

 
(27,543
)
 
1,918,061

Operating (loss) income
(9,658
)
 
310,055

 
37,841

 
27,543

 
365,781

Other, net:
 
 
 
 
 
 
 
 
 
Interest expense
(28,137
)
 
(2,400
)
 

 

 
(30,537
)
Other income (expense), net
38,248

 
(4,204
)
 
(3,258
)
 
(27,543
)
 
3,243

Total other, net
10,111

 
(6,604
)
 
(3,258
)
 
(27,543
)
 
(27,294
)
Income before provision for income taxes
453

 
303,451

 
34,583

 

 
338,487

Provision for income taxes
1,059

 
75,964

 
6,902

 

 
83,925

(Loss) income before equity in earnings of subsidiaries
(606
)
 
227,487

 
27,681

 

 
254,562

Equity in earnings of subsidiaries
255,168

 
27,681

 

 
(282,849
)
 

Net income
$
254,562

 
$
255,168

 
$
27,681

 
$
(282,849
)
 
$
254,562


Condensed Consolidating Statement of Operations
For the Twenty-eight Weeks Ended July 15, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
4,977,128

 
$
310,295

 
$
(132,858
)
 
$
5,154,565

Cost of sales,  including purchasing and warehousing costs

 
2,801,921

 
221,730

 
(132,858
)
 
2,890,793

Gross profit

 
2,175,207

 
88,565

 

 
2,263,772

Selling, general and administrative expenses
20,167

 
1,901,621

 
43,266

 
(27,773
)
 
1,937,281

Operating (loss) income
(20,167
)
 
273,586

 
45,299

 
27,773

 
326,491

Other, net:
 
 
 
 
 
 
 
 
 
Interest (expense) income
(28,366
)
 
(4,023
)
 
38

 

 
(32,351
)
Other income (expense), net
49,351

 
(12,766
)
 
(830
)
 
(27,773
)
 
7,982

Total other, net
20,985

 
(16,789
)
 
(792
)
 
(27,773
)
 
(24,369
)
Income before provision for income taxes
818

 
256,797

 
44,507

 

 
302,122

(Benefit) provision for income taxes
(1,616
)
 
100,296

 
8,433

 

 
107,113

Income before equity in earnings of subsidiaries
2,434

 
156,501

 
36,074

 

 
195,009

Equity in earnings of subsidiaries
192,572

 
36,074

 

 
(228,646
)
 

Net income
$
195,006

 
$
192,575

 
$
36,074

 
$
(228,646
)
 
$
195,009


14

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Condensed Consolidating Statement of Comprehensive Income
For the Twelve Weeks ended July 14, 2018

(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
117,836

 
$
117,548

 
$
15,483

 
$
(133,031
)
 
$
117,836

Other comprehensive loss
(7,102
)
 
(7,102
)
 
(7,035
)
 
14,137

 
(7,102
)
Comprehensive income
$
110,734

 
$
110,446

 
$
8,448

 
$
(118,894
)
 
$
110,734



Condensed Consolidating Statement of Comprehensive Income
For the Twelve Weeks ended July 15, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
87,049

 
$
87,056

 
$
20,522

 
$
(107,578
)
 
$
87,049

Other comprehensive income
13,910

 
13,910

 
13,973

 
(27,883
)
 
13,910

Comprehensive income
$
100,959

 
$
100,966

 
$
34,495

 
$
(135,461
)
 
$
100,959



Condensed Consolidating Statement of Comprehensive Income
For the Twenty-eight Weeks Ended July 14, 2018
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
254,562

 
$
255,168

 
$
27,681

 
$
(282,849
)
 
$
254,562

Other comprehensive loss
(10,960
)
 
(10,960
)
 
(10,802
)
 
21,762

 
(10,960
)
Comprehensive income
$
243,602

 
$
244,208

 
$
16,879

 
$
(261,087
)

$
243,602



Condensed Consolidating Statement of Comprehensive Income
For the Twenty-eight Weeks Ended July 15, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
195,006

 
$
192,575

 
$
36,074

 
$
(228,646
)
 
$
195,009

Other comprehensive income
13,037

 
13,037

 
13,185

 
(26,222
)
 
13,037

Comprehensive income
$
208,043

 
$
205,612

 
$
49,259

 
$
(254,868
)
 
$
208,046




15

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Condensed Consolidating Statement of Cash Flows
For the Twenty-eight Weeks Ended July 14, 2018
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating activities
$

 
$
435,890

 
$
8,078

 
$

 
$
443,968

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(61,337
)
 
(478
)
 

 
(61,815
)
Proceeds from sales of property and equipment

 
534

 
44

 

 
578

Net cash used in investing activities

 
(60,803
)
 
(434
)
 

 
(61,237
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Decrease in bank overdrafts

 
(6,760
)
 
(1,602
)
 

 
(8,362
)
Dividends paid

 
(13,398
)
 

 

 
(13,398
)
Proceeds from the issuance of common stock

 
1,697

 

 

 
1,697

Tax withholdings related to the exercise of stock appreciation rights

 
(304
)
 

 

 
(304
)
Repurchase of common stock

 
(5,657
)
 

 

 
(5,657
)
Other, net

 
784

 

 

 
784

Net cash used in financing activities

 
(23,638
)
 
(1,602
)
 

 
(25,240
)
Effect of exchange rate changes on cash

 

 
(2,179
)
 

 
(2,179
)
Net increase in cash and cash equivalents

 
351,449

 
3,863

 

 
355,312

Cash and cash equivalents , beginning of period
23

 
482,620

 
64,317

 
(23
)
 
546,937

Cash and cash equivalents , end of period
$
23

 
$
834,069

 
$
68,180

 
$
(23
)
 
$
902,249



16

Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)



Condensed Consolidating Statement of Cash Flows
For the Twenty-eight Weeks Ended July 15, 2017
(In thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$

 
$
285,164

 
$
(17,815
)
 
$

 
$
267,349

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(121,615
)
 
(749
)
 

 
(122,364
)
Proceeds from sales of property and equipment

 
1,311

 

 

 
1,311

Other, net

 
480

 
(460
)
 

 
20

Net cash used in investing activities

 
(119,824
)
 
(1,209
)
 

 
(121,033
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Increase in bank overdrafts

 
(5,488
)
 
1,286

 

 
(4,202
)
Borrowings under credit facilities

 
534,400

 

 

 
534,400

Payments on credit facilities

 
(534,400
)
 

 

 
(534,400
)
Dividends paid

 
(13,363
)
 

 

 
(13,363
)
Proceeds from the issuance of common stock

 
2,281

 

 

 
2,281

Tax withholdings related to the exercise of stock appreciation rights

 
(6,230
)
 

 

 
(6,230
)
Repurchase of common stock

 
(3,303
)
 

 

 
(3,303
)
Other, net

 
(2,027
)
 

 

 
(2,027
)
Net cash (used in) provided by financing activities

 
(28,130
)
 
1,286

 

 
(26,844
)
Effect of exchange rate changes on cash

 

 
2,580

 

 
2,580

Net increase (decrease) in cash and cash equivalents

 
137,210

 
(15,158
)
 

 
122,052

Cash and cash equivalents , beginning of period
22

 
78,543

 
56,635

 
(22
)
 
135,178

Cash and cash equivalents , end of period
$
22

 
$
215,753

 
$
41,477

 
$
(22
)
 
$
257,230



17

Table of Contents

ITEM 2.
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 the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 30, 2017 (filed with the Securities and Exchange Commission (“SEC”) on February 21, 2018 ), which we refer to as our 2017 Form 10-K, and our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.

Certain statements in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. 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, in evaluating forward-looking statements, you should consider these risks and uncertainties, together with the important risks, uncertainties and contingencies described in our 2017 Form 10-K and other documents filed with the SEC, and you should not place undue reliance on those statements. We intend 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 Act of 1995.

Management Overview

Comparable store sales increased 2.8% in the second quarter of 2018 , driven by harsh winter weather early in the year, delayed spring sales and increased sales in several categories and regions. Severe weather-related conditions in many of our regions, including our Northeastern and North Central markets, in the last five weeks of Q1 2018 caused a delay in the start of our normal spring selling season resulting in an increased demand in early Q2 2018. Additionally, stronger performance in our Midwest, Appalachian, Southwest and Gulf Coast markets, as well as increased sales in several product categories, drove growth during the quarter.

Our operating margin expansion for the twelve weeks ended July 14, 2018 was primarily driven by the positive impact to long-term productivity of past investments in our business, as well as a savings in labor and insurance costs. This improvement in margin was partially offset by increased supply chain costs due to higher transportation and fuel costs, distribution center costs related to the new locations opened in the second half of 2017 and higher bonus.


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Table of Contents

We generated diluted earnings per share (“diluted EPS”) of $1.59 during our second quarter of 2018 compared to $1.17 for the comparable period of 2017 . When adjusted for the following non-operational items, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended July 14, 2018 and July 15, 2017 were $1.97 and $1.58 and our Adjusted EPS for the twenty-eight weeks ended July 14, 2018 and July 15, 2017 were $4.07 and $3.18 :
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
 
July 14, 2018
 
July 15, 2017
 
July 14, 2018
 
July 15, 2017
GPI integration and store consolidation costs
$
0.01

 
$
0.06

 
$
0.03

 
$
0.17

GPI amortization of acquired intangible assets
$
0.09

 
$
0.08

 
$
0.21

 
$
0.18

Transformation expenses (1)
$
0.28

 
$
0.27

 
$
0.40

 
$
0.27

Other income adjustment
$

 
$

 
$

 
$
(0.07
)

(1)  
For the twelve and twenty-eight weeks ended July 14, 2018 , $0.23 and $0.35 of the total $0.28 and $0.40 Adjusted EPS related to Transformation expenses are included in Selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations. The remainder of the Adjusted EPS impact is included in Cost of sales in the accompanying condensed consolidated statements of operations.

Refer to “Reconciliation of Non-GAAP Financial Measures” for further details of our comparable adjustments and the usefulness of such measures to investors.

Summary of Second Quarter Financial Results

A high-level summary of our financial results for the second quarter of 2018 includes:
 
Total Net sales during the second quarter of 2018 were $2.3 billion , an increase of 2.8% as compared to the second quarter of 2017 , which is primarily driven by an increase in comparable store sales of 2.8% .
Operating income for the second quarter of 2018 was $167.5 million , an increase of $20.8 million as compared to the second quarter of 2017 . As a percentage of total sales, operating income was 7.2% , an increase of 72 basis points as compared to the second quarter of 2017 , which is due to an increase in comparable store sales and savings in labor and insurance costs, partially offset by increased supply chain costs and higher bonus.
Inventories as of July 14, 2018 decrease d $8.7 million , or 0.2% , from inventories as of December 30, 2017 , as compared to a 0.8% decrease in the same period of last year. This decrease was driven by our inventory optimization efforts.
We generated operating cash flow of $444.0 million for the twenty-eight weeks ended July 14, 2018 , an increase of 66.1% as compared to the same period in 2017 , primarily due to a focus on managing working capital and an increase in net income.
On August 8, 2018, our Board of Directors authorized a $600.0 million share repurchase program. This new authorization replaces the $500.0 million share repurchase program authorized in May 2012, which had $415.1 million remaining.

Refer to “Results of Operations” and “ Liquidity and Capital Resources” for further details of 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 “do-it-for-me”, or Professional, and “do-it-yourself”, or DIY, customers. To achieve these improvements, we have undertaken planned transformation actions to help build a foundation for long-term success across the entire company. These transformation actions include:

Focused on continuous improvement of our common catalog across our Professional and DIY businesses - AAP, Carquest (“CQ”), Worldpac (“WP”) and Autopart International (“AI”) that was completed in Q1 2018.
Development of a demand-based assortment, leveraging purchase history and look-ups from the common catalog, versus our existing push-down supply approach. This technology is a first step in moving from a supply-driven to a demand-driven assortment.
Progression in the early development of a more efficient end-to-end supply chain to deliver our broad assortment.

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Table of Contents

Continued movement towards optimizing our footprint by focusing on evaluating all of our assets by market to drive share, repurposing of our in-market store and asset base and optimizing our distribution centers.
Creation of new DIY omni-channel capabilities to reach our customers in the manner that is most desirable for them, including the 2017 launch of our enhanced website and future launch of a mobile application.
Entered into a strategic partnership with Uber in the first quarter of 2018 as their aftermarket auto parts supplier, which we expect will not only drive more traffic into our stores, but will also foster stronger relationships with new and existing customers to help drive long-term success.
Continued focus on Worldpac branch openings in 2018 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. These factors include, but are not limited to:

Fuel costs
Unemployment rates
Consumer confidence
Competition
Changes in new car sales
Miles driven
Vehicle manufacturer warranties
Increasing number of vehicles 11 years and older
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.
Stores and Branches

Key factors 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. During the twenty-eight weeks ended July 14, 2018 , 11 stores and branches were opened and 35 were closed or consolidated, resulting in a total of 5,159 stores and branches as of July 14, 2018 , compared to a total of 5,183 stores and branches as of December 30, 2017 .

Results of Operations

The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated:
 
 
Twelve Weeks Ended
 
$ Increase/(Decrease)
 
Basis Points
(in millions)
 
July 14, 2018
 
July 15, 2017
 
 
Net sales
 
$
2,326.7

 
100.0
 %
 
$
2,263.7

 
100.0
 %
 
$
63.0

 

Cost of sales
 
1,315.1

 
56.5

 
1,270.6

 
56.1

 
44.5

 
39

Gross profit
 
1,011.6

 
43.5

 
993.1

 
43.9

 
18.5

 
(39
)
Selling, general and administrative expenses
 
844.0

 
36.3

 
846.4

 
37.4

 
(2.4
)
 
111

Operating income
 
167.5

 
7.2

 
146.7

 
6.5

 
20.8

 
72

Interest expense
 
(12.9
)
 
(0.6
)
 
(13.9
)
 
(0.6
)
 
1.0

 

Other income, net
 
2.8

 
0.1

 
3.2

 
0.1

 
(.4
)
 

Provision for income taxes
 
39.6

 
1.7

 
48.9

 
2.2

 
(9.3
)
 
(50
)
Net income
 
$
117.8

 
5.1
 %
 
$
87.0

 
3.8
 %
 
$
30.8

 
130

Note: Table amounts may not foot due to rounding.


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Table of Contents

 
 
Twenty-Eight Weeks Ended
 
$ Increase/(Decrease)
 
Basis Points
(in millions)
 
July 14, 2018
 
July 15, 2017
 
 
Net sales
 
$
5,200.5

 
100.0
 %
 
$
5,154.6

 
100.0
 %
 
$
45.9

 

Cost of sales
 
2,916.7

 
56.1

 
2,890.8

 
56.1

 
25.9

 

Gross profit
 
2,283.8

 
43.9

 
2,263.8

 
43.9

 
20.0

 

Selling, general and administrative expenses
 
1,918.1

 
36.9

 
1,937.3

 
37.6

 
(19.2
)
 
70

Operating income
 
365.8

 
7.0

 
326.5

 
6.3

 
39.2

 
70

Interest expense
 
(30.5
)
 
(0.6
)
 
(32.4
)
 
(0.6
)
 
1.9

 
4

Other income, net
 
3.2

 
0.1

 
8.0

 
0.2

 
(4.8
)
 
(9
)
Provision for income taxes
 
83.9

 
1.6

 
107.1

 
2.1

 
(23.2
)
 
(46
)
Net income
 
$
254.6

 
4.9
 %
 
$
195.0

 
3.8
 %
 
$
59.6

 
111

Note: Table amounts may not foot due to rounding.

Net Sales

Sales increase d 2.8% during the second quarter of 2018 compared to the same period of 2017 driven by an increase in comparable store sales of 2.8% for the quarter as a result of an increase in winter related demand in early Q2 2018 as compared to the comparable period in 2017 and a strong spring selling season.

For the twenty-eight weeks ended July 14, 2018 , comparable stores sales increased 0.8% driven by the factors discussed above and the strong performance of certain product categories as customers invested in repairs as a result of harsh winter weather.

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 once the stores have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores in comparable store sales from the original date of opening.

Gross Profit

The decrease in the gross profit rate for the twelve weeks ended July 14, 2018 was driven by increased supply chain headwinds related to increased transportation costs due to higher fuel prices and distribution center costs related to the new locations opened in the second half of 2017. Gross profit rate for the twenty-eight weeks ended July 14, 2018 remained consistent due to the factors described above, offset by a reduction in material costs and shrink and defectives in the first quarter of 2018.

Selling, general and administrative expenses (“SG&A”)

The decrease in SG&A for the twelve weeks ended July 14, 2018 was primarily driven by continued progress in our expense management initiatives during the quarter, including savings in labor and insurance costs, partially offset by higher bonus. The decrease in SG&A for the twenty-eight weeks ended July 14, 2018 was driven by similar factors.

Income Taxes

Our effective income tax rate was 25.2% and 36.0% for the twelve weeks ended July 14, 2018 and July 15, 2017 and our effective income tax rate was 24.8% and 35.5% for the twenty-eight weeks ended July 14, 2018 and July 15, 2017 . The decrease in the effective tax rate for both twelve and twenty-eight weeks ended July 14, 2018 was primarily related to the reduction of the federal tax rate from 35% to 21% due to the enactment of the Tax Cuts and Jobs Act in December 2017, which favorably impacted our Net income for the twelve and twenty-eight weeks ended July 14, 2018 by $22.0 million or $0.30 per diluted share and $47.4 million or $0.64 per diluted share.


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Table of Contents

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”). Non-GAAP financial measures 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; and (3) transformation expenses under our strategic business plan, is 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.

GPI Integration Expenses —We acquired GPI for $2.08 billion in 2014 and are in the midst of a multi-year plan to integrate the operations of GPI with AAP. This includes the integration of product brands and assortments, supply chain and information technology. The integration is being completed in phases and 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. Our focus then shifted to integrating the supply chain and information technology systems. Due to the size of the acquisition, we consider these expenses 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 the operating performance of our base business and our sustainability once the integration is completed.

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 July 14, 2018 , 352 Carquest stores acquired from GPI had been consolidated into existing AAP stores and 423 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, including Worldpac and AI. These expenses will include, but not be limited to, restructuring costs, third-party professional services and other significant costs to integrate and streamline our operating structure across the enterprise. We are focused on several areas throughout Advance, such as supply chain and information technology.


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Table of Contents

We have included a reconciliation of this information to the most comparable GAAP measures in the following table:
 
 
Twelve Weeks Ended
 
Twenty-Eight Weeks Ended
(in millions, except per share data)
 
July 14, 2018
 
July 15, 2017
 
July 14, 2018
 
July 15, 2017
Net income (GAAP)
 
$
117.8

 
$
87.0

 
$
254.6

 
$
195.0

Cost of sales adjustments:
 
 
 
 
 
 
 
 
Transformation expenses
 
5.3

 

 
5.3

 

SG&A adjustments:
 
 
 
 
 
 
 
 
GPI integration and store consolidation costs
 
0.7

 
6.9

 
2.9

 
19.8

GPI amortization of acquired intangible assets
 
8.8

 
9.1

 
20.5

 
21.4

Transformation expenses
 
23.0

 
32.8

 
34.9

 
32.8

Other income adjustment (1)
 

 
(0.5
)
 

 
(8.9
)
Provision for income taxes on adjustments (2)
 
(9.4
)
 
(18.4
)
 
(15.9
)
 
(24.7
)
Adjusted net income (Non-GAAP)
 
$
146.2

 
$
117.0

 
$
302.3

 
$
235.3

 
 
 
 
 
 
 
 
 
Diluted earnings per share (GAAP)
 
$
1.59

 
$
1.17

 
$
3.43

 
$
2.63

Adjustments, net of tax
 
0.38

 
0.41

 
0.64

 
0.55

Adjusted EPS (Non-GAAP)
 
$
1.97

 
$
1.58

 
$
4.07

 
$
3.18


Note: Table amounts may not foot due to rounding.

(1)  
The adjustment to Other income for the twelve and twenty-eight weeks ended July 15, 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, we may use available funds for acquisitions, to repay borrowings under our credit agreement, to periodically repurchase shares of our common stock under our stock repurchase programs and for the payment of quarterly cash dividends. Historically, we have funded these 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 Repurchase Program

Our share repurchase program permits the repurchase of our common stock on the open market or in privately negotiated transactions from time to time. The $500.0 million share repurchase program in place as of July 14, 2018 was authorized by our Board of Directors on May 14, 2012. During the twenty-eight weeks ended July 14, 2018 and July 15, 2017 , we repurchased no shares of our common stock under the share repurchase program. We had $415.1 million remaining under its share repurchase program as of July 14, 2018 .

On August 8, 2018, our Board of Directors authorized a $600.0 million share repurchase program. This new authorization replaced the remaining portion of the $500.0 million share repurchase program.


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Table of Contents

Analysis of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities:
 
Twenty-Eight Weeks Ended
(in millions)
July 14, 2018
 
July 15, 2017
Cash flows provided by operating activities
$
444.0

 
$
267.3

Cash flows used in investing activities
(61.2
)
 
(121.0
)
Cash flows (used in) provided by financing activities
(25.2
)
 
(26.8
)
Effect of exchange rate changes on cash
(2.2
)
 
2.6

Net increase (decrease) in cash and cash equivalents
$
355.3

 
$
122.1

Note: Table amounts may not foot due to rounding.

Operating Activities

For the twenty-eight weeks ended July 14, 2018 , net cash provided by operating activities increase d by $176.7 million to $444.0 million compared to the comparable period of 2017 . The net increase in operating cash flows compared to the prior year was primarily driven by an increase in net income and lower cash outflows resulting from our focus on working capital management.

Investing Activities

For the twenty-eight weeks ended July 14, 2018 , net cash used in investing activities decrease d by $59.8 million to $61.2 million compared to the comparable period of 2017 . Cash used in investing activities for the twenty-eight weeks ended July 14, 2018 consisted primarily of purchases of property and equipment, which was $60.5 million lower than the comparable period of 2017 primarily driven by lower investments in new stores and the impact of disciplined capital expenditure policies implemented last year.

Our primary capital requirements have been the funding of our new store development, maintenance of existing stores, and investments in supply chain and information technology. We lease approximately 84% of our stores. Our future capital requirements will depend in large part on the number and timing of 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. In 2018 , we anticipate that our capital expenditures related to such investments will be up to $220.0 million , but may vary with business conditions. During the twenty-eight weeks ended July 14, 2018 , we opened 7 stores and 4 Worldpac branches compared to 32 stores and 4 branches during the comparable period of last year.

Financing Activities

For the twenty-eight weeks ended July 14, 2018 , net cash used in financing activities was $25.2 million , a decrease of $1.6 million as compared to the twenty-eight weeks ended July 15, 2017 . This decrease was primarily a result of a decrease in tax withholdings related to the exercise of stock appreciation rights.

Our Board of Directors has declared a $0.06 per share 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 August 8, 2018 , our Board of Directors declared a regular quarterly cash dividend of $0.06 per share to be paid on October 5, 2018 to all common shareholders of record as of September 21, 2018 .


24

Table of Contents

Long-Term Debt

As of July 14, 2018 , 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 be 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.

Critical Accounting Policies and Estimates

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.

During the twenty-eight weeks ended July 14, 2018 , there were no changes to the critical accounting policies discussed in our 2017 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2017 Form 10-K.

Internet Address and Access to SEC Filings

Our Internet address is www.AdvanceAutoParts.com. The information on our website is not part of this Form 10-Q . 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 and amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such materials 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 at www.sec.gov.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our exposure to market risk since December 30, 2017 . Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our 2017 Form 10-K.

ITEM 4.
CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures 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 controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act 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.

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 July 14, 2018 in accordance with Rule 13a-15(b) under the Exchange Act. 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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended July 14, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

PART II.  OTHER INFORMATION
 
ITEM 1.
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 its current and former officers in the United States District Court, 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.  The case is still in its preliminary stages. We strongly dispute the allegations of the complaint and intend to defend the case vigorously. 


ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth the information with respect to repurchases of our common stock for the quarter ended July 14, 2018 :  
(in thousands, except per share data)
 
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 of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 22, 2018 to May 19, 2018
 
2,281

 
$
118.30

 

 
$
415,092

May 20, 2018 to June 16, 2018
 
1,198

 
125.90

 

 
415,092

June 17, 2018 to July 14, 2018
 
96

 
132.46

 

 
415,092

Total
 
3,575

 
$
121.23

 

 
$
415,092


(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 $0.4 million , during the twelve weeks ended July 14, 2018 .
(2)  
Our share repurchase program authorizing the repurchase of up to $500 million in common stock was authorized by our Board of Directors and publicly announced on May 14, 2012 .

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Table of Contents

ITEM 6.
EXHIBITS  
 
 
Incorporated by Reference
Filed
Exhibit No.
Exhibit Description
Form
Exhibit
Filing Date
Herewith
 
 
 
X
10-Q
3.2
5/22/2018
 
 
 
 
X
 
 
 
X
 
 
 
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
 
 
 
 




27

Table of Contents

SIGNATURE
 
Pursuant to the requirements 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.
 
 
 
August 14, 2018
By:
/s/ Jeffrey W. Shepherd
 
Jeffrey W. Shepherd
Executive Vice President, Chief Financial Officer,
Controller and Chief Accounting Officer


S-1
Exhibit 3.1



RESTATED CERTIFICATE OF INCORPORATION
OF
ADVANCE AUTO PARTS, INC.


The original Certificate of Incorporation of Advance Auto Parts, Inc. (originally incorporated as MUR Holding Corp.), filed with the Delaware Secretary of State on August 1, 2001 and amended by the filing of a Certificate of Amendment of Certificate of Incorporation with the Delaware Secretary of State on August 8, 2001, which was further amended by the filing of a Restated Certificate of Incorporation with the Delaware Secretary of State on November 26, 2001, the filing of a Certificate of Amendment of Restated Certificate of Incorporation with the Delaware Secretary of State on May 19, 2004, the filing of a Certificate of Second Amendment to Restated Certificate of Incorporation with the Delaware Secretary of State on June 7, 2013, the filing of a Certificate of Third Amendment to Restated Certificate of Incorporation with the Delaware Secretary of State on June 6, 2016, and the filing of a Certificate of Fourth Amendment to Restated Certificate of Incorporation with the Delaware Secretary of State on May 24, 2017, is hereby restated and integrated with no further amendments to read in its entirety as follows:


ARTICLE I

The name of the corporation is Advance Auto Parts, Inc. (the “Corporation”).

ARTICLE II

The address of the Corporation’s registered office in the State of Delaware is 160 Greentree Drive, Suite 101 in the City of Dover, County of Kent, 19904. The name of the Corporation’s registered agent at such address is National Registered Agents, Inc.

ARTICLE III

The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

ARTICLE IV

A. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is Two Hundred Ten Million (210,000,000) shares, consisting of Two Hundred Million (200,000,000) shares of Common Stock, par value, $0.0001 per share ("Common Stock"), and Ten Million (10,000,000) shares of Preferred Stock, par value $0.0001 per share ("Preferred Stock").


B. The holders of Common Stock shall be entitled to one (1) vote per share on all matters to be voted on by the stockholders of the Corporation.


Effective May 24, 2017



C. Shares of Preferred Stock may be issued in one or more series, from time to time, with each such series to consist of such number of shares and to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors of the Corporation (the “Board of Directors”), and the Board of Directors is hereby expressly vested with authority, to the full extent now or hereafter provided by law, to adopt any such resolution or resolutions.

The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:

(i) The number of shares constituting that series and the distinctive designation of that series;

(ii) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;

(iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

(iv) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine;

(v) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(vi) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;

(vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and

(viii) Any other relative rights, preferences and limitations of that series.

ARTICLE V

Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot.






Effective May 24, 2017



ARTICLE VI

In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to adopt, alter, amend and repeal the Bylaws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any bylaw whether adopted by them or otherwise.

ARTICLE VII

A. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders.

B. Special meetings of stockholders may be called only by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, or stockholders following receipt by the Secretary of the Corporation of a written request for a special meeting from record holders owning at least ten percent (10%), in the aggregate, of the outstanding common stock of the Corporation, and may not be called by any other person or persons.

ARTICLE VIII

A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware Corporation Law. No amendment to or repea1 of this Article Seventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.

ARTICLE IX

The Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this article.

    

Effective May 24, 2017



Exhibit 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas R. Greco , certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Advance Auto Parts, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: August 14, 2018



/s/ Thomas R. Greco
Thomas R. Greco
President and Chief Executive Officer and Director





Exhibit 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey W. Shepherd , certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Advance Auto Parts, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: August 14, 2018



/s/ Jeffrey W. Shepherd
Jeffrey W. Shepherd
Executive Vice President, Chief Financial Officer,
Controller and Chief Accounting Officer





Exhibit 32.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas R. Greco , certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Quarterly Report on Form 10-Q of Advance Auto Parts, Inc. for the quarterly period ended July 14, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Advance Auto Parts, Inc. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying report on Form 10-Q . A signed original of this statement has been provided to Advance Auto Parts, Inc. and will be retained by Advance Auto Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 
Date:
August 14, 2018
By: 
/s/ Thomas R. Greco
 
 
Name:
Thomas R. Greco
 
 
Title:
President and Chief Executive Officer and Director


I, Jeffrey W. Shepherd , certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Quarterly Report on Form 10-Q of Advance Auto Parts, Inc. for the quarterly period ended July 14, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Advance Auto Parts, Inc. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying report on Form 10-Q . A signed original of this statement has been provided to Advance Auto Parts, Inc. and will be retained by Advance Auto Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


Date:
August 14, 2018
By: 
/s/ Jeffrey W. Shepherd
 
 
Name:
Jeffrey W. Shepherd
 
 
Title:
Executive Vice President, Chief Financial Officer,
Controller and Chief Accounting Officer