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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 2020

☐ 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
________________________

AAP-20201003_G1.JPG
ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

Delaware 54-2049910
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

2635 East Millbrook Road, Raleigh, North Carolina 27604
(Address of principal executive offices) (Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common Stock, $0.0001 par value AAP New York Stock Exchange
 
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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 6, 2020, the number of shares of the registrant’s common stock outstanding was 67,854,539 shares.


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NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “should,” “strategy,” “will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global pandemic. Please refer to “Item 1A. Risk Factors.” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
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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)
  October 3, 2020 December 28, 2019
Assets
Current assets:    
Cash and cash equivalents $ 1,068,205  $ 418,665 
Receivables, net 843,054  689,469 
Inventories 4,367,272  4,432,168 
Other current assets 158,819  155,241 
Total current assets 6,437,350  5,695,543 
Property and equipment, net of accumulated depreciation of $2,138,194 and $2,037,849 1,444,889  1,433,213 
Operating lease right-of-use assets 2,362,437  2,365,325 
Goodwill 991,398  992,240 
Intangible assets, net 686,315  709,756 
Other assets 50,374  52,448 
  $ 11,972,763  $ 11,248,525 
Liabilities and Stockholders’ Equity    
Current liabilities:    
Accounts payable $ 3,527,324  $ 3,421,987 
Accrued expenses 632,670  535,863 
Other current liabilities 488,894  519,852 
Total current liabilities 4,648,888  4,477,702 
Long-term debt 1,031,872  747,320 
Non-current operating lease liabilities 2,014,898  2,017,159 
Deferred income taxes 342,730  334,013 
Other long-term liabilities 171,711  123,250 
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 772,313  735,183 
Treasury stock, at cost (1,072,719) (924,389)
Accumulated other comprehensive loss (38,714) (34,569)
Retained earnings 4,101,776  3,772,848 
Total stockholders’ equity 3,762,664  3,549,081 
  $ 11,972,763  $ 11,248,525 



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 Operations
(In thousands, except per share data) (Unaudited)
  Twelve Weeks Ended Forty Weeks Ended
October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Net sales $ 2,541,928  $ 2,312,106  $ 7,741,190  $ 7,596,389 
Cost of sales, including purchasing and warehousing costs
1,413,457  1,300,180  4,343,272  4,270,412 
Gross profit 1,128,471  1,011,926  3,397,918  3,325,977 
Selling, general and administrative expenses
871,660  839,598  2,799,837  2,774,936 
Operating income 256,811  172,328  598,081  551,041 
Other, net:
Interest expense (11,925) (8,443) (37,590) (32,062)
Loss on early redemptions of senior unsecured notes (48,022) —  (48,022) (10,756)
Other income (expense), net 674  (3,145) (2,198) 9,484 
Total other, net (59,273) (11,588) (87,810) (33,334)
Income before provision for income taxes 197,538  160,740  510,271  517,707 
Provision for income taxes 50,062  37,071  129,247  126,718 
Net income $ 147,476  $ 123,669  $ 381,024  $ 390,989 
Basic earnings per common share $ 2.14  $ 1.76  $ 5.51  $ 5.48 
Weighted average common shares outstanding 68,965  70,381  69,097  71,351 
Diluted earnings per common share $ 2.13  $ 1.75  $ 5.50  $ 5.46 
Weighted average common shares outstanding 69,267  70,664  69,325  71,643 


Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
  Twelve Weeks Ended Forty Weeks Ended
October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Net income $ 147,476  $ 123,669  $ 381,024  $ 390,989 
Other comprehensive income (loss):
Changes in net unrecognized other postretirement benefit costs, net of tax of $26, $32, $29 and $40 (73) (92) (80) (66)
Currency translation adjustments 5,298  (5,289) (4,065) 5,397 
Total other comprehensive income (loss) 5,225  (5,381) (4,145) 5,331 
Comprehensive income $ 152,701  $ 118,288  $ 376,879  $ 396,320 



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 Changes in Stockholders’ Equity
(In thousands, except per share data) (Unaudited)
Twelve Weeks Ended October 3, 2020
Common Stock Additional
Paid-in Capital 		Treasury Stock, at Cost Accumulated Other
Comprehensive Loss 		Retained Earnings Total
Stockholders’ Equity
Shares Amount
Balance, July 11, 2020 69,139  $ 8  $ 760,535  $ (961,592) $ (43,939) $ 3,971,507  $ 3,726,519 
Net income
—  —  —  —  —  147,476  147,476 
Total other comprehensive income
—  —  —  —  5,225  —  5,225 
Restricted stock units and deferred stock units vested
27  —  —  —  —  —  — 
Share-based compensation
—  —  11,089  —  —  —  11,089 
Stock issued under employee stock purchase plan
5  —  693  —  —  —  693 
Repurchases of common stock
(726) —  —  (111,127) —  —  (111,127)
Cash dividends declared ($0.25 per common share)
—  —  —  —  —  (17,207) (17,207)
Other —  —  (4) —  —  —  (4)
Balance, October 3, 2020 68,445  $ 8  $ 772,313  $ (1,072,719) $ (38,714) $ 4,101,776  $ 3,762,664 
Twelve Weeks Ended October 5, 2019
Common Stock Additional
Paid-in Capital 		Treasury Stock, at Cost Accumulated Other
Comprehensive Loss 		Retained Earnings Total
Stockholders’ Equity
Shares Amount
Balance, July 13, 2019 71,697  $ 8  $ 715,747  $ (572,592) $ (33,481) 3,561,620  $ 3,671,302 
Net income
—  —  —  —  —  123,669  123,669 
Total other comprehensive loss
—  —  —  —  (5,381) —  (5,381)
Restricted stock units and deferred stock units vested
22 —  —  —  —  —  — 
Share-based compensation
—  —  8,613  —  —  —  8,613 
Stock issued under employee stock purchase plan
5 —  710 —  —  —  710 
Repurchases of common stock
(2,449) —  —  (339,743) —  —  (339,743)
Cash dividends declared ($0.06 per common share)
—  —  —  —  —  (4,189) (4,189)
Other
—  —  (39) —  —  —  (39)
Balance, October 5, 2019 69,275  $ 8  $ 725,031  $ (912,335) $ (38,862) 3,681,100  $ 3,454,942 



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Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except per share data) (Unaudited)
Forty Weeks Ended October 3, 2020
  Common Stock Additional
Paid-in Capital 		Treasury Stock, at Cost Accumulated Other
Comprehensive Loss 		Retained Earnings Total
Stockholders’ Equity
  Shares Amount
Balance, December 28, 2019 69,232  $ 8  $ 735,183  $ (924,389) $ (34,569) $ 3,772,848  $ 3,549,081 
Net income
—  —  —  —  —  381,024  381,024 
Total other comprehensive loss
—  —  —  —  (4,145) —  (4,145)
Restricted stock units and deferred stock units vested
206  —  —  —  —  —  — 
Share-based compensation
—  —  34,927  —  —  —  34,927 
Stock issued under employee stock purchase plan
20  —  2,211  —  —  —  2,211 
Repurchases of common stock
(1,013) —  —  (148,330) —  —  (148,330)
Cash dividends declared ($0.75 per common share)
—  —  —  —  —  (52,096) (52,096)
Other
—  —  (8) —  —  —  (8)
Balance, October 3, 2020 68,445  $ 8  $ 772,313  $ (1,072,719) $ (38,714) $ 4,101,776  $ 3,762,664 
Forty Weeks Ended October 5, 2019
  Common Stock Additional
Paid-in Capital 		Treasury Stock, at Cost Accumulated Other
Comprehensive Loss 		Retained Earnings Total
Stockholders’ Equity
  Shares Amount
Balance, December 29, 2018 72,460  $ 8  $ 694,797  $ (425,954) $ (44,193) $ 3,326,155  $ 3,550,813 
Net income
—  —  —  —  —  390,989  390,989 
Cumulative effect of accounting change from adoption of ASU 2016-02, net of tax —  —  —  —  —  (23,165) (23,165)
Total other comprehensive loss
—  —  —  —  5,331  —  5,331 
Restricted stock units and deferred stock units vested
167  —  —  —  —  —  — 
Share-based compensation
—  —  28,038  —  —  —  28,038 
Stock issued under employee stock purchase plan
16  —  2,358  —  —  —  2,358 
Repurchases of common stock
(3,370) —  —  (486,381) —  —  (486,381)
Cash dividends declared ($0.18 per common share)
—  —  —  —  —  (12,879) (12,879)
Other
2  —  (162) —  —  —  (162)
Balance, October 5, 2019 69,275  $ 8  $ 725,031  $ (912,335) $ (38,862) $ 3,681,100  $ 3,454,942 



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)
  Forty Weeks Ended
October 3, 2020 October 5, 2019
Cash flows from operating activities:    
Net income $ 381,024  $ 390,989 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 192,911  179,565 
Share-based compensation 34,927  28,038 
Loss and impairment of long-lived assets 1,582  4,413 
Loss on early redemptions of senior unsecured notes 48,022  10,756 
Provision for deferred income taxes 8,975  7,653 
Other 1,212  1,328 
Net change in:
Receivables, net (154,888) (95,280)
Inventories 62,181  (24,985)
Accounts payable 106,831  227,822 
Accrued expenses 111,136  (29,672)
Other assets and liabilities, net 15,305  7,919 
Net cash provided by operating activities 809,218  708,546 
Cash flows from investing activities:    
Purchases of property and equipment (192,632) (169,224)
Purchase of an indefinite-lived intangible asset (230) — 
Proceeds from sales of property and equipment 914  8,714 
Net cash used in investing activities (191,948) (160,510)
Cash flows from financing activities:    
Decrease in bank overdrafts —  (59,351)
Proceeds from borrowing on revolving credit facility 500,000  — 
Payment on revolving credit facility (500,000) — 
Proceeds from issuances of senior unsecured notes, net 847,092  — 
Early redemptions of senior unsecured notes (602,568) (310,047)
Dividends paid (56,210) (17,185)
Proceeds from the issuance of common stock
2,211  2,358 
Repurchases of common stock (148,330) (486,381)
Other, net (8,735) (258)
Net cash provided by (used in) financing activities 33,460  (870,864)
Effect of exchange rate changes on cash (1,190) 27 
Net increase (decrease) in cash and cash equivalents 649,540  (322,801)
Cash and cash equivalents, beginning of period
418,665  896,527 
Cash and cash equivalents, end of period
$ 1,068,205  $ 573,726 
Non-cash transactions:
Accrued purchases of property and equipment $ 16,302  $ 30,331 


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
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 have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,” “we,” “us” or “our”).

As of October 3, 2020, we operated a total of 4,811 stores and 168 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of October 3, 2020, we served 1,269 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands.

In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic. As a majority of our stores and facilities have remained open, we have taken additional measures to help protect the health and safety of our Team Members and customers. Such measures, among others, include the implementation of other labor-related benefits for Team Members and increased sanitation practices across Advance. Since the assumptions underpinning our long-term revenue and cash flow growth rates, operating models and business strategies have not been significantly impacted, there was no material impairment of our various assets during the twelve and forty weeks ended October 3, 2020.

The COVID-19 pandemic remains an evolving situation. If a period of decreased demand were to reoccur, it may lead to increased asset recovery and valuation risks in the future, such as impairment of goodwill, intangible assets and store and other assets. We will continue to assess the impact of the pandemic on our financial position. The extent to which the COVID-19 pandemic will impact our operations, liquidity, compliance with debt covenants or financial results in subsequent periods is uncertain, but such impact could be material.

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 2019 as filed with the SEC on February 18, 2020.

The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. 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 second and third quarter of 2020 consist of twelve weeks, while our fourth quarter of 2020 contains thirteen weeks due to the 53-week fiscal year in 2020.

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

2.    Significant Accounting Policies

Revenues

The following table summarizes disaggregated revenue from contracts with customers by product group:
Twelve Weeks Ended Forty Weeks Ended
October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Percentage of Net sales, by product group:
Parts and batteries 67  % 68  % 66  % 67  %
Accessories and chemicals 20  20  21  21 
Engine maintenance 12  11  12  11 
Other 1  1  1  1 
Total 100  % 100  % 100  % 100  %

Recently Issued Accounting Pronouncements

During the first quarter of 2020, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.

During the second quarter of 2020, we early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 89% of inventories as of October 3, 2020 and December 28, 2019. 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 forty weeks ended October 3, 2020 and prior years. We recorded a reduction to Cost of sales of $15.9 million and an increase to Cost of sales of $33.8 million for the twelve weeks ended October 3, 2020 and October 5, 2019 and a reduction to Cost of sales of $3.9 million and an increase to Cost of sales of $76.7 million for the forty weeks ended October 3, 2020 and October 5, 2019 to state inventories at LIFO.

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

Inventory balances were as follows:
(in thousands) October 3, 2020 December 28, 2019
Inventories at first in, first out (“FIFO”) $ 4,221,760  $ 4,290,565 
Adjustments to state inventories at LIFO 145,512  141,603 
Inventories at LIFO $ 4,367,272  $ 4,432,168 

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

4.    Intangible Assets

Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $7.3 million for the twelve weeks ended October 3, 2020 and October 5, 2019 and $24.3 million and $24.4 million for the forty weeks ended October 3, 2020 and October 5, 2019.

5.    Receivables, net

Receivables consist of the following:
(in thousands) October 3, 2020 December 28, 2019
Trade $ 556,503  $ 422,403 
Vendor 268,223  249,009 
Other 28,890  32,306 
Total receivables 853,616  703,718 
Less: allowance for doubtful accounts (10,562) (14,249)
Receivables, net $ 843,054  $ 689,469 

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

Long-term debt consists of the following:
(in thousands) October 3, 2020 December 28, 2019
4.50% Senior Unsecured Notes due January 15, 2022 $ —  $ 299,441 
4.50% Senior Unsecured Notes due December 1, 2023 192,849  447,879 
1.75% Senior Unsecured Notes due October 1, 2027 345,909  — 
3.90% Senior Unsecured Notes due April 15, 2030 493,114  — 
Total long-term debt $ 1,031,872  $ 747,320 
Fair value of long-term debt $ 1,128,000  $ 795,000 

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. 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.

Senior Unsecured Notes

Our 4.50% senior unsecured notes due January 15, 2022 (the “2022 Notes”) were issued in January 2012 at 99.97% of the principal amount of $300.0 million. The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. Our 4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69% of the principal amount of $450.0 million. The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year.

On April 16, 2020, we issued $500.0 million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued at 99.65% of the principal amount of $500.0 million, are due April 15, 2030 and bear interest at 3.90% per year payable semi-annually in arrears on April 15 and October 15 of each year (collectively with the 2023 Notes and 2027 Notes, referred to as our “senior unsecured notes”).

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

During the second quarter of 2020, we commenced an exchange offer to exchange the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 3.90% senior unsecured notes due 2030 (the “Exchange Notes” or “2030 Notes”), which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes. On July 28, 2020, the Original Notes were successfully exchanged for the Exchange Notes.

On September 16, 2020, we redeemed all $300.0 million aggregate principal amount of our outstanding 2022 Notes. In connection with this early redemption, we incurred charges relating to a make-whole provision and debt issuance costs of $15.8 million and $0.3 million.

On September 29, 2020, we issued $350.0 million aggregate principal amount of senior unsecured notes (the “2027 Notes”). The 2027 Notes were issued at 99.67% of the principal amount of $350.0 million, are due October 1, 2027 and bear interest at 1.75% per year payable semi-annually in arrears on April 1 and October 1 of each year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.

Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of our 2023 Notes with the net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges relating to tender premiums and debt issuance costs of $30.5 million and $1.4 million.

Bank Debt

During the second quarter of 2020, we elected to repay the $500.0 million outstanding under our revolving credit facility that we borrowed during the first quarter of 2020. As of October 3, 2020, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under the unsecured revolving credit facility (the “2017 Credit Agreement”). As of December 28, 2019, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility.

As of October 3, 2020 and December 28, 2019, we had $99.9 million and $111.6 million of bilateral letters of credit issued separately from the 2017 Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.

We were in compliance with financial covenants required by our debt arrangements as of October 3, 2020.

Debt Guarantees

We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $53.6 million and $26.4 million as of October 3, 2020 and December 28, 2019. 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 $56.5 million and $50.3 million as of October 3, 2020 and December 28, 2019. We believe that the likelihood of performance under these guarantees is remote.

7.    Leases

Substantially all of our leases are for facilities and vehicles. The initial term for facilities are typically 5 years to 10 years, with renewal options at 5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically 3 years to 5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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

Operating lease liabilities consist of the following:
(in thousands) October 3, 2020 December 28, 2019
Total operating lease liabilities $ 2,458,607  $ 2,495,141 
Less: Current portion of operating lease liabilities (443,709) (477,982)
Noncurrent operating lease liabilities $ 2,014,898  $ 2,017,159 

The current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheets.

Total lease cost is included in Cost of sales and selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:
Twelve Weeks Ended Forty Weeks Ended
(in thousands) October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Operating lease cost $ 121,869  $ 121,057  $ 403,381  $ 405,868 
Variable lease cost 31,469  36,808  105,862  119,354 
Total lease cost $ 153,338  $ 157,865  $ 509,243  $ 525,222 

The future maturity of lease liabilities are as follows:
(in thousands) October 3, 2020
Remainder of 2020 $ 132,419 
2021 520,542 
2022 440,081 
2023 401,295 
2024 322,254 
Thereafter 1,011,763 
Total lease payments 2,828,354 
Less: Imputed interest (369,747)
Total operating lease liabilities $ 2,458,607 

As of October 3, 2020, our operating lease payments include $54.4 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $45.7 million of legally binding minimum lease payments for leases signed, but not yet commenced.

The weighted-average remaining lease term and weighted-average discount rate for our operating leases are 7.0 years and 3.7% as of October 3, 2020. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.

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

Other information relating to our lease liabilities is as follows:
Forty Weeks Ended
(in thousands) October 3, 2020 October 5, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 433,934  $ 417,262 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases $ 305,930  $ 270,440 

8.    Warranty Liabilities

The following table presents changes in our warranty reserves:
Forty Weeks Ended Fifty-Two Weeks Ended
(in thousands) October 3, 2020 December 28, 2019
Warranty reserve, beginning of period $ 36,820  $ 45,280 
Additions to warranty reserves 12,512  34,117 
Reduction and utilization of reserve (29,694) (42,577)
Warranty reserve, end of period $ 19,638  $ 36,820 
  
9.    Share Repurchase Program

On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.

During the twelve weeks ended October 3, 2020, we repurchased 0.7 million shares of our common stock at an aggregate cost of $109.6 million, or an average price of $153.06 per share, in connection with our share repurchase program. During the twelve weeks ended October 5, 2019, we purchased 2.4 million shares of our common stock under the share repurchase program at an aggregate cost of $338.6 million, or an average price of $138.71 per share. During the forty weeks ended October 3, 2020 and October 5, 2019, we repurchased 0.9 million and 3.3 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the forty weeks ended October 3, 2020 and October 5, 2019 were at an aggregate cost of $138.6 million and $476.7 million, or an average price of $147.13 and $144.03 per share. We had $752.2 million remaining under our share repurchase program as of October 3, 2020.

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

10.    Earnings per Share

The computation of basic and diluted earnings per share are as follows:  
  Twelve Weeks Ended Forty Weeks Ended
(in thousands, except per share data) October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Numerator
Net income applicable to common shares $ 147,476  $ 123,669  $ 381,024  $ 390,989 
Denominator
Basic weighted average common shares 68,965  70,381  69,097  71,351 
Dilutive impact of share-based awards 302  283  228  292 
Diluted weighted average common shares (1)
69,267  70,664  69,325  71,643 
Basic earnings per common share $ 2.14  $ 1.76  $ 5.51  $ 5.48 
Diluted earnings per common share $ 2.13  $ 1.75  $ 5.50  $ 5.46 

(1)For the twelve weeks and forty weeks ended October 3, 2020 101 thousand, and 134 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twelve and forty weeks ended October 5, 2019, 175 thousand and 115 thousand restricted stock units (“RSUs”) were excluded excluded from the diluted calculation as their inclusion would have been anti-dilutive.

11.    Share-Based Compensation

During the forty weeks ended October 3, 2020, we granted 312 thousand time-based RSUs, 74 thousand performance-based RSUs and 37 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 forty weeks ended October 3, 2020 were $136.13, $130.03 and $145.04 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.

Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 3, 2020 was $2.8 million and $8.8 million. Total income tax benefit related to share-based compensation expense for the twelve and forty weeks ended October 5, 2019 was $1.7 million and $6.7 million. As of October 3, 2020, there was $76.3 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.6 years.

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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 28, 2019 (filed with the SEC on February 18, 2020), which we refer to as our 2019 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.

Impact of COVID-19 on Our Business

During the COVID-19 pandemic we are prioritizing protecting the health and safety of our Team Members and customers; working to drive financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and working to help ensure that when the current period of crisis passes, our team will emerge even stronger.

In response to the COVID-19 pandemic, we have continued to take additional measures to help ensure the health and safety of our Team Members and customers. Such measures include retro-fitting our stores with plexiglass care shields, the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery.

Government imposed restrictions and stay at home orders related to the pandemic occurred during our first quarter of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. However, as the second and third quarters of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY Omnichannel business, that we believe was largely attributable to higher overall industry demand driven by external factors such as government stimulus, an increase in unemployment benefits, consumers’ preference to use personal vehicles rather than public transportation and other factors that may have contributed to an increase in DIY automotive projects. In addition to these external factors, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day options, contributed to the improvement in demand. We have also continued to make progress on the development of our key supply chain initiatives, including cross-banner replenishment and our single warehouse management system.

Despite the increase in Net sales during the twelve and forty weeks ended October 3, 2020, the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.

Management Overview

Net sales increased 9.9% in the third quarter of 2020 as compared to the same period in the prior year, primarily driven by an increase in comparable store sales resulting from growth in our DIY Omnichannel business. We experienced positive comparable store sales across every region, with the Gulf Coast, Central and Southeast regions having the strongest growth. While still positive, the Northeast Mid-Atlantic and West Coast regions had the lowest comparable store sales growth.

We generated diluted earnings per share (“diluted EPS”) of $2.13 during our third quarter of 2020 compared to $1.75 for the comparable period of 2019. When adjusted for the following non-operational items, our adjusted diluted earnings per share (“Adjusted EPS”) for the twelve weeks ended October 3, 2020 and October 5, 2019 were $2.81 and $2.10.

Twelve Weeks Ended Forty Weeks Ended
October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Transformation expenses $ 0.09  $ 0.28  $ 0.39  $ 0.63 
General Parts International, Inc. (“GPI”) amortization of acquired intangible assets 0.07  0.07  0.23  0.21 
Other adjustments 0.52  —  0.52  0.25 

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

A high-level summary of our financial results for the third quarter of 2020 includes:
 
•Net sales during the third quarter of 2020 were $2.5 billion, an increase of 9.9% as compared to the third quarter of 2019, primarily driven by an increase in comparable store sales of 10.2%, led by growth in our DIY Omnichannel business.
•Gross profit margin for the third quarter of 2020 was 44.4% of Net sales, an increase of 63 basis points as compared to the third quarter of 2019. This increase was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, supply chain efficiencies and favorable pricing actions.
•SG&A expenses for the third quarter of 2020 were 34.3% of Net sales, a favorable impact of 202 basis points as compared to the third quarter of 2019. This favorable impact was primarily due to our ability to leverage payroll and rent expenses and lower incident rate and claims that we attribute to continued focus on employee safety.

Business and Risks Update

We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience and driving consistent execution for both Professional and DIY customers. To achieve these improvements, we have undertaken planned strategic initiatives to help build a foundation for long-term success across the organization, which include:

•Continued development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
•Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network.
•Continued development of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand.
•Progress in the development of a more efficient end-to-end supply chain to deliver our broad assortment.
•Enhancement of ‘Advance Same Day’ Curbside Pick Up, ‘Advance Same Day’ Home Delivery and our mobile application and eCommerce performance.

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. For a complete discussion of these factors, refer to our 2019 Form 10-K, as updated by our subsequent filings with the SEC, including our Form 10-Q filed for the quarterly period ended April 18, 2020, and the “Impact of COVID-19 on Our Business” section included within this Form 10-Q.

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 forty weeks ended October 3, 2020, 10 stores and branches were opened and 68 were closed or consolidated, resulting in a total of 4,979 stores and branches as of October 3, 2020, compared to a total of 5,037 stores and branches as of December 28, 2019.

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Results of Operations

Twelve Weeks Ended $ Increase/(Decrease) Basis Points
(in millions) October 3, 2020 October 5, 2019
Net sales $ 2,541.9  100.0  % $ 2,312.1  100.0  % $ 229.8  — 
Cost of sales
1,413.5  55.6  1,300.2  56.2  113.3  (63)
Gross profit 1,128.5  44.4  1,011.9  43.8  116.5  63 
SG&A 871.7  34.3  839.6  36.3  32.1  (202)
Operating income 256.8  10.1  172.3  7.5  84.5  265 
Interest expense (11.9) (0.5) (8.4) (0.4) (3.5) (10)
Loss on early redemptions of senior unsecured notes (48.0) (1.9) 0.0  0.0  (48.0) (189)
Other income (expense), net 0.7  0.0  (3.1) (0.1) 3.8  16 
Provision for income taxes 50.1  2.0  37.1  1.6  13.0  37 
Net income $ 147.5  5.8  % $ 123.7  5.3  % $ 23.8  45 

Forty Weeks Ended $ Increase/(Decrease) Basis Points
(in millions) October 3, 2020 October 5, 2019
Net sales $ 7,741.2  100.0  % $ 7,596.4  100.0  % $ 144.8  — 
Cost of sales
4,343.3  56.1  4,270.4  56.2  72.9  (11)
Gross profit 3,397.9  43.9  3,326.0  43.8  71.9  11 
SG&A 2,799.8  36.2  2,774.9  36.5  24.9  (36)
Operating income 598.1  7.7  551.0  7.3  47.0  47 
Interest expense (37.6) (0.5) (32.1) (0.4) (5.5) (6)
Loss on early redemptions of senior unsecured notes (48.0) (0.6) (10.8) (0.1) (37.2) (48)
Other (expense) income, net (2.2) 0.0  9.5  0.1  (11.7) (15)
Provision for income taxes 129.2  1.7  126.7  1.7  2.5  — 
Net income $ 381.0  4.9  % $ 391.0  5.1  % $ (10.0) (23)
Note: Table amounts may not foot due to rounding.

Net Sales

Net sales for the twelve weeks ended October 3, 2020 increased 9.9% as compared to the same period of 2019, primarily driven by an increase in comparable store sales resulting from growth in our DIY Omnichannel business. We experienced positive comparable store sales across every region, with the Gulf Coast, Florida and Southeast regions having the strongest growth. While still positive, the Northeast Mid-Atlantic and West Coast regions had the lowest comparable store sales growth.

For the forty weeks ended October 3, 2020, Net sales increased 1.9% compared to the same period of 2019, primarily driven by a 1.8% increase in comparable store sales resulting from an increase in demand in the second and third quarter of 2020, partially offset by less demand in the first quarter of 2020 caused principally by the COVID-19 pandemic, particularly in the six weeks ended April 18, 2020.

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.

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Gross Profit

Gross profit for the twelve weeks ended October 3, 2020 was $1,128.5 million, or 44.4%, of Net sales, as compared to $1,011.9 million, or 43.8%, of Net sales for the twelve weeks ended October 5, 2019. This increase in Gross profit as a percentage of Net sales was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, supply chain efficiencies and favorable pricing actions. These improvements were partially offset by unfavorable product mix and headwinds associated with shrink and defectives.

Gross profit for the forty weeks ended October 3, 2020 was $3,397.9 million, or 43.9% of Net sales, as compared to $3,326.0 million, or 43.8%, of Net sales for the forty weeks ended October 5, 2019. This increase in Gross profit as a percentage of Net sales was primarily due to favorable channel mix, including growth in our DIY Omnichannel business, supply chain efficiencies and favorable pricing actions. These improvements were partially offset by unfavorable product mix.

As a result of changes in our LIFO reserve, a benefit of $15.9 million and an expense of $33.8 million was included in the twelve weeks ended October 3, 2020 and October 5, 2019. A benefit of $3.9 million and an expense of $76.7 million was included in the forty weeks ended October 3, 2020 and October 5, 2019.

Selling, general and administrative expenses

SG&A expenses for the twelve weeks ended October 3, 2020 were $871.7 million, or 34.3% of Net sales, as compared to $839.6 million, or 36.3% of Net sales, for the twelve weeks ended October 5, 2019. This decrease in SG&A expenses as a percentage of Net sales was primarily due to our ability to leverage payroll and rent expenses, lower incident rate and claims that we attribute to continued focus on employee safety and suspension of travel due to the COVID-19 pandemic. These improvements were partially offset by an increase in costs incurred in response to the COVID-19 pandemic and an increase in support contracts related to information technology solutions.

SG&A for the forty weeks ended October 3, 2020 was $2,799.8 million, or 36.2% of Net sales, as compared to $2,774.9 million, or 36.5% of Net sales, for the forty weeks ended October 5, 2019. This decrease in SG&A as a percentage of Net sales was primarily due to our ability to leverage payroll and rent expenses, lower incident rate and claims that we attribute to continued focus on employee safety and suspension of travel due to the COVID-19 pandemic. These improvements were partially offset by the factors discussed above.

Loss on early redemptions of senior unsecured notes

During the twelve weeks ended October 3, 2020, we incurred charges of $48.0 million related to the early redemption of our 2022 and 2023 senior unsecured notes. During the sixteen weeks ended April 20, 2019, we incurred charges of $10.8 million related to the early redemption of our 2020 senior unsecured notes.

Provision for income taxes

Our Provision for income taxes for the twelve weeks ended October 3, 2020 was $50.1 million, as compared to $37.1 million for the twelve weeks ended October 5, 2019. Our effective tax rate was 25.3% and 23.1% for the twelve weeks ended October 3, 2020 and October 5, 2019.

Our Provision for income taxes for the forty weeks ended October 3, 2020 was $129.2 million, as compared to $126.7 million for the forty weeks ended October 5, 2019. Our effective tax rate was 25.3% and 24.5% for the forty weeks ended October 3, 2020 and October 5, 2019.

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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, including Adjusted net income and Adjusted EPS, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. We have presented these non-GAAP financial measures as we believe that the presentation of our financial results that exclude (1) transformation expenses under our strategic business plan; (2) non-cash amortization related to the acquired GPI intangible assets; and (3) other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to store closure and consolidation activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors to evaluate our performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.

Transformation Expenses — Costs incurred in connection with our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses will include, but not be limited to the following:
•Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and Team Member severance in connection with our 2018 Store Rationalization plan and 2017 Store and Supply Chain Rationalization plan.
•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
•Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise.

GPI Amortization of Acquired Intangible Assets — As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable leases agreements, which we expect to be subject to amortization through 2025.

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We have included a reconciliation of this information to the most comparable GAAP measures in the following table:

Twelve Weeks Ended Forty Weeks Ended
(in thousands, except per share data) October 3, 2020 October 5, 2019 October 3, 2020 October 5, 2019
Net income (GAAP) $ 147,476  $ 123,669  $ 381,024  $ 390,989 
Cost of sales adjustments:
Transformation expenses:
Restructuring costs —  2,991  —  3,272 
Other significant costs 79  —  1,627  — 
Other adjustment (1)
—  —  —  13,010 
SG&A adjustments:
GPI amortization of acquired intangible assets
6,324  6,362  21,086  21,157 
Transformation expenses:
Restructuring costs 2,581  4,082  12,221  14,595 
Third-party professional services 4,660  11,966  8,924  31,282 
Other significant costs 1,438  7,338  13,560  10,756 
Other income adjustment (2)
48,022  —  48,022  10,756 
Provision for income taxes on adjustments (3)
(15,776) (8,185) (26,360) (26,207)
Adjusted net income (Non-GAAP) $ 194,804  $ 148,223  $ 460,104  $ 469,610 
Diluted earnings per share (GAAP) $ 2.13  $ 1.75  $ 5.50  $ 5.46 
Adjustments, net of tax 0.68  0.35  1.14  1.09 
Adjusted EPS (Non-GAAP) $ 2.81  $ 2.10  $ 6.64  $ 6.55 

(1)During the sixteen weeks ended April 20, 2019, we made an out-of-period correction, which increased Cost of sales by $13.0 million, related to received not invoiced inventory.
(2)During the twelve weeks ended October 3, 2020, we incurred charges relating to a make-whole provision and tender premiums of $46.3 million and debt issuance costs of $1.7 million resulting from the early redemption of our 2022 and 2023 Notes. During the sixteen weeks ended April 20, 2019, we incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting from the early redemption of our 2020 senior unsecured notes.
(3)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.

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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, funding of initiatives under our strategic business plan and other operational priorities. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, given uncertainties related to the COVID-19 pandemic, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity change. Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year.

Share Repurchase Program

On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program as an addition to the previous $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.

During the twelve weeks ended October 3, 2020, we repurchased 0.7 million shares of our common stock at an aggregate cost of $109.6 million, or an average price of $153.06 per share, in connection with our share repurchase program. During the twelve weeks ended October 5, 2019, we purchased 2.4 million shares of our common stock under the share repurchase program at an aggregate cost of $338.6 million, or an average price of $138.71 per share. During the forty weeks ended October 3, 2020 and October 5, 2019, we repurchased 0.9 million and 3.3 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the forty weeks ended October 3, 2020 and October 5, 2019 were at an aggregate cost of $138.6 million and $476.7 million, or an average price of $147.13 and $144.03 per share.

Analysis of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities:
Forty Weeks Ended
(in thousands) October 3, 2020 October 5, 2019
Cash flows provided by operating activities $ 809,218  $ 708,546 
Cash flows used in investing activities (191,948) (160,510)
Cash flows provided by (used in) financing activities 33,460  (870,864)
Effect of exchange rate changes on cash (1,190) 27 
Net increase (decrease) in Cash and cash equivalents
$ 649,540  $ (322,801)

Operating Activities

For the forty weeks ended October 3, 2020, net cash provided by operating activities increased by $100.7 million to $809.2 million compared to the same period of the prior year. The net increase in cash flows provided by operating activities compared to the prior year was primarily driven by improvements in working capital, as well as the deferral of payroll taxes under the CARES Act. In the current year, working capital included an increase in cash provided by Accrued expenses and Inventories, partially offset by a decrease in cash provided by Accounts payable and an increase in cash used by Receivables, net.

Investing Activities

For the forty weeks ended October 3, 2020, net cash used in investing activities increased by $31.4 million to $191.9 million compared to the same period of the prior year. Cash used in investing activities for the forty weeks ended October 3, 2020 consisted primarily of purchases of property and equipment, which was $23.4 million higher than the comparable period of 2019, primarily driven by investments made in supply chain and e-commerce, as well as information technology as we remain focused on the complete back office integration throughout the enterprise.
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Financing Activities

For the forty weeks ended October 3, 2020, net cash provided by financing activities was $33.5 million, an increase of $904.3 million as compared to the same period of the prior year. The net cash provided by financing activities during the forty weeks ended October 3, 2020, was primarily the result of issuing $850.0 million aggregate principal amount of senior unsecured notes during the forty weeks ended October 3, 2020, partially offset by the early redemptions of senior unsecured notes in the amount of $602.6 million, the repurchase of $148.3 million of common stock and dividends paid of $56.2 million.

Our Board of Directors has declared a quarterly cash dividend since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. On October 26, 2020, our Board of Directors declared a quarterly cash dividend of $0.25 per share to be paid on January 4, 2021 to all common shareholders of record as of December 18, 2020.

Long-Term Debt

As of October 3, 2020, 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.

For additional information on transactions entered into relating to Long-term debt during the forty weeks ended October 3, 2020, refer to Note 6, Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein.

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 forty weeks ended October 3, 2020, there were no changes to the critical accounting policies discussed in our 2019 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2019 Form 10-K.

Supplemental Guarantor Financial Information

The following is a description of the terms and conditions of the guarantees with respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee.

Certain 100% wholly owned domestic subsidiaries of the Issuer, including our Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors (“Guarantor Subsidiaries”) of our senior unsecured notes. The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiaries. Certain of our wholly owned subsidiaries, including all of our foreign subsidiaries and captive insurance subsidiary, do not serve as guarantors of our senior unsecured notes (“Non-Guarantor Subsidiaries”).

The following tables present summarized financial information for the Issuer and Guarantor Subsidiaries on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor Subsidiaries and (ii) equity in earnings from and investments in any subsidiaries that are a Non-Guarantor Subsidiary.

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Summarized Financial Information

Balance Sheets
Issuer and Guarantor Subsidiaries
(in millions) October 3, 2020 December 28, 2019
Assets
Current assets (1)
$ 6,047.0  $ 5,329.9 
Non-current assets (2)
5,376.4  5,403.6 
Liabilities
Current liabilities $ 4,441.0  $ 4,264.3 
Intercompany payables, net due to Non-Guarantor Subsidiaries 365.6  342.8 
Other non-current liabilities 3,432.1  3,128.2 
(1)Current assets includes $4,177.4 million and $4,234.2 million of Inventories as of October 3, 2020 and December 28, 2019.
(2)Non-current assets includes $1,592.3 million and $1,613.8 million of Goodwill and Intangible assets, net as of October 3, 2020 and December 28, 2019.

Statements of Operations
Issuer and Guarantor Subsidiaries
Forty Weeks Ended Fifty-Two Weeks Ended
(in millions) October 3, 2020 December 28, 2019
Net sales $ 7,460.3  $ 9,342.2 
Gross profit 3,284.7  4,089.8 
Operating income 550.2  605.5 
Income before provision for income taxes 469.5  569.0 
Net income 381.0  486.9 


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes in our exposure to market risk since December 28, 2019. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our 2019 Form 10-K.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information 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.

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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 October 3, 2020. 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 to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our quarter ended October 3, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic that commenced during the first quarter of 2020, during the third quarter of 2020 certain of our Team Members continued to work remotely and certain stores and distribution centers continued to operate with limited Team Members on-site. We have not identified any material changes in our internal control over financial reporting as a result of these changes to the working environment. We are continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls over financial reporting.
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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 our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleges that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020 the court granted in part and denied in part our motion to dismiss. The surviving claims are subject to discovery. On November 6, 2020 the court granted plaintiff’s motion for class certification, for which defendants intend to seek review by the Third Circuit Court of Appeals. In addition, derivative complaints purportedly on behalf of the Company were filed against us as nominal defendant and certain of our current and former officers and directors related to similar allegations for the Class Period on April 29, 2020 in the U.S. District Court for the District of Delaware and August 13, 2020 in the Delaware Court of Chancery. The defendants have moved to dismiss the federal derivative complaint and the state court derivative claim is stayed pending the determination of the federal motion to dismiss. We strongly dispute the allegations of the complaints and intend to defend the cases vigorously.

ITEM 1A. RISK FACTORS

Please refer to “Item 1a. Risk Factors.” found in our 2019 Form 10-K filed for the year ended December 28, 2019, as updated by our subsequent filings with the SEC, including our Form 10-Q filed for the quarterly period ended April 18, 2020, for risks that, if were to occur, could materially adversely affect our business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of our common stock.

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 October 3, 2020: 
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) (in thousands)
July 12, 2020 to August 8, 2020 —  $ —  —  $ 861,747 
August 9, 2020 to September 5, 2020 201,509  155.19  191,730  $ 832,011 
September 6, 2020 to October 3, 2020 524,278  152.31  524,278  $ 752,156 
Total 725,787  $ 153.11  716,008  $ 752,156 

(1)The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $1.5 million, or an average price of $157.12 per share, during the twelve weeks ended October 3, 2020.
(2)On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.
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ITEM 6.EXHIBITS 
    Incorporated by Reference Filed
Exhibit No. Exhibit Description Form Exhibit Filing Date Herewith
3.1
10-Q 3.1 8/14/2018
3.2
10-Q 3.2 8/18/2020
4.1
8-K 4.1 4/29/2010
4.2
8-K 10.45 6/03/2011
4.3
8-K 4.5 12/21/2012
4.4
8-K 4.6 4/19/2013
4.5
10-Q 4.11 5/28/2014
4.6
8-K 4.6 9/30/2020
4.7
X
X
      X
      X
      X
101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document. X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. X
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document. X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. X
104.1 Cover Page Interactive Data file (Embedded within Inline XBRL Documents and Included in Exhibit 101.)

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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.
Date: November 10, 2020 /s/ Andrew E. Page
Andrew E. Page
Senior Vice President, Controller and Chief Accounting Officer

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Exhibit 4.7

DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES ACT OF 1934
    The following description sets forth certain material terms and provisions of the securities of Advance Auto Parts, Inc. that are registered under Section 12 of the Securities Exchange Act of 1934, as amended. In this description, the words “Company,” “we,” “us,” “our” and “AAP” refer only to Advance Auto Parts, Inc. and not to any of its subsidiaries.
DESCRIPTION OF COMMON STOCK
The following description of the general terms and provisions of the shares of our Common Stock, par value $0.0001 per share (“Common Stock”), is only a summary and is qualified in its entirety by reference to our Restated Certificate of Incorporation (our “Charter”), our Amended and Restated Bylaws (our “Bylaws”) and applicable provisions of the Delaware General Corporation Law (the “DGCL”).
Authorized Capital Stock
Our authorized capital stock consists of 200,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, par value $0.0001 per share (“Preferred Stock”).
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters to be voted on by the stockholders of AAP. An election of directors by our stockholders shall be determined by a majority of the votes cast by the stockholders entitled to vote on the election, provided that if the number of nominees exceeds the number of directors to be elected, directors shall be elected by a plurality of the shares represented and entitled to vote. Stockholders are entitled to any dividends that may be declared by our board of directors. Holders of Common Stock do not have cumulative voting rights. Upon our dissolution, liquidation or winding up, holders of Common Stock are entitled to share ratably in our net assets after payment or provision for all liabilities and preferential liquidation rights of Preferred Stock then outstanding. Holders of Common Stock have no preemptive rights to purchase shares of Common Stock. The issued and outstanding shares of Common Stock are not subject to any redemption or sinking fund provisions and are not convertible into any other shares of our capital stock. The rights, preferences and privileges of holders of Common Stock are subject to those of the holders of any shares of Preferred Stock that we may issue in the future.
Transfer Agent and Registrar
Computershare is the transfer agent and registrar for our Common Stock.
Stock Exchange Listing
Our Common Stock is traded on the New York Stock Exchange under the symbol “AAP.”
Certain Provisions of Our Charter and Bylaws
Authorized but Unissued Stock. Our Charter authorizes the issuance of a significant number of shares of Common Stock and Preferred Stock. The existence of authorized but unissued shares of capital stock could render more difficult or discourage an attempt to obtain control of us by means of a tender offer, takeover attempt or otherwise. Additionally, Preferred Stock could be issued by our Board of Directors to increase the number of outstanding shares or otherwise make a takeover or change in control more difficult and expensive.


Advance Notice of Proposals and Nominations and Proxy Access. Our Bylaws provide that stockholders must provide timely written notice to bring business before an annual meeting of stockholders or to nominate candidates for election as directors at an annual meeting of stockholders. Generally, the advance notice provisions require that stockholder proposals be provided to us between 120 and 150 days before the anniversary of our last annual meeting and director nominations be provided to us between 120 and 150 days before the anniversary of the mailing of our proxy statement for our last annual meeting in order to be properly brought before a stockholder meeting. Our Bylaws also specify the form and content of a stockholder’s notice. Our bylaws generally provide a stockholder or group of stockholders holding three percent or more of the outstanding Common Stock for three years to nominate candidates for up to 20% of the Board of Directors.
Special Meetings and Written Consent. A special meeting of the stockholders may only be called by our Board of Directors, the Chairman of our 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 in the aggregate of the outstanding Common Stock. Stockholders are not permitted under AAP’s Restated Certificate of Incorporation or Bylaws to act by written consent in lieu of a meeting.
Potential Anti-Takeover Effects of Delaware Law
Our Company is governed by the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in “business combination” transactions with any “interested stockholder” for a period of three years following the time that the stockholder became an interested stockholder, unless:
•prior to the time the stockholder became an interested stockholder, the corporation’s board of directors approved either the applicable business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
•upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the voting stock owned by the interested stockholder) shares owned by directors who are also officers of the corporation and shares owned by employee stock plans in which the employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
•at or subsequent to the time that the stockholder became an interested stockholder, the business combination is approved by the corporation’s board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the interested stockholder.
A “business combination” is defined to include, among other things and in general and subject to exceptions, a merger of the corporation with the interested stockholder; a sale of 10% or more of the market value of the corporation’s consolidated assets to the interested stockholder; certain transactions that result in the issuance of the corporation’s stock to the interested stockholder; a transaction that has the effect of increasing the proportionate share of the corporation’s stock owned by the interested stockholder; and any receipt by the interested stockholder of loans, guarantees or other financial benefits provided by the corporation. An “interested stockholder” is defined to include, in general and subject to exceptions, a person that (1) owns 15% or more of the outstanding voting stock of the corporation or (2) is an “affiliate” or
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“associate” (as defined in Section 203) of the corporation and was the owner of 15% or more of the corporation’s outstanding voting stock at any time within the prior three-year period.

DESCRIPTION OF DEBT SECURITIES
The following description of AAP’s 4.50% senior notes due 2023 (the “2023 Notes”), 1.750% senior unsecured notes due 2027 (the “2027 Notes”) and 3.90% senior notes due 2030 (the “2030 Notes,” and together with the 2023 Notes and the 2027 Notes, the “Notes”) is a summary and does not purport to be complete. Although for convenience, the 2023 Notes, the 2027 Notes and the 2030 Notes are referred to as “Notes,” each such Note was be issued as a separate series under a separate supplemental indenture. Accordingly, unless otherwise stated, for purposes of this description, references to the “Notes” shall be deemed to refer to each series of Notes separately, and not to the 2023 Notes, the 2027 Notes and the 2030 Notes on any combined basis.
The description of the 2023 Notes and the 2027 Notes is qualified in its entirety by reference to an indenture, dated as of April 29, 2010 (as supplemented by the Seventh Supplemental Indenture, the “2023 Notes Indenture” and, as supplemented by the Eighth Supplemental Indenture, the “2027 Notes Indenture”), among AAP, as issuer, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee. In addition, the description of the 2030 Notes is qualified in its entirety by reference to an indenture, dated as of April 16, 2020 (the “2030 Notes Indenture,” and together with the 2023 Notes Indenture and the 2027 Notes Indenture, the “Indentures”), among AAP, as issuer, the subsidiary guarantors named therein and Wells Fargo Bank, National Association, as trustee.
AAP has an automatic shelf registration statement on Form S-3 (File No.: 333-248963), which was filed with the SEC on September 22, 2020, covering the registration of the 2023 Notes and the 2027 Notes. In addition, AAP has a registration statement on Form S-4 (File No.: 333-239145), which was filed with the Securities and Exchange Commission (the “SEC”) on June 12, 2020 and deemed effective by the SEC on June 24, 2020, covering the registration of the 2030 Notes.
The Notes
The 2023 Notes were issued under the 2023 Notes Indenture, the 2027 Notes were issued under the 2027 Notes Indenture and the 2030 Notes were issued under the 2030 Notes Indenture, which each provide that debt securities may be issued under the applicable Indenture from time to time in one or more series. Neither Indenture limits the amount of debt securities that AAP may issue under such Indenture. AAP may, without the consent of the holders of any series of Notes, issue additional notes (“Additional Notes”) of a series having the same terms as the Notes of such series, except for the public offering price and the issue date and, if applicable, the initial interest accrual date and the initial interest payment date. Any Additional Notes of a series, together with the Notes of such series, will constitute a single series of Notes and will vote together as one class on all matters with respect to such series of Notes; provided, however, that any Additional Notes that are not fungible with existing Notes of such series for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number from the existing Notes of such series.
The 2023 Notes. AAP issued $450.0 million aggregate principal amount of senior unsecured notes on November 27, 2013. The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year to the holders of record at the close of business on the immediately preceding May 15 and November 15. As of October 3, 2020, $193.7 million aggregate principal amount of the 2023 Notes remain outstanding.
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The 2027 Notes. AAP issued $350.0 million aggregate principal amount of senior unsecured notes on September 29, 2020. The 2027 Notes bear interest at a rate of 1.750% per year payable semi-annually in arrears on April 1 and October 1 of each year to the holders of record at the close of business on the immediately preceding March 15 and September 15. As of October 3, 2020, $350.0 million aggregate principal amount of the 2027 Notes remain outstanding.
The 2030 Notes. AAP issued $500.0 million aggregate principal amount of senior unsecured notes on April 16, 2020 in a private placement. During the twelve weeks ended July 11, 2020, $499.9 million of such notes were exchanged for the equivalent amount of registered 2030 Notes. The 2030 Notes bear interest at a rate of 3.90% per year payable semi-annually in arrears on April 15 and October 15 of each year to the holders of record at the close of business on the immediately preceding April 1 and October 1. As of October 3, 2020, $500.0 million aggregate principal amount of the 2030 Notes remain outstanding.
Subsidiary Guarantees
The Notes are guaranteed by certain of our domestic subsidiaries. Our obligations under the Notes will be fully and unconditionally guaranteed, jointly and severally, on an unsubordinated unsecured basis by each of our subsidiaries that incurs or guarantees the applicable Credit Facility or any other of our or any of our subsidiaries’ Credit Facility Debt or any Capital Markets Debt. Each subsidiary guarantee will rank equally in right of payment with all existing and future liabilities of the applicable subsidiary guarantor that are not subordinated. Each subsidiary guarantee will effectively rank junior to any secured indebtedness of its respective subsidiary guarantor to the extent of the value of the assets securing such indebtedness. Under the terms of the guarantees, holders of the Notes will not be required to exercise their remedies against us before they proceed directly against the subsidiary guarantors.
For purposes of the guarantee provisions of the Indentures, the following terms are defined as follows:
“Capital Markets Debt” means any debt for borrowed money that (i) is in the form of, or represented by, bonds, notes, debentures or other securities (other than promissory notes or similar evidences of debt under a credit agreement) and (ii) has an aggregate principal amount outstanding of (A) at least $25.0 million, at any time that any Existing Notes remain outstanding or (B) at least $75.0 million at any time that no Existing Notes remain outstanding.
“Credit Facility”, (i) with respect to the 2023 Notes, means (A) the credit agreement dated May 27, 2011, among AAP, Advance Stores Company, Incorporated, the lenders referred to therein and JPMorgan Chase Bank, N.A., as administrative agent, as amended, extended, renewed, restated, replaced, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and (B) the credit agreement entered into in connection with the acquisition, among AAP, Advance Stores Company, Incorporated, the lenders referred to therein and J.P. Morgan Chase Bank, N.A., as administrative agent, as amended, extended, renewed, restated, replaced, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, or any other credit agreement entered into by AAP from time to time, and, (ii) with respect to the 2027 Notes and the 2030 Notes, means the credit agreement, dated as of January 31, 2017, among us, Advance Stores Company, Incorporated, the lenders referred to therein and Bank of America, N.A., as administrative agent, as amended, extended, renewed, restated, replaced, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time.
“Credit Facility Debt” means any debt for borrowed money that (i) is incurred pursuant to a credit agreement, including pursuant to the applicable Credit Facility or other agreement providing for revolving credit loans, term loans or other debt entered into between us or any of our subsidiaries and any lender or
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group of lenders and (ii) has an aggregate principal amount outstanding or committed of (A) at least $25.0 million, at any time that any Existing Notes remain outstanding or (B) at least $75.0 million at any time that no Existing Notes remain outstanding.
“subsidiary guarantor” means each of our subsidiaries that is or becomes a guarantor under the applicable Indenture.
Under the applicable Indenture, the respective holders of the Notes will be deemed to have consented to the release of the guarantee of the Notes provided by a subsidiary guarantor, without any action required on the part of the trustee or any holder of the Notes, upon such subsidiary guarantor ceasing to guarantee or be an obligor with respect to the applicable Credit Facility or any other Credit Facility Debt and Capital Markets Debt of us or any subsidiary. Accordingly, if the lenders under the applicable Credit Facility release a subsidiary guarantor from its guarantee of, or obligations as a borrower under, the applicable Credit Facility, or if the applicable Credit Facility is terminated in full, the obligations of our subsidiaries to guarantee the Notes will immediately terminate, unless our subsidiaries incur or guarantee obligations under any other Credit Facility Debt or Capital Markets Debt. We will give prompt written notice to the trustee of the automatic release of any subsidiary guarantor. If any of our subsidiaries incur or guarantee obligations under any Credit Facility Debt or Capital Markets Debt while the Notes are outstanding, then such subsidiaries will be required to guarantee the Notes.
In addition, a subsidiary guarantor will be released and relieved from all its obligations under its subsidiary guarantee in the following circumstances, each of which is permitted by the applicable Indenture:
•upon the sale or other disposition (including by way of consolidation or merger), in one transaction or a series of related transactions, of a majority of the total voting power of the capital stock or other interests of such subsidiary guarantor (other than to us or any of our affiliates); or
•upon the sale or disposition of all or substantially all the property of such subsidiary guarantor (other than to any of our affiliates other than another subsidiary guarantor);
provided, however, that, in each case, after giving effect to such transaction, such subsidiary is no longer liable for any guarantee or other obligations in respect of any of our or our subsidiaries’ Credit Facility Debt or Capital Markets Debt.
The subsidiary guarantee of a subsidiary guarantor also will be released if we exercise our legal defeasance or our covenant defeasance option as described under “—Defeasance” or if our obligations under the Indentures are discharged as described under “—Discharge of the Indenture.” At our written instruction, the trustee will execute and deliver any documents, instructions or instruments evidencing any such release.
Ranking
The Notes are:
•our unsubordinated unsecured obligations,
•effectively subordinated to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness,
•structurally subordinated to any indebtedness of any of our subsidiaries that do not guarantee the Notes,
•equal in ranking (“pari passu“) with all our existing and future unsubordinated indebtedness, and
•senior in right of payment to all our existing and future subordinated indebtedness.
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With respect to each subsidiary guarantor, the subsidiary guarantee is:
•an unsubordinated unsecured obligation of such subsidiary guarantor,
•effectively subordinated to any secured indebtedness of such subsidiary guarantor to the extent of the value of the assets securing such indebtedness,
•structurally subordinated to any indebtedness of any subsidiaries of such subsidiary guarantor that do not guarantee the Notes,
•pari passu with such subsidiary guarantor’s existing and future unsubordinated indebtedness, and
•senior in right of payment to such subsidiary guarantor’s existing and future subordinated indebtedness.
Payment on the Notes
The trustee, through its corporate trust office in New York City, acts as our paying agent (the “paying agent”) and security registrar in respect of the Notes. The current location of such corporate trust office is 150 East 42nd Street, 40th Floor, New York, New York 10017. So long as the Notes are issued in the form of global certificates, payments of principal, interest and premium, if any, will be made by us through the paying agent to DTC.
We will pay principal and interest on any Note in definitive registered form (without a coupon) by check mailed to the address of the person entitled thereto as it appears in the note register (or upon written notice from such person given at least 15 days before the payment date, by wire transfer in immediately available funds if such person is entitled to interest on an aggregate principal amount of Notes in excess of $2.0 million).
Optional Redemption
Prior to the Par Call Date, the Notes will be redeemable in whole or in part at any time and from time to time, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed that would have been made if such Notes matured on the Par Call Date (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then-current Treasury Rate, plus 30 basis points (with respect to the 2023 Notes), 25 basis points (with respect to the 2027 Notes) and 50 basis points (with respect to the 2030 Notes) plus accrued interest thereon to but excluding the redemption date.
On or after the Par Call Date, the Notes will be redeemable in whole or in part at any time and from time to time, at our option, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued interest thereon to but excluding the redemption date.
“Comparable Treasury Issue” means the U.S. Treasury security selected by us as having a maturity comparable to the remaining term of the Notes (with respect to the 2027 Notes and the 2030 Notes, as measured from the date of redemption assuming such Notes matured on the Par Call Date) to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such notes.
“Comparable Treasury Price” means, with respect to any redemption date, (i) the average of five Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest
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Reference Treasury Dealer Quotations, or (ii) if we obtain fewer than five such Reference Treasury Dealer Quotations, the average of all such quotations.
“Par Call Date” means, (i) with respect to the 2023 Notes, September 1, 2023 (three months prior to the maturity date of the 2023 Notes), (ii) with respect to the 2027 Notes, August 1, 2027 (two months prior to the maturity date of the 2027 Notes) and (iii) with respect to the 2030 Notes, January 15, 2030 (three months prior to the maturity date of the 2030 Notes).
“Reference Treasury Dealers” means, (i) with respect to the 2023 Notes, each of J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated and their respective successors, and any other primary Treasury dealer we select and, (ii) with respect to the 2027 Notes and the 2030 Notes, each of J.P. Morgan Securities LLC and BofA Securities, Inc. and their respective successors, and any other primary Treasury dealer we select. If any of the foregoing ceases to be a primary U.S. government securities dealer in New York City, we must substitute another primary Treasury dealer.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by us, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the trustee at 5:00 p.m., New York City time, on the third business day preceding such redemption date.
“Treasury Rate” means, with respect to any redemption date: (a) the yield, under the heading which represents the average for the immediately preceding week, appearing in the most recently published statistical release designated “H.15” or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded U.S. Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities,” for the maturity corresponding to the Comparable Treasury Issue (if no maturity is within three months before or after the remaining life (as defined below), yields for the two published maturities most closely corresponding to the Comparable Treasury Issue will be determined and the Treasury Rate will be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month), or (b) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. The Treasury Rate will be calculated on the third business day preceding the date fixed for redemption.
Selection and Notice
We will mail a notice of redemption to each holder of Notes to be redeemed by first-class mail or delivered electronically (in the case of book-entry) at least 30 and not more than 60 days prior to the date fixed for redemption. Any notice to holders of Notes of such a redemption shall include the appropriate calculation of the redemption price, but does not need to include the redemption price itself. The actual redemption price, calculated as described above, must be set forth in an officer’s or officers’ certificate (as described in the applicable Indenture) delivered to the trustee no later than one business day prior to the redemption date. Unless we default on payment of the redemption price, as of the redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption. If fewer than all of the Notes are to be redeemed, the trustee will select, at least 30 days and not more than 60 days prior to the redemption date, the particular Notes or portions thereof for redemption from the outstanding Notes not previously redeemed (i) if the Notes are listed on any securities exchange, in accordance with the requirements of such
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exchange, or (ii) if the Notes are not so listed, by such method as the trustee deems fair and appropriate in accordance with DTC procedures. Notes of $2,000 principal amount or less will not be redeemed in part.
Certain Covenants
Limitation on Liens
The Indentures provide that we will not, and will not permit any of our subsidiaries to, create, incur, issue, assume or guarantee any debt secured by a Lien (other than Permitted Liens) upon any property or assets (other than deposit accounts, inventory, accounts receivable or the proceeds thereof), without making effective provision to secure all of the Notes, equally and ratably with any and all other debt secured thereby, so long as any of such other debt shall be so secured.
Limitation on Sale and Leaseback Transactions
The Indentures provide that we will not, and will not permit any subsidiary to, enter into any arrangement with any person providing for the leasing by us or any subsidiary of any property or assets that has been or is to be sold or transferred by us or such subsidiary to such person, with the intention of taking back a lease of such property or assets (a “Sale and Leaseback Transaction”) unless either:
    (1)    within 12 months after the receipt of the proceeds of the sale or transfer, we or any subsidiary apply an amount equal to the greater of the net proceeds of the sale or transfer or the fair value of such property or assets (as determined in good faith by our board of directors as of any date within 90 days prior to the date of such sale or transfer) to the prepayment or retirement (other than any mandatory prepayment or retirement) of Senior Funded Debt; or
    (2)    we or such subsidiary would be entitled, at the effective date of the sale or transfer, to incur debt secured by a Lien on such property or assets in an amount at least equal to the Attributable Debt in respect of the Sale and Leaseback Transaction, without equally and ratably securing the Notes pursuant to the covenant described under “—Limitation on Liens.”
The foregoing restriction in the paragraph above will not apply to any Sale and Leaseback Transaction (i) for a term of not more than three years including renewals, (ii) between us and a subsidiary or between subsidiaries; provided that the lessor is us or a wholly-owned subsidiary, or (iii) entered into within 270 days after the later of the acquisition or completion of construction of the subject property or assets.
Merger, Consolidation or Sale of Assets
The Indentures provide that we shall not merge, consolidate or amalgamate with or into any other person (other than a merger of a wholly-owned subsidiary into AAP) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of our property in any one transaction or series of related transactions unless:
(1)    AAP shall be the surviving person or the surviving person (if other than AAP) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia;
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    (2)    the surviving person (if other than AAP) expressly assumes, by supplemental indenture in form satisfactory to the trustee, executed and delivered to the trustee by such surviving person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of the Indentures and, if applicable, the registration rights agreement to be performed by us;
    (3)    immediately before and immediately after giving effect to such transaction or series of related transactions, no default or event of default under the Indentures shall have occurred and be continuing; and
    (4)    we shall deliver, or cause to be delivered, to the trustee, an officer’s certificate and an opinion of counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent in the applicable Indenture relating to such transaction have been complied with.
For the purposes of this covenant, the sale, transfer, assignment, lease, conveyance or other disposition of all the property of one or more of our subsidiaries, which property, if held by us instead of such subsidiaries, would constitute all or substantially all of our property on a consolidated basis, shall be deemed to be the transfer of all or substantially all of our property.
The Indentures provide that, unless the subsidiary guarantee of the applicable subsidiary guarantor is permitted to be released in connection with such transaction as described above under “—Subsidiary Guarantees,” such subsidiary guarantor shall not merge, consolidate or amalgamate with or into any other person or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its property in any one transaction or series of related transactions unless:
    (1)    such subsidiary guarantor shall be the surviving person or the surviving person (if other than such subsidiary guarantor) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation, limited partnership or limited liability company organized and existing under the laws of the United States of America, any state thereof or the District of Columbia;
    (2)    the surviving person (if other than such subsidiary guarantor) expressly assumes, by supplemental indenture in form satisfactory to the trustee, executed and delivered to the trustee by such surviving person, such subsidiary guarantor’s guarantee of the due and punctual payment of the principal of, and premium, if any, and interest on, all the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of the applicable Indenture and, if applicable, the registration rights agreement to be performed by such subsidiary guarantor;
    (3)    immediately before and immediately after giving effect to such transaction or series of related transactions, no default or event of default under the Indentures shall have occurred and be continuing; and
    (4)    we shall deliver, or cause to be delivered, to the trustee, an officer’s certificate and an opinion of counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent in the applicable Indenture relating to such transaction have been complied with.
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Certain Definitions
The following terms used in “—Certain Covenants” are defined as follows. Reference is made to the applicable Indentures for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided.
“Attributable Debt” in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value discounted at the rate of interest implicit in the terms of the lease (as determined in good faith by us) of the obligations of the lessee under such lease for net rental payments during the remaining term of the lease (including any period for which such lease has been extended or may, at our option, be extended).
“Consolidated Net Tangible Assets” means the aggregate amount of our assets (less applicable reserves and other properly deductible items) and our consolidated subsidiaries’ assets after deducting therefrom (a) all current liabilities (excluding the sum of any debt for money borrowed having a maturity of less than twelve months from the date of our most recent consolidated balance sheet but which by its terms is renewable or extendable beyond twelve months from such date at the option of the borrower and, without duplication, any current installments thereof payable within such twelve month period) and (b) all goodwill, trade names, patents, unamortized debt discount and expense and other like intangibles, all as set forth on our most recent consolidated balance sheet and computed in accordance with GAAP.
“Funded Debt” means debt which matures more than one year from the date of creation, or which is extendable or renewable at the sole option of the obligor so that it may become payable more than one year from such date or which is classified, in accordance with United States generally accepted accounting principles, as long-term debt on the consolidated balance sheet for the most-recently ended fiscal quarter (or if incurred subsequent to the date of such balance sheet, would have been so classified) of the person for which the determination is being made. Funded Debt does not include (1) obligations created pursuant to leases, (2) any debt or portion thereof maturing by its terms within one year from the time of any computation of the amount of outstanding Funded Debt unless such debt shall be extendable or renewable at the sole option of the obligor in such manner that it may become payable more than one year from such time, or (3) any debt for which money in the amount necessary for the payment or redemption of such debt is deposited in trust either at or before the maturity date thereof.
“Lien” means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, security interest, lien, encumbrance or other security arrangement of any kind or nature on or with respect to such property or assets.
“Permitted Liens” means:
    (1)    Liens (other than Liens created or imposed under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), for taxes, assessments or governmental charges or levies not yet subject to penalties for non-timely payment or Liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established (and as to which the property or assets subject to any such Lien is not yet subject to foreclosure, sale or loss on account thereof);
    (2)    statutory Liens of landlords and Liens of mechanics, materialmen, warehousemen, carriers and suppliers and other Liens imposed by law or pursuant to customary reservations or retentions of title arising in the ordinary course of business; provided that any such Liens which are material secure only
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amounts not yet due and payable or, if due and payable, are unfiled and no other action has been taken to enforce the same or are being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with GAAP have been established;
    (3)    Liens (other than Liens created or imposed under ERISA) incurred or deposits made by us and our subsidiaries in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, laws or regulations, or to secure the performance of tenders, statutory obligations, bids, leases, trade or government contracts, surety, indemnification, appeal, performance and return-of-money bonds, letters of credit, bankers acceptances and other similar obligations (exclusive of obligations for the payment of borrowed money), or as security for customs or import duties and related amounts;
    (4)    Liens in connection with attachments or judgments (including judgment or appeal bonds), provided that the judgments secured shall, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall have been discharged within 30 days after the expiration of any such stay;
    (5)    Liens securing indebtedness (including capital leases) incurred to finance the purchase price or cost of construction of property or assets (or additions, repairs, alterations or improvements thereto), provided that such Liens and the indebtedness secured thereby are incurred within twelve months of the later of acquisition or completion of construction (or addition, repair, alteration or improvement) and full operation thereof;
    (6)    Liens securing industrial revenue bonds, pollution control bonds or similar types of tax-exempt bonds;
    (7)    Liens arising from deposits with, or the giving of any form of security to, any governmental agency required as a condition to the transaction of business or exercise of any privilege, franchise or license;
    (8)    encumbrances, covenants, conditions, restrictions, easements, reservations and rights of way or zoning, building code or other restrictions, (including defects or irregularities in title and similar encumbrances) as to the use of real property, or Liens incidental to conduct of the business or to the ownership of our or our subsidiaries’ properties not securing debt that do not in the aggregate materially impair the use of said properties in the operation of our business, including our subsidiaries, taken as a whole;
    (9)    leases, licenses, subleases or sublicenses granted to others not interfering in any material respect with our business, including our subsidiaries, taken as a whole;
    (10)    Liens on property or assets at the time such property or assets is acquired by us or any of our subsidiaries;
    (11)    Liens on property or assets of any person at the time such person becomes one of our subsidiaries;
    (12)    Liens on receivables from customers sold to third parties pursuant to credit arrangements in the ordinary course of business;
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    (13)    Liens existing on the date of the applicable Indenture or any extensions, amendments, renewals, refinancings, replacements or other modifications thereto;
    (14)    Liens on any property or assets created, assumed or otherwise brought into existence in contemplation of the sale or other disposition of the underlying property or assets, whether directly or indirectly, by way of share disposition or otherwise;
    (15)    Liens securing debt of one of our subsidiaries owed to us or to another one of our subsidiaries;
    (16)    Liens in favor of the United States of America or any State thereof, or any department, agency or instrumentality or political subdivision thereof, to secure partial, progress, advance or other payments;
    (17)    Liens to secure debt of joint ventures in which we or any of our subsidiaries has an interest, to the extent such Liens are on property or assets of, or equity interests in, such joint ventures;
    (18)    Liens arising solely by virtue of any statutory or common law provisions relating to banker’s Liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depositary institution;
    (19)    Liens arising from financing statement filings regarding operating leases;
    (20)    Liens in favor of customs and revenue authorities to secure custom duties in connection with the importation of goods;
    (21)    Liens securing the financing of insurance premiums payable on insurance policies; provided, that, such Liens shall only encumber unearned premiums with respect to such insurance, interests in any state guarantee fund relating to such insurance and subject and subordinate to the rights and interests of any loss payee, loss payments which shall reduce such unearned premiums;
    (22)    Liens securing cash management obligations (that do not constitute indebtedness) in the ordinary course of business;
    (23)    Liens on any property or assets of our foreign subsidiaries securing debt of such subsidiaries (but not of our or any of our domestic subsidiaries’ debt);
    (24)    Liens securing indebtedness in an aggregate principal amount at any time outstanding not exceeding $250.0 million in respect of any arrangement under which we or any subsidiary transfers, once or on a revolving basis, without recourse (except for indemnities and representations customary for securitization transactions and except for the retention of risk in an amount and form required by applicable laws and regulations or as is customary for a similar type of transaction) involving one or more “true sale” transactions, accounts receivable or interests therein and related assets customarily transferred in connection with securitization transactions (a) to a trust, partnership, corporation, limited liability company or other entity, which transfer is funded in whole or in part, directly or indirectly, by the incurrence or issuance by the transferee or successor transferee of Indebtedness or other securities that are to receive payments from, or that represent interests in, the cash flow derived from such accounts receivable or interests therein, or (b) directly to one or more investors or other purchasers; and
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    (25)    other Liens on our property or assets and the property or assets of our subsidiaries securing debt in an aggregate principal amount (together with the aggregate amount of all Attributable Debt in respect of Sale and Leaseback Transactions entered into in reliance on this clause) not to exceed, as of any date of incurrence of such debt pursuant to this clause and after giving effect to such incurrence and the application of the proceeds therefrom, the greater of (1) $375.0 million and (2) 15% of our Consolidated Net Tangible Assets.
“Senior Funded Debt” means all Funded Debt of ours or our subsidiaries (except Funded Debt, the payment of which is subordinated to the payment of the Notes).
Events of Default
Each of the following constitutes an event of default with respect to the Notes:
(1)a default in payment of the principal amount or redemption price with respect to any Note when such amount becomes due and payable;
(2)our failure to pay interest on any Note within 30 days of when such amount becomes due and payable;
(3)our failure to comply with any of our covenants or agreements in the applicable Indenture or the Notes (other than a failure that is subject to the foregoing clause (1) or (2)) and our failure to cure (or obtain a waiver of) such default and such failure continues for 60 days after written notice is given to us as provided below;
(4)a default under any debt for money borrowed by us or any subsidiary that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25.0 million at any time that any Existing Notes remain outstanding, or $75.0 million at any time that no Existing Notes remain outstanding, or its foreign currency equivalent at the time without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by us of notice of the default by the trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding (the “cross acceleration provision”);
(5)certain events of bankruptcy, insolvency or reorganization affecting us, any subsidiary guarantor or any subsidiary that would be a significant subsidiary of AAP within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC (a “Significant Subsidiary”) (the “bankruptcy provisions”); and
(6)except as permitted by the applicable Indenture, any subsidiary guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect, or any subsidiary guarantor, or any person acting on its behalf, shall deny or disaffirm its obligation under the subsidiary guarantee.
A default under clause (3) is not an event of default until the trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding notify us of the default and we do not cure such default within the time specified after receipt of such notice. Such notice must specify the default, demand that it be remedied and state that such notice is a “Notice of Default.”
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We will deliver to the trustee, within 30 days after the occurrence thereof, written notice in the form of an officer’s or officers’ certificate (as described in the applicable Indenture) of any event that with the giving of notice or the lapse of time or both would become an event of default, its status and what action we are taking or propose to take with respect thereto.
If an event of default (other than an event of default resulting from certain events involving bankruptcy, insolvency or reorganization with respect to us or any subsidiary guarantor) shall have occurred and be continuing, the trustee or the registered holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare, by notice to us in writing (and to the trustee, if given by holders of such Notes) specifying the event of default, to be immediately due and payable the principal amount of all the Notes then outstanding, plus accrued but unpaid interest to the date of acceleration. In case an event of default resulting from certain events of bankruptcy, insolvency or reorganization with respect to us or any subsidiary guarantor shall occur, such amount with respect to all the Notes shall be due and payable immediately without any declaration or other act on the part of the trustee or the holders of the Notes. After any such acceleration, but before a judgment or decree based on acceleration is obtained by the trustee, the registered holders of a majority in aggregate principal amount of the Notes then outstanding may, under certain circumstances, rescind and annul such acceleration and waive such event of default if all events of default, other than the nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the Indenture.
Subject to the provisions of the applicable Indenture relating to the duties of the trustee, in case an event of default under the Indentures shall occur and be continuing, the trustee will be under no obligation to exercise any of its rights or powers under the applicable Indenture at the request or direction of any of the holders of the Notes, unless such holders shall have offered to the trustee indemnity or security reasonably satisfactory to it against any loss, liability or expense. Subject to such provisions for the indemnification of the trustee, the holders of a majority in aggregate principal amount of the Notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the Notes.
No holder of Notes will have any right to institute any proceeding with respect to the applicable Indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless:
(1)such holder has previously given to the trustee written notice of a continuing event of default,
(2)the registered holders of at least 25% in aggregate principal amount of the Notes then outstanding have made a written request and offered indemnity or security to the trustee reasonably satisfactory to it to institute such proceeding as trustee, and
(3)the trustee shall not have received from the registered holders of a majority in aggregate principal amount of the Notes then outstanding a written direction inconsistent with such request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of any Note for enforcement of payment of the principal of, and premium, if any, or interest on, such Note on or after the respective due dates expressed in such Note.
The Indentures provide that, if a default with respect to the applicable Notes occurs and is continuing and is known to the trustee, the trustee must mail to each holder of such Notes notice of the
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default within 90 days after it occurs. The trustee may withhold the notice if and so long as it in good faith determines that withholding notice is in the interest of the holders of such Notes.
The Indentures require us, in each case, to furnish to the trustee, within 120 days after the end of each fiscal year, a written statement of an officer regarding compliance with such Indenture. Within 30 days after the occurrence of any default or event of default, we are required to deliver to the trustee written notice in the form of an officer’s or officers’ certificate (as described in the applicable Indenture) a statement specifying its status and what actions we are taking or propose to take with respect thereto.
Legal Defeasance and Covenant Defeasance
We may terminate at any time all our obligations with respect to the Notes, which we refer to as “legal defeasance,” except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. We may also terminate at any time our obligations with respect to the Notes under other covenants described in the Indentures, and the operation of the cross acceleration provision and the bankruptcy provisions with respect to Significant Subsidiaries and subsidiary guarantors, which we refer to as “covenant defeasance.” We may exercise the legal defeasance option notwithstanding our prior exercise of the covenant defeasance option.
Modification and Waiver
Modifications and amendments of the Indentures as it relates to the applicable Notes may be made by us, the subsidiary guarantors and the trustee with the consent of the holders of at least a majority in aggregate principal amount of the outstanding Notes affected by such modification or amendment.
No such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby:
•reduce the percentage of principal amount of Notes the holders of which must consent to an amendment, modification, supplement or waiver;
•reduce the rate of or extend the time of payment for interest on any Note;
•reduce the principal amount or extend the stated maturity of any Note;
•reduce the redemption price of any Note or add redemption provisions to any Note;
•make any Note payable in money other than that stated in the applicable Indenture or the Note;
•other than in accordance with the provisions of Indentures, eliminate any existing subsidiary guarantee of the Notes;
•impair the right to receive, and to institute suit for the enforcement of, any payment with respect to the Notes; or
•make any change to the amendment and waiver provisions of the Notes.
Without the consent of any holder, we, the subsidiary guarantors and the trustee may amend the Indentures to, among other things, cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor of our or any subsidiary guarantor’s obligations under the Indentures as permitted thereunder, to provide for the issuance of additional notes in accordance with the limitations set
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forth in the applicable Indenture, to add guarantees with respect to the Notes or to make any other change that does not adversely affect the rights of any holder in any material respect.
The holders of at least a majority in principal amount of the outstanding Notes affected may waive compliance by us with certain restrictive provisions of the Indenture. The holders of at least a majority in principal amount of the outstanding Notes may waive any past default under the Indentures, except a default in the payment of principal or interest and certain covenants and provisions of such Indenture which cannot be amended without the consent of the holder of each outstanding Note.
Discharge
When (i) we deliver to the trustee all outstanding Notes (other than Notes replaced because of mutilation, loss, destruction or wrongful taking) for cancellation or (ii) all outstanding Notes have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption as described above, and we irrevocably deposit with the trustee funds sufficient to pay at maturity or upon redemption all outstanding Notes, including interest thereon, and if in either case we pay all other sums related to the Notes payable under the Indentures by us, then the Indentures will, subject to certain surviving provisions, cease to be of further effect. The trustee shall acknowledge satisfaction and discharge of the Indentures with respect to the Notes on our demand accompanied by an officer’s or officers’ certificate (as described in the applicable Indenture) and an opinion of counsel.
Governing Law
The Indentures, the Notes and the subsidiary guarantees will be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof.
Regarding the Trustee
The Indentures provide that, except during the continuance of an event of default, the trustee will perform only such duties as are specifically set forth in the Indentures. During the existence of an event of default, the trustee will exercise such rights and powers vested in it under the Indentures and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person’s own affairs.



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Exhibit 22.1

List of the Issuer and its Guarantor Subsidiaries

As of October 3, 2020, the following subsidiaries of Advance Auto Parts, Inc. (the “Issuer”) guarantee the 4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”), the 1.750% senior unsecured notes due October 1, 2027 (the “2027 Notes”) and the 3.90% senior unsecured notes due April 15, 2030 (the “2030 Notes”), each issued by the Issuer:
Entity Jurisdiction of
Incorporation or
Organization 		2023 Notes 2027 Notes 2030 Notes
Advance Auto Parts, Inc. Delaware Issuer Issuer Issuer
AAP Financial Services, Inc. Virginia Guarantor Guarantor Guarantor
Advance Auto Business Support, LLC Virginia Guarantor Guarantor Guarantor
Advance Auto Innovations, LLC Virginia Guarantor Guarantor Guarantor
Advance e-Service Solutions, Inc. Virginia Guarantor Guarantor Guarantor
Advance Patriot, Inc. Delaware Guarantor Guarantor Guarantor
Advance Stores Company, Incorporated Virginia Guarantor Guarantor Guarantor
Advance Trucking Corporation Virginia Guarantor Guarantor Guarantor
Autopart International, Inc. Massachusetts Guarantor Guarantor Guarantor
B.W.P. Distributors, Inc. New York Guarantor Guarantor Guarantor
Crossroads Global Trading Corp. Virginia Guarantor Guarantor Guarantor
Discount Auto Parts, LLC Virginia Guarantor Guarantor Guarantor
Driverside, Inc. Delaware Guarantor Guarantor Guarantor
E-Advance, LLC Virginia Guarantor Guarantor Guarantor
General Parts Distribution LLC North Carolina Guarantor Guarantor Guarantor
General Parts International, Inc. North Carolina Guarantor Guarantor Guarantor
General Parts, Inc. North Carolina Guarantor Guarantor Guarantor
Golden State Supply LLC Nevada Guarantor Guarantor Guarantor
GPI Technologies LLC Delaware Guarantor Guarantor Guarantor
Lee Holdings NC, Inc. Delaware Guarantor Guarantor Guarantor
MotoLogic, Inc. Delaware Guarantor Guarantor Guarantor
Straus-Frank Enterprises, LLC Texas Guarantor Guarantor Guarantor
Western Auto of Puerto Rico, Inc. Delaware Guarantor Guarantor Guarantor
Western Auto of St. Thomas, Inc. Delaware Guarantor Guarantor Guarantor
WORLDPAC Puerto Rico, LLC Delaware Guarantor Guarantor Guarantor
WORLDPAC, Inc. Delaware Guarantor Guarantor Guarantor
Worldwide Auto Parts, Inc. California Guarantor Guarantor Guarantor



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 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 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: November 10, 2020



/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 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 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: November 10, 2020



/s/ Jeffrey W. Shepherd
Jeffrey W. Shepherd
Executive Vice President, Chief Financial 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 Rule 13a-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report on Form 10-Q of Advance Auto Parts, Inc. for the quarterly period ended October 3, 2020 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in such Report fairly presents in all material respects the financial condition and results of operations of the Company. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying Report.

 
Date: November 10, 2020
By: 
/s/ Thomas R. Greco
Name: Thomas R. Greco
Title: President and Chief Executive Officer and Director


I, Jeffrey W. Shepherd, certify, pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report on Form 10-Q of Advance Auto Parts, Inc. for the quarterly period ended October 3, 2020 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in such Report fairly presents in all material respects the financial condition and results of operations of the Company. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying Report.


Date: November 10, 2020
By: 
/s/ Jeffrey W. Shepherd
Name: Jeffrey W. Shepherd
Title: Executive Vice President, Chief Financial Officer