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ADVANCE AUTO PARTS INC - Quarter Report: 2015 October (Form 10-Q)

Table of Contents

 

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

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 10, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission file number 001-16797
________________________

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

 Delaware
(State or other jurisdiction of
incorporation or organization)
    54-2049910
(I.R.S. Employer
Identification No.)
 
5008 Airport Road, Roanoke, Virginia 24012
(Address of Principal Executive Offices)
(Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 12, 2015, the registrant had outstanding 73,236,597 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
 



Table of Contents

 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I.  FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES 

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
October 10, 2015 and January 3, 2015
(in thousands, except per share data)
(unaudited)

 
October 10,
2015
 
January 3,
2015
 
Assets
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
105,346

 
$
104,671

 
Receivables, net
664,614

 
579,825

 
Inventories, net
4,141,562

 
3,936,955

 
Other current assets
96,863

 
119,589

 
Total current assets
5,008,385

 
4,741,040

 
Property and equipment, net of accumulated depreciation of $1,469,254 and $1,372,359
1,396,093

 
1,432,030

 
Goodwill
992,576

 
995,426

 
Intangible assets, net
702,719

 
748,125

 
Other assets, net
81,763

 
45,737

 
 
$
8,181,536

 
$
7,962,358

 
Liabilities and Stockholders' Equity
 

 
 

 
Current liabilities:
 

 
 

 
Current portion of long-term debt
$
595

 
$
582

 
Accounts payable
3,180,175

 
3,095,365

 
Accrued expenses
582,661

 
520,673

 
Other current liabilities
187,483

 
126,446

 
Total current liabilities
3,950,914

 
3,743,066

 
Long-term debt
1,293,102

 
1,636,311

 
Other long-term liabilities
524,444

 
580,069

 
Commitments and contingencies


 


 
Stockholders' equity:
 

 
 

 
Preferred stock, nonvoting, $0.0001 par value

 

 
Common stock, voting, $0.0001 par value
7

 
7

 
Additional paid-in capital
589,324

 
562,945

 
Treasury stock, at cost
(114,864
)
 
(113,044
)
 
Accumulated other comprehensive loss
(32,053
)
 
(12,337
)
 
Retained earnings
1,970,662

 
1,565,341

 
Total stockholders' equity
2,413,076

 
2,002,912

 
 
$
8,181,536

 
$
7,962,358

 

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


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Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Twelve and Forty Week Periods Ended
October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 10,
2015
 
October 4,
2014
 
October 10,
2015
 
October 4,
2014
Net sales
$
2,295,203

 
$
2,289,456

 
$
7,703,473

 
$
7,606,652

Cost of sales, including purchasing and warehousing costs
1,262,816

 
1,255,014

 
4,189,873

 
4,156,980

Gross profit
1,032,387

 
1,034,442

 
3,513,600

 
3,449,672

Selling, general and administrative expenses
826,862

 
825,284

 
2,788,498

 
2,744,039

Operating income
205,525

 
209,158

 
725,102

 
705,633

Other, net:
 

 
 

 
 
 
 
Interest expense
(14,384
)
 
(15,903
)
 
(51,599
)
 
(56,406
)
Other income (expense), net
1,276

 
398

 
(4,440
)
 
1,209

Total other, net
(13,108
)
 
(15,505
)
 
(56,039
)
 
(55,197
)
Income before provision for income taxes
192,417

 
193,653

 
669,063

 
650,436

Provision for income taxes
71,948

 
71,476

 
250,484

 
241,045

Net income
$
120,469

 
$
122,177

 
$
418,579

 
$
409,391

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.64

 
$
1.67

 
$
5.70

 
$
5.60

Diluted earnings per common share
$
1.63

 
$
1.66

 
$
5.66

 
$
5.56

Dividends declared per common share
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
73,215

 
72,955

 
73,168

 
72,913

Weighted average common shares outstanding - assuming dilution
73,763

 
73,427

 
73,695

 
73,390


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Twelve and Forty Week Periods Ended
October 10, 2015 and October 4, 2014
(in thousands)
(unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 10,
2015
 
October 4,
2014
 
October 10,
2015
 
October 4,
2014
Net income
$
120,469

 
$
122,177

 
$
418,579

 
$
409,391

Other comprehensive loss:
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs, net of $86, $89, $288 and $296 tax
(134
)
 
(138
)
 
(446
)
 
(461
)
Currency translation adjustments
811

 
(11,454
)
 
(19,270
)
 
(8,040
)
Total other comprehensive income (loss)
677

 
(11,592
)
 
(19,716
)
 
(8,501
)
Comprehensive income
$
121,146

 
$
110,585

 
$
398,863

 
$
400,890


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
For the Forty Week Period Ended
October 10, 2015
(in thousands, except per share data)
(unaudited)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock,
at cost
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance, January 3, 2015

 
$

 
74,493

 
$
7

 
$
562,945

 
1,419

 
$
(113,044
)
 
$
(12,337
)
 
$
1,565,341

 
$
2,002,912

Net income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
418,579

 
418,579

Total other comprehensive loss
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(19,716
)
 
 

 
(19,716
)
Issuance of shares upon the exercise of stock appreciation rights
 

 
 

 
121

 
 

 


 
 

 
 

 
 

 
 

 

Tax withholdings related to the exercise of stock appreciation rights
 
 
 
 
 
 
 
 
(11,713
)
 
 
 
 
 
 
 
 
 
(11,713
)
Tax benefit from share-based compensation, net
 

 
 

 
 

 
 

 
10,284

 
 

 
 

 
 

 
 

 
10,284

Restricted stock and restricted stock units vested
 

 
 

 
24

 
 

 
 

 
 

 
 

 
 

 
 

 

Share-based compensation
 

 
 

 
 

 
 

 
23,938

 
 

 
 

 
 

 
 

 
23,938

Stock issued under employee stock purchase plan
 

 
 

 
26

 
 

 
3,838

 
 

 
 

 
 

 
 

 
3,838

Repurchase of common stock
 

 
 

 
 

 
 

 
 

 
11

 
(1,820
)
 
 

 
 

 
(1,820
)
Cash dividends ($0.18 per common share)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(13,258
)
 
(13,258
)
Other
 

 
 

 
 

 
 

 
32

 
 

 
 

 
 

 
 

 
32

Balance, October 10, 2015

 
$

 
74,664

 
$
7

 
$
589,324

 
1,430

 
$
(114,864
)
 
$
(32,053
)
 
$
1,970,662

 
$
2,413,076


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


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Table of Contents

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 10, 2015 and October 4, 2014
(in thousands)
(unaudited)
 
Forty Week Periods Ended
 
October 10,
2015
 
October 4,
2014
Cash flows from operating activities:
 
 
 
Net income
$
418,579

 
$
409,391

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
207,496

 
218,615

Share-based compensation
25,941

 
15,969

Loss on property and equipment, net
9,737

 
3,504

Other
2,045

 
2,014

(Benefit) provision for deferred income taxes
(13,486
)
 
32,243

Excess tax benefit from share-based compensation
(10,291
)
 
(5,698
)
Net increase in, net of effect from acquisition of businesses:
 
 
 
Receivables, net
(86,610
)
 
(102,062
)
Inventories, net
(202,901
)
 
(227,557
)
Other assets
(16,522
)
 
(43,534
)
Net increase (decrease) in, net of effect from acquisition of businesses:
 
 
 
Accounts payable
91,590

 
209,461

Accrued expenses
93,101

 
29,103

Other liabilities
1,409

 
(1,155
)
Net cash provided by operating activities
520,088

 
540,294

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(161,232
)
 
(161,542
)
Business acquisitions, net of cash acquired
(18,893
)
 
(2,060,816
)
Proceeds from sales of property and equipment
178

 
710

Net cash used in investing activities
(179,947
)
 
(2,221,648
)
Cash flows from financing activities:
 

 
 

Increase in bank overdrafts
23,455

 
3,366

Borrowings under credit facilities
509,200

 
1,940,700

Payments on credit facilities
(852,600
)
 
(1,258,400
)
Dividends paid
(17,642
)
 
(17,561
)
Proceeds from the issuance of common stock, primarily for employee stock purchase plan
3,870

 
5,506

Tax withholdings related to the exercise of stock appreciation rights
(11,713
)
 
(4,730
)
Excess tax benefit from share-based compensation
10,291

 
5,698

Repurchase of common stock
(1,820
)
 
(839
)
Contingent consideration related to previous business acquisition

 
(10,047
)
Other
(294
)
 
(801
)
Net cash (used in) provided by financing activities
(337,253
)
 
662,892

 
 
 
 
Effect of exchange rate changes on cash
(2,213
)
 
(4,345
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
675

 
(1,022,807
)
Cash and cash equivalents, beginning of period
104,671

 
1,112,471

Cash and cash equivalents, end of period
$
105,346

 
$
89,664

 
 
 
 


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Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Forty Week Periods Ended
October 10, 2015 and October 4, 2014
(in thousands)
(unaudited)
 
Forty Week Periods Ended
 
October 10,
2015
 
October 4,
2014
Supplemental cash flow information:
 
 
 
Interest paid
$
42,477

 
$
40,266

Income tax payments
185,085

 
222,862

Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
17,350

 
21,801

Changes in other comprehensive income from post retirement benefits
(446
)
 
(461
)
 
 
 
 

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


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Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)



1.
Basis of Presentation:

The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company and include the accounts of Advance Auto Parts, Inc. ("Advance"), its wholly owned subsidiary, Advance Stores Company, Incorporated ("Advance Stores"), and its subsidiaries (collectively, the "Company"). All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted based upon the Securities and Exchange Commission ("SEC") interim reporting guidance. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for Fiscal 2014 (filed with the SEC on March 3, 2015).

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 2 to the consolidated financial statements included in the Company’s Annual Report.

The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full fiscal year. The first quarter of each of the Company's fiscal years contains 16 weeks. The Company's remaining three quarters consist of 12 weeks, with the exception of the fourth quarter of fiscal 2014 which contained 13 weeks due to the 53-week fiscal year in 2014. The Company's next 53-week fiscal year is 2020.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Acquisitions

During the forty weeks ended October 10, 2015, the Company acquired 23 stores through multiple cash transactions. The aggregate cost of the store acquisitions was $18,893, the value of which was primarily attributed to inventory, accounts receivable and goodwill. The fair value of assets and liabilities assumed are included in the balance sheet as of October 10, 2015. Proforma financial information is not provided based on materiality.

On January 2, 2014, the Company acquired General Parts International, Inc. ("GPI") in an all cash transaction. GPI, formerly a privately-held company, is a leading distributor and supplier of original equipment and aftermarket replacement products for Commercial markets operating under the Carquest and Worldpac trade names. As of the acquisition date, GPI operated 1,223 Carquest stores and 103 Worldpac branches located in 45 states and Canada and serviced approximately 1,400 independently-owned Carquest stores.

The Company acquired all of GPI's assets and liabilities as a result of the transaction. Under the terms of the agreement, the Company acquired all of the outstanding stock of GPI for a purchase price of $2,080,804 (subject to adjustment for certain closing items) consisting of $1,307,991 in cash to GPI's shareholders, the repayment of $694,301 of GPI debt and $78,512 in make-whole fees and transaction related expenses paid by the Company on GPI's behalf. The Company included the financial results of GPI in its consolidated financial statements commencing January 2, 2014.



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Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Segment and Related Information

As of October 10, 2015, the Company's operations are comprised of 5,240 stores and 118 distribution branches, which operate in the United States, Canada, Puerto Rico and the U.S. Virgin Islands primarily under the trade names “Advance Auto Parts,” "Carquest," "Autopart International" and "Worldpac." These locations offer a broad selection of brand name, original equipment manufacturer ("OEM") and proprietary automotive replacement parts, accessories, and maintenance items primarily for domestic and imported cars and light trucks. While the mix of do-it-yourself ("DIY") and do-it-for-me ("Commercial") customers varies among the four store brands, all of the locations serve customers through similar distribution channels. The Company has begun implementation of its plan to fully integrate the Carquest company-operated stores and overall operations into Advance Auto Parts by the end of fiscal 2017 and to eventually integrate the availability of all of the Company's product offerings throughout the entire chain.

The Company's Advance Auto Parts operations are comprised of five geographic areas which include the operations of the stores operating under the Advance Auto Parts, Carquest and Autopart International trade names. Each of the Advance Auto Parts geographic areas, in addition to Worldpac, are individually considered operating segments which are aggregated into one reportable segment. Effective in the first quarter of 2015, the Company expanded from three geographic areas, which previously comprised the Advance Auto Parts and Autopart International operations, to five geographic areas inclusive of the Carquest operations, such that Carquest is no longer a separate operating segment. Included in the Company's overall store operations are sales generated from its e-commerce platforms. The Company's e-commerce platforms, primarily consisting of its online websites and Commercial ordering platforms, are part of its integrated operating approach of serving its DIY and Commercial customers. The Company's online websites allow its DIY customers to pick up merchandise at a conveniently located store location or have their purchases shipped directly to them. The majority of the Company's online DIY sales are picked up at store locations. Through the Company's online ordering platforms, Commercial customers can conveniently place orders with a designated store location for delivery to their places of business or pick-up.

New Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2015-11 "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU 2015-11 requires entities to measure most inventory at the lower of cost or net recognizable value, simplifying the current requirement that inventories be measured at the lower of cost or market. The ASU will not apply to inventories that are measured using the last-in, first-out method or retail inventory method. The guidance will be effective prospectively for annual periods, and interim periods within those annual periods, that begin after December 15, 2016; earlier adoption is permitted. As the majority of the Company's inventory is accounted for under the last-in, first-out method, the adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-3 "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs." ASU 2015-3 simplifies the presentation of debt issuance costs by requiring such costs be presented as a deduction from the corresponding debt liability. In August 2015, the FASB issued ASU 2015-15 "Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" which clarifies that entities may continue to defer and present debt issuance costs associated with a line-of-credit as an asset and subsequently amortize the deferred costs ratably over the term of the arrangement. The guidance is effective for financial statements issued for reporting periods beginning after December 15, 2015 and interim periods within the reporting periods and requires retrospective presentation; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In August 2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." This new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. This ASU is effective for annual periods ending after December 15, 2016, and


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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


interim periods thereafter; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In June 2014, the FASB issued ASU 2014-12 “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period." The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015; earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." This ASU is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 will become effective during annual reporting periods beginning after December 15, 2017 and interim reporting periods during the year of adoption with public entities permitted to early adopt for reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the adoption of this guidance on the Company's consolidated financial condition, results of operations and cash flows.

In April 2014, the FASB issued ASU No. 2014-08 "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of Equity", which amends the definition of a discontinued operation in Accounting Standards Codification, or ASC, 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The new guidance changes the definition of a discontinued operation and requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The Company adopted this guidance effective January 4, 2015. The adoption of this guidance affects prospective presentation of disposals and did not have an impact on the Company's consolidated financial condition, results of operations or cash flows.

2.
Inventories, net:

Inventories are stated at the lower of cost or market. The Company used the LIFO method of accounting for approximately 89% of inventories at October 10, 2015 and 88% of inventories at January 3, 2015. Under LIFO, the Company’s cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in Fiscal 2015 and prior years. As a result of utilizing LIFO, the Company recorded a decrease to cost of sales of $46,356 and $4,172 for the forty weeks ended October 10, 2015 and October 4, 2014, respectively. The Company's overall costs to acquire inventory for the same or similar products have generally decreased historically as the Company has been able to leverage its continued growth, execution of merchandising strategies and realization of supply chain efficiencies.

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


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Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Inventory balances at October 10, 2015 and January 3, 2015 were as follows:

 
October 10,
2015
 
January 3,
2015
Inventories at FIFO, net
$
3,972,375

 
$
3,814,123

Adjustments to state inventories at LIFO
169,187

 
122,832

Inventories at LIFO, net
$
4,141,562

 
$
3,936,955


3. Exit Activities and Impairment:

Office Consolidations

In June 2014, the Company approved plans to relocate operations from its Minneapolis, Minnesota and Campbell, California offices to other existing offices of the Company, including its offices in Newark, California, Roanoke, Virginia and Raleigh, North Carolina, and to close its Minneapolis and Campbell offices. The Company also relocated various functions between its existing offices in Roanoke and Raleigh. The relocations and office closings are substantially complete as of October 10, 2015.

In connection with these relocations and office closings, the Company relocated some employees and terminated the employment of others. The Board of Directors of the Company approved this action in order to take advantage of synergies following the acquisition of GPI and to capitalize on the strength of existing locations and organizational experience. The Company estimates that it will incur restructuring costs of approximately $23,300 under these plans through the end of 2015. Substantially all of these costs are expected to be cash expenditures. This estimate includes approximately $10,700 of employee severance costs and $12,600 of relocation costs, most of which has been incurred as of October 10, 2015.

Employees receiving severance/outplacement benefits were required to render service until termination in order to receive the benefits. Therefore, the severance/outplacement benefits are recognized over the related service periods. During the twelve and forty weeks ended October 10, 2015 the Company recognized $431 and $3,459, respectively, of severance/outplacement benefits under these restructuring plans and other severance related to the acquisition of GPI. Other restructuring costs, including costs to relocate employees, are recognized in the period in which the liability is incurred. During the twelve and forty weeks ended October 10, 2015 the Company recognized $928 and $3,699, respectively, of relocation costs.

Integration of Carquest stores

The Company also approved plans in June 2014 to begin consolidating its Carquest stores acquired on January 2, 2014. As of October 10, 2015, 152 Carquest stores had been consolidated into existing Advance Auto Parts stores and 118 Carquest stores had been converted to the Advance Auto Parts format. This includes the consolidation of 54 Carquest stores and conversion of 108 Carquest stores during the forty weeks ended October 10, 2015. Plans are in place to consolidate or convert the remaining Carquest stores by the middle of 2017. In addition, the Company will continue to consolidate or convert the remaining 33 stores that were acquired with B.W.P. Distributors, Inc. ("BWP") on December 31, 2012 (which also operate under the Carquest trade name), 37 of which had been consolidated and 34 had been converted as of October 10, 2015. Three of these stores were consolidated and two stores were converted during the forty weeks ended October 10, 2015. The Company estimates that the total exit costs to be incurred as a result of consolidations and conversions during Fiscal 2015 will be approximately $8,400, consisting primarily of closed store lease obligations. The Company incurred $2,193 and $7,202 of exit costs related to the consolidations and conversions during the twelve and forty weeks ended October 10, 2015, respectively.

Contract termination costs, such as those associated with leases on closed stores, will be recognized at the cease-use date. Closed lease liabilities include the present value of the remaining lease obligations and management’s estimate of future costs of insurance, property tax and common area maintenance (reduced by the present value of estimated revenues from subleases and lease buyouts).



9

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Other Exit Activities

In August 2014, the Company approved plans to consolidate and convert its 40 Autoparts International ("AI") stores located in Florida into Advance Auto Parts stores. As of October 10, 2015, all of the AI consolidations and conversions were complete. During the forty weeks ended October 10, 2015, the Company incurred $2,700 of exit costs associated with these plans.

In July 2015, the Company approved a plan to close 50 under-performing Advance Auto Parts, Carquest and AI stores during the remainder of 2015 and to eliminate certain positions at its corporate offices. The majority of the corporate office eliminations were effective during the twelve weeks ended October 10, 2015. The Company expects to recognize approximately $6,000 related to the elimination of corporate office positions, most of which was recognized during the twelve weeks ended October 10, 2015. In November 2015, the Company approved a plan to close an additional 30 under-performing stores during 2015. The Company estimates that it will incur restructuring costs of $26,000 to $35,000 related to the 80 store closures, primarily consisting of closed store lease obligations. Substantially all of these costs are expected to be cash expenditures. The amount recognized for these store closures during the twelve weeks ended October 10, 2015 was insignificant.

Total Restructuring Liabilities

A summary of the Company’s restructuring liabilities, which are recorded in accrued expenses (current portion) and other long-term liabilities (long-term portion) in the accompanying condensed consolidated balance sheet, are presented in the following table:
 
 
Closed Store Lease Obligations
 
Severance
 
Relocation and Other Exit Costs
 
Total
 
For the twelve weeks ended October 10, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 18, 2015
 
$
22,236

 
$
2,634

 
$
804

 
$
25,674

 
Reserves established
 
3,040

 
5,948

 
928

 
9,916

 
Change in estimates
 
(1,666
)
 
(527
)
 

 
(2,193
)
 
Cash payments
 
(2,000
)
 
(1,961
)
 
(1,666
)
 
(5,627
)
 
Balance, October 10, 2015
 
$
21,610

 
$
6,094

 
$
66

 
$
27,770

 
 
 
 
 
 
 
 
 
 
 
For the forty weeks ended October 10, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 3, 2015
 
$
19,270

 
$
5,804

 
$
1,816

 
$
26,890

 
Reserves established
 
10,877

 
9,957

 
3,699

 
24,533

 
Change in estimates
 
(262
)
 
(1,509
)
 

 
(1,771
)
 
Cash payments
 
(8,275
)
 
(8,158
)
 
(5,449
)
 
(21,882
)
 
Balance, October 10, 2015
 
$
21,610

 
$
6,094

 
$
66

 
$
27,770

 



10

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


4. Goodwill and Intangible Assets:

Goodwill

The following table reflects the carrying amount of goodwill and the changes in goodwill carrying amounts.
 
October 10,
2015
 
January 3,
2015
 
 
(40 weeks ended)
 
(53 weeks ended)
 
Goodwill, beginning of period
$
995,426

 
$
199,835

 
Acquisitions
1,995

 
798,043

 
Changes in foreign currency exchange rates
(4,845
)
 
(2,452
)
 
 
 
 
 
 
Goodwill, end of period
$
992,576

 
$
995,426

 

During the forty weeks ended October 10, 2015, the Company added $1,995 of goodwill associated with the acquisition of 23 stores. During 2014, the Company acquired GPI which resulted in the addition of $797,391 of goodwill and also added $652 of goodwill associated with the acquisition of nine stores.

Intangible Assets Other Than Goodwill

In 2014, the Company recorded an increase to intangible assets of $757,453 related to the acquisition of GPI and nine stores. The increase included customer relationships of $330,293 which are being amortized over 12 years, non-competes totaling $50,695 which are being amortized over 5 years and favorable leases of $56,465 which are being amortized over the life of the respective leases at a weighted average of 4.5 years. The increase also includes indefinite-life intangibles of $320,000 from acquired brands.

Amortization expense was $12,382 and $12,947 for the twelve weeks ended October 10, 2015 and October 4, 2014, respectively. Amortization expense was $40,595 and $43,868 for the forty weeks ended October 10, 2015 and October 4, 2014, respectively. The gross carrying amounts and accumulated amortization of acquired intangible assets as of October 10, 2015 and January 3, 2015 are comprised of the following:
 
 
October 10, 2015
 
January 3, 2015
 
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
360,212

 
$
(63,829
)
 
$
296,383

 
$
362,483

 
$
(40,609
)
 
$
321,874

Acquired technology
 
8,850

 
(8,850
)
 

 
8,850

 
(8,569
)
 
281

Favorable leases
 
56,130

 
(20,762
)
 
35,368

 
56,342

 
(11,939
)
 
44,403

Non-compete and other
 
57,430

 
(22,866
)
 
34,564

 
56,780

 
(14,596
)
 
42,184

 
 
482,622

 
(116,307
)
 
366,315

 
484,455

 
(75,713
)
 
408,742

 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Brands, trademark and tradenames
 
336,404

 

 
336,404

 
339,383

 

 
339,383

 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets
 
$
819,026

 
$
(116,307
)
 
$
702,719

 
$
823,838

 
$
(75,713
)
 
$
748,125

 


11

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Future Amortization Expense

The table below shows expected amortization expense for the next five years for acquired intangible assets recorded as of October 10, 2015:

Fiscal Year
 
Amount
Remainder of 2015
 
$
11,342

2016
 
48,166

2017
 
45,812

2018
 
42,801

2019
 
32,041

Thereafter
 
186,153


5. Receivables, net:

Receivables consist of the following:
 
 
October 10,
2015
 
January 3,
2015
Trade
 
$
435,964

 
$
360,922

Vendor
 
236,852

 
222,476

Other
 
16,111

 
12,579

Total receivables
 
688,927

 
595,977

Less: Allowance for doubtful accounts
 
(24,313
)
 
(16,152
)
Receivables, net
 
$
664,614

 
$
579,825




12

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


6. Long-term Debt:

Long-term debt consists of the following:
 
October 10,
2015
 
January 3,
2015
 
Revolving facility at variable interest rates (1.35% and 2.45% at October 10, 2015 and January 3, 2015, respectively, due December 5, 2018)
$
60,000

 
$
93,400

 
Term loan at variable interest rates (1.50% and 1.72% at October 10, 2015 and January 3, 2015, respectively) due January 2, 2019
180,000

 
490,000

 
5.75% Senior Unsecured Notes (net of unamortized discount of $653 and $746 at October 10, 2015 and January 3, 2015, respectively) due May 1, 2020
299,347

 
299,254

 
4.50% Senior Unsecured Notes (net of unamortized discount of $65 and $72 at October 10, 2015 and January 3, 2015, respectively) due January 15, 2022
299,935

 
299,928

 
4.50% Senior Unsecured Notes (net of unamortized discount of $1,180 and $1,271 at October 10, 2015 and January 3, 2015, respectively) due December 1, 2023
448,820

 
448,729

 
Other
5,595

 
5,582

 
 
1,293,697

 
1,636,893

 
Less: Current portion of long-term debt
(595
)
 
(582
)
 
Long-term debt, excluding current portion
$
1,293,102

 
$
1,636,311

 
 
Bank Debt

The Company has a credit agreement (the “2013 Credit Agreement”) which provides a $700,000 unsecured term loan and a $1,000,000 unsecured revolving credit facility with Advance Stores, as Borrower, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. The revolving credit facility also provides for the issuance of letters of credit with a sub-limit of $300,000 and swingline loans in an amount not to exceed $50,000. The Company may request, subject to agreement by one or more lenders, that the total revolving commitment be increased by an amount not to exceed $250,000 by those respective lenders (up to a total commitment of $1,250,000) during the term of the 2013 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving balance are permitted in whole or in part, at the Company’s option, in minimum principal amounts as specified in the 2013 Credit Agreement. Under the terms of the 2013 Credit Agreement the revolving credit facility terminates in December 2018 and the term loan matures in January 2019.

As of October 10, 2015, under the 2013 Credit Agreement, the Company had outstanding borrowings of $60,000 under the revolver and $180,000 under the term loan. As of October 10, 2015, the Company also had letters of credit outstanding of $118,622, which reduced the availability under the revolver to $821,378. The letters of credit generally have a term of one year or less and primarily serve as collateral for the Company’s self-insurance policies.

The interest rate on borrowings under the revolving credit facility is based, at the Company’s option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.10% and 0.10% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. A facility fee is charged on the total amount of the revolving credit facility, payable in arrears. The current facility fee rate is 0.15% per annum. Under the terms of the 2013 Credit Agreement, the interest rate and facility fee are subject to change based on the Company’s credit rating.

The interest rate on the term loan is based, at the Company’s option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. The current margin is 1.25% and 0.25% per annum for the adjusted LIBOR and alternate base rate borrowings, respectively. Under the terms of the term loan, the interest rate is subject to change based on the Company’s credit rating.



13

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


The 2013 Credit Agreement contains customary covenants restricting the ability of: (a) subsidiaries of Advance Stores to, among other things, create, incur or assume additional debt; (b) Advance Stores and its subsidiaries to, among other things, (i) incur liens, (ii) make loans and investments, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (c) Advance, Advance Stores and their subsidiaries to, among other things (i) engage in certain mergers, acquisitions, asset sales and liquidations, (ii) enter into certain hedging arrangements, (iii) enter into restrictive agreements limiting its ability to incur liens on any of its property or assets, pay distributions, repay loans, or guarantee indebtedness of its subsidiaries, and (iv) engage in sale-leaseback transactions; and (d) Advance, among other things, to change its holding company status. Advance and Advance Stores are required to comply with financial covenants with respect to a maximum leverage ratio and a minimum consolidated coverage ratio. The 2013 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults to Advance Stores’ other material indebtedness. The Company was in compliance with its covenants with respect to the 2013 Credit Agreement as of October 10, 2015.

Senior Unsecured Notes

The Company's 4.50% senior unsecured notes were issued in December 2013 at 99.69% of the principal amount of $450,000 and are due December 1, 2023 (the “2023 Notes”). The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year. The Company's 4.50% senior unsecured notes were issued in January 2012 at 99.968% of the principal amount of $300,000 and are due January 15, 2022 (the “2022 Notes”). 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. The Company’s 5.75% senior unsecured notes were issued in April 2010 at 99.587% of the principal amount of $300,000 and are due May 1, 2020 (the “2020 Notes” or collectively with the 2023 Notes and the 2022 Notes, “the Notes”). The 2020 Notes bear interest at a rate of 5.75% per year payable semi-annually in arrears on May 1 and November 1 of each year. Advance served as the issuer of the Notes with certain of Advance's domestic subsidiaries currently serving as subsidiary guarantors. The terms of the Notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among the Company, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.

The Company may redeem some or all of the Notes at any time or from time to time, at the redemption price described in the Indenture. In addition, in the event of a Change of Control Triggering Event (as defined in the Indenture for the Notes), the Company will be required to offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. The Notes are currently fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by each of the subsidiary guarantors. The Company will be permitted to release guarantees without the consent of holders of the Notes under the circumstances described in the Indenture: (i) upon the release of the guarantee of the Company’s other debt that resulted in the affected subsidiary becoming a guarantor of this debt; (ii) upon the sale or other disposition of all or substantially all of the stock or assets of the subsidiary guarantor; or (iii) upon the Company’s exercise of its legal or covenant defeasance option.

The Indenture contains customary provisions for events of default including for: (i) failure to pay principal or interest when due and payable; (ii) failure to comply with covenants or agreements in the Indenture or the Notes and failure to cure or obtain a waiver of such default upon notice; (iii) a default under any debt for money borrowed by the Company or any of its subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25,000 without such debt having been discharged or acceleration having been rescinded or annulled within 10 days after receipt by the Company of notice of the default by the Trustee or holders of not less than 25% in aggregate principal amount of the Notes then outstanding; and (iv) events of bankruptcy, insolvency or reorganization affecting the Company and certain of its subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indenture also contains covenants limiting the ability of the Company and its subsidiaries to incur debt secured by liens and to enter into sale and lease-back transactions.

Debt Guarantees

The Company is a guarantor of loans made by banks to various independently-owned Carquest stores that are customers of the Company ("Independents") totaling $28,764 as of October 10, 2015. The Company has concluded that some of these


14

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


guarantees meet the definition of a variable interest in a variable interest entity. However, the Company does not have the power to direct the activities that most significantly affect the economic performance of the Independents and therefore is not the primary beneficiary of these stores. Upon entering into a relationship with certain Independents, the Company guaranteed the debt of those stores to aid in the procurement of business loans. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized in these agreements is $68,498 as of October 10, 2015. The Company believes that the likelihood of performance under these guarantees is remote, and any fair value attributable to these guarantees would be very minimal.

7. Fair Value Measurements:
 
The Company’s financial assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of these assets or liabilities. These levels are:

Level 1 – Unadjusted quoted prices that are available in active markets for identical assets or liabilities at the measurement date.
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities at the measurement date, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are less active, and inputs other than quoted prices that are observable for the asset or liability or corroborated by other observable market data.
Level 3 – Unobservable inputs for assets or liabilities that are not able to be corroborated by observable market data and reflect the use of a reporting entity’s own assumptions. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The fair value hierarchy requires the use of observable market data when available. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

During the forty weeks ended October 10, 2015, the Company had no significant assets or liabilities that were measured at fair value on a recurring basis.

Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). During the twelve and forty weeks ended October 10, 2015, the Company recorded impairment charges of $2,744 and $8,735, respectively, on various store and corporate assets. The remaining fair value of these assets was not significant.

Fair Value of Financial Assets and Liabilities

The carrying amount of the Company’s cash and cash equivalents, accounts receivable, bank overdrafts, accounts payable, accrued expenses and the current portion of long term debt approximate their fair values due to the relatively short term nature of these instruments. The fair value of the Company’s senior unsecured notes was determined using Level 2 inputs based on quoted market prices, and the Company believes that the carrying value of its other long-term debt and certain long-term liabilities approximate fair value. The carrying value and fair value of the Company's long-term debt as of October 10, 2015 and January 3, 2015, respectively, are as follows:


15

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


 
October 10,
2015
 
January 3,
2015
 
Carrying Value
$
1,293,102

 
$
1,636,311

 
Fair Value
$
1,361,000

 
$
1,728,000

 
 
8. Stock Repurchases:

The Company’s stock repurchase program allows it to repurchase its common stock on the open market or in privately negotiated transactions from time to time in accordance with the requirements of the SEC. The Company's $500,000 stock repurchase program in place as of October 10, 2015 was authorized by its Board of Directors on May 14, 2012.

During the twelve and forty week periods ended October 10, 2015 the Company repurchased no shares of its common stock under its stock repurchase program. The Company had $415,092 remaining under its stock repurchase program as of October 10, 2015.

The Company repurchased an insignificant number of shares of its common stock at an aggregate cost of $86, or an average price of $183.62 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock and restricted stock units during the twelve weeks ended October 10, 2015. The Company repurchased 11 shares of its common stock at an aggregate cost of $1,820, or an average price of $159.03 per share, in connection with the net settlement of shares issued as a result of the vesting of restricted stock and restricted stock units during the forty weeks ended October 10, 2015.

9. Earnings per Share:

Certain of the Company’s shares granted to Team Members in the form of restricted stock and restricted stock units are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the twelve week periods ended October 10, 2015 and October 4, 2014, earnings of $425 and $392, respectively, were allocated to the participating securities. For the forty week periods ended October 10, 2015 and October 4, 2014, earnings of $1,503 and $1,282, respectively, were allocated to the participating securities.

Diluted earnings per share are calculated by including the effect of dilutive securities. Share-based awards to purchase approximately 1 and 2 shares of common stock that had an exercise price in excess of the average market price of the common stock during the twelve week periods ended October 10, 2015 and October 4, 2014, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive. Share-based awards to purchase approximately 1 and 9 shares of common stock that had an exercise price in excess of the average market price of the common stock during the forty week periods ended October 10, 2015 and October 4, 2014, respectively, were not included in the calculation of diluted earnings per share because they were anti-dilutive.



16

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


The following table illustrates the computation of basic and diluted earnings per share for the twelve and forty week periods ended October 10, 2015 and October 4, 2014, respectively: 
 
Twelve Weeks Ended
 
Forty Weeks Ended
 
October 10,
2015
 
October 4,
2014
 
October 10,
2015
 
October 4,
2014
Numerator
 
 
 
 
 
 
 
Net income
$
120,469

 
$
122,177

 
$
418,579

 
$
409,391

Participating securities' share in earnings
(425
)
 
(392
)
 
(1,503
)
 
(1,282
)
Net income applicable to common shares
$
120,044

 
$
121,785

 
$
417,076

 
$
408,109

Denominator
 
 
 
 
 

 
 
Basic weighted average common shares
73,215

 
72,955

 
73,168

 
72,913

Dilutive impact of share-based awards
548

 
472

 
527

 
477

Diluted weighted average common shares
73,763

 
73,427

 
73,695

 
73,390

 
 
 
 
 
 
 
 
Basic earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.64

 
$
1.67

 
$
5.70

 
$
5.60

 
 
 
 
 
 
 
 
Diluted earnings per common share
 

 
 

 
 
 
 
Net income applicable to common stockholders
$
1.63

 
$
1.66

 
$
5.66

 
$
5.56


10. Warranty Liabilities:

The following table presents changes in the Company’s warranty reserves:
 
October 10,
2015
 
January 3,
2015
 
(40 weeks ended)
 
(53 weeks ended)
Warranty reserve, beginning of period
$
47,972

 
$
39,512

Reserves acquired with GPI

 
4,490

Additions to warranty reserves
35,820

 
52,306

Reserves utilized
(36,738
)
 
(48,336
)
 
 
 
 
Warranty reserve, end of period
$
47,054

 
$
47,972

 
The Company’s warranty liabilities are included in Accrued expenses in its condensed consolidated balance sheets.
 


17

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


11. Condensed Consolidating Financial Statements:

Certain 100% wholly-owned domestic subsidiaries of Advance, including its Material Subsidiaries (as defined in the 2013 Credit Agreement) serve as guarantors of Advance's senior unsecured notes ("Guarantor Subsidiaries"). The subsidiary guarantees related to Advance's senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of Advance to obtain funds from its Guarantor Subsidiaries. Certain of Advance's wholly-owned subsidiaries, including all of its foreign subsidiaries, do not serve as guarantors of Advance's senior unsecured notes ("Non-Guarantor Subsidiaries"). The Non-Guarantor Subsidiaries do not qualify as minor as defined by SEC regulations. Accordingly, the Company presents below the condensed consolidating financial information for the Guarantor Subsidiaries and Non-Guarantor Subsidiaries. Investments in subsidiaries of the Company are required to be presented under the equity method, even though all such subsidiaries meet the requirements to be consolidated under GAAP.

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, and cash flows of (i) Advance, (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries, and (iv) the eliminations necessary to arrive at consolidated information for the Company. The statement of operations eliminations relate primarily to the sale of inventory from a Non-Guarantor Subsidiary to a Guarantor Subsidiary. The balance sheet eliminations relate primarily to the elimination of intercompany receivables and payables and subsidiary investment accounts.

The following tables present condensed consolidating balance sheets as of October 10, 2015 and January 3, 2015 and condensed consolidating statements of operations, comprehensive income and cash flows for the twelve and forty weeks ended October 10, 2015 and October 4, 2014, and should be read in conjunction with the condensed consolidated financial statements herein.




18

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Balance Sheets
As of October 10, 2015
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
9

 
$
72,070

 
$
33,276

 
$
(9
)
 
$
105,346

Receivables, net

 
625,236

 
39,378

 

 
664,614

Inventories, net

 
3,971,213

 
170,349

 

 
4,141,562

Other current assets
2,390

 
94,710

 
1,761

 
(1,998
)
 
96,863

Total current assets
2,399

 
4,763,229

 
244,764

 
(2,007
)
 
5,008,385

Property and equipment, net of accumulated depreciation
160

 
1,386,074

 
9,859

 

 
1,396,093

Goodwill

 
943,319

 
49,257

 

 
992,576

Intangible assets, net

 
652,404

 
50,315

 

 
702,719

Other assets, net
13,483

 
74,131

 
802

 
(6,653
)
 
81,763

Investment in subsidiaries
2,473,182

 
303,741

 

 
(2,776,923
)
 

Intercompany note receivable
1,048,102

 

 

 
(1,048,102
)
 

Due from intercompany, net

 

 
300,606

 
(300,606
)
 

 
$
3,537,326

 
$
8,122,898

 
$
655,603

 
$
(4,134,291
)
 
$
8,181,536

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$

 
$
595

 
$

 
$

 
$
595

Accounts payable
24

 
2,878,701

 
301,450

 

 
3,180,175

Accrued expenses
2,231

 
559,577

 
21,785

 
(932
)
 
582,661

Other current liabilities

 
172,523

 
16,035

 
(1,075
)
 
187,483

Total current liabilities
2,255

 
3,611,396

 
339,270

 
(2,007
)
 
3,950,914

Long-term debt
1,048,102

 
245,000

 

 

 
1,293,102

Other long-term liabilities

 
518,505

 
12,592

 
(6,653
)
 
524,444

Intercompany note payable

 
1,048,102

 

 
(1,048,102
)
 

Due to intercompany, net
73,893

 
226,713

 

 
(300,606
)
 

Commitments and contingencies

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Stockholders' equity
2,413,076

 
2,473,182

 
303,741

 
(2,776,923
)
 
2,413,076

 
$
3,537,326

 
$
8,122,898

 
$
655,603

 
$
(4,134,291
)
 
$
8,181,536




19

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Balance Sheets
As of January 3, 2015
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
9

 
$
65,345

 
$
39,326

 
$
(9
)
 
$
104,671

Receivables, net

 
549,151

 
30,674

 

 
579,825

Inventories, net

 
3,771,816

 
165,139

 

 
3,936,955

Other current assets
4,102

 
113,003

 
3,383

 
(899
)
 
119,589

Total current assets
4,111

 
4,499,315

 
238,522

 
(908
)
 
4,741,040

Property and equipment, net of accumulated depreciation
2

 
1,421,325

 
10,703

 

 
1,432,030

Goodwill

 
940,817

 
54,609

 

 
995,426

Intangible assets, net

 
689,745

 
58,380

 

 
748,125

Other assets, net
12,963

 
37,377

 
683

 
(5,286
)
 
45,737

Investment in subsidiaries
2,057,761

 
280,014

 

 
(2,337,775
)
 

Intercompany note receivable
1,047,911

 

 

 
(1,047,911
)
 

Due from intercompany, net

 

 
211,908

 
(211,908
)
 

 
$
3,122,748

 
$
7,868,593

 
$
574,805

 
$
(3,603,788
)
 
$
7,962,358

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$

 
$
582

 
$

 
$

 
$
582

Accounts payable

 
2,845,043

 
250,322

 

 
3,095,365

Accrued expenses
4,884

 
498,505

 
17,284

 

 
520,673

Other current liabilities

 
115,497

 
11,857

 
(908
)
 
126,446

Total current liabilities
4,884

 
3,459,627

 
279,463

 
(908
)
 
3,743,066

Long-term debt
1,047,911

 
588,400

 

 

 
1,636,311

Other long-term liabilities

 
570,027

 
15,328

 
(5,286
)
 
580,069

Intercompany note payable

 
1,047,911

 

 
(1,047,911
)
 

Due to intercompany, net
67,041

 
144,867

 

 
(211,908
)
 

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity
2,002,912

 
2,057,761

 
280,014

 
(2,337,775
)
 
2,002,912

 
$
3,122,748

 
$
7,868,593

 
$
574,805

 
$
(3,603,788
)
 
$
7,962,358







20

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Statements of Operations
For the Twelve weeks ended October 10, 2015
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,223,582

 
$
132,404

 
$
(60,783
)
 
$
2,295,203

Cost of sales, including purchasing and warehousing costs

 
1,226,663

 
96,936

 
(60,783
)
 
1,262,816

Gross profit

 
996,919

 
35,468

 

 
1,032,387

Selling, general and administrative expenses
4,269

 
814,492

 
21,017

 
(12,916
)
 
826,862

Operating (loss) income
(4,269
)
 
182,427

 
14,451

 
12,916

 
205,525

Other, net:
 
 
 
 
 
 
 
 
 
Interest expense
(11,929
)
 
(2,478
)
 
23

 

 
(14,384
)
Other income (expense), net
16,243

 
(3,843
)
 
1,792

 
(12,916
)
 
1,276

Total other, net
4,314

 
(6,321
)
 
1,815

 
(12,916
)
 
(13,108
)
Income before provision for income taxes
45

 
176,106

 
16,266

 

 
192,417

Provision for income taxes
110

 
68,435

 
3,403

 

 
71,948

(Loss) Income before equity in earnings of subsidiaries
(65
)
 
107,671

 
12,863

 

 
120,469

Equity in earnings of subsidiaries
120,534

 
12,863

 

 
(133,397
)
 

Net income
$
120,469

 
$
120,534

 
$
12,863

 
$
(133,397
)
 
$
120,469


Condensed Consolidating Statements of Operations
For the Twelve weeks ended October 4, 2014
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,210,946

 
$
128,949

 
$
(50,439
)
 
$
2,289,456

Cost of sales, including purchasing and warehousing costs

 
1,215,938

 
89,515

 
(50,439
)
 
1,255,014

Gross profit

 
995,008

 
39,434

 

 
1,034,442

Selling, general and administrative expenses
2,972

 
809,372

 
25,522

 
(12,582
)
 
825,284

Operating (loss) income
(2,972
)
 
185,636

 
13,912

 
12,582

 
209,158

Other, net:
 
 
 
 
 
 
 
 
 
Interest expense
(11,926
)
 
(3,974
)
 
(3
)
 

 
(15,903
)
Other income (expense), net
14,858

 
(2,412
)
 
534

 
(12,582
)
 
398

Total other, net
2,932

 
(6,386
)
 
531

 
(12,582
)
 
(15,505
)
(Loss) income before provision for income taxes
(40
)
 
179,250

 
14,443

 

 
193,653

(Benefit) provision for income taxes
(35
)
 
68,585

 
2,926

 

 
71,476

(Loss) Income before equity in earnings of subsidiaries
(5
)
 
110,665

 
11,517

 

 
122,177

Equity in earnings of subsidiaries
122,182

 
11,517

 

 
(133,699
)
 

Net income
$
122,177

 
$
122,182

 
$
11,517

 
$
(133,699
)
 
$
122,177




21

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Statements of Operations
For the Forty weeks ended October 10, 2015
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
7,466,695

 
$
465,035

 
$
(228,257
)
 
$
7,703,473

Cost of sales, including purchasing and warehousing costs

 
4,081,261

 
336,869

 
(228,257
)
 
4,189,873

Gross profit

 
3,385,434

 
128,166

 

 
3,513,600

Selling, general and administrative expenses
15,377

 
2,744,555

 
72,981

 
(44,415
)
 
2,788,498

Operating (loss) income
(15,377
)
 
640,879

 
55,185

 
44,415

 
725,102

Other, net:
 
 
 
 
 
 
 
 
 
Interest expense
(40,280
)
 
(11,481
)
 
162

 

 
(51,599
)
Other income (expense), net
55,886

 
(11,077
)
 
(4,834
)
 
(44,415
)
 
(4,440
)
Total other, net
15,606

 
(22,558
)
 
(4,672
)
 
(44,415
)
 
(56,039
)
Income before provision for income taxes
229

 
618,321

 
50,513

 

 
669,063

Provision for income taxes
564

 
241,885

 
8,035

 

 
250,484

(Loss) Income before equity in earnings of subsidiaries
(335
)
 
376,436

 
42,478

 

 
418,579

Equity in earnings of subsidiaries
418,914

 
42,478

 

 
(461,392
)
 

Net income
$
418,579

 
$
418,914

 
$
42,478

 
$
(461,392
)
 
$
418,579


Condensed Consolidating Statements of Operations
For the Forty weeks ended October 4, 2014
 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
7,356,764

 
$
411,256

 
$
(161,368
)
 
$
7,606,652

Cost of sales, including purchasing and warehousing costs

 
4,030,531

 
287,817

 
(161,368
)
 
4,156,980

Gross profit

 
3,326,233

 
123,439

 

 
3,449,672

Selling, general and administrative expenses
10,936

 
2,695,012

 
80,638

 
(42,547
)
 
2,744,039

Operating (loss) income
(10,936
)
 
631,221

 
42,801

 
42,547

 
705,633

Other, net:
 
 
 
 
 
 
 
 
 
Interest expense
(40,023
)
 
(16,219
)
 
(164
)
 

 
(56,406
)
Other income (expense), net
51,005

 
(6,836
)
 
(413
)
 
(42,547
)
 
1,209

Total other, net
10,982

 
(23,055
)
 
(577
)
 
(42,547
)
 
(55,197
)
Income before provision for income taxes
46

 
608,166

 
42,224

 

 
650,436

Provision for income taxes
73

 
232,489

 
8,483

 

 
241,045

(Loss) Income before equity in earnings of subsidiaries
(27
)
 
375,677

 
33,741

 

 
409,391

Equity in earnings of subsidiaries
409,418

 
33,741

 

 
(443,159
)
 

Net income
$
409,391

 
$
409,418

 
$
33,741

 
$
(443,159
)
 
$
409,391




22

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Statements of Comprehensive Income
For the Twelve Weeks ended October 10, 2015

 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
120,469

 
$
120,534

 
$
12,863

 
$
(133,397
)
 
$
120,469

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs

 
(134
)
 

 

 
(134
)
Currency translation adjustments

 

 
811

 

 
811

Equity in other comprehensive income of subsidiaries
677

 
811

 

 
(1,488
)
 

Other comprehensive income
677

 
677

 
811

 
(1,488
)
 
677

Comprehensive income
$
121,146

 
$
121,211

 
$
13,674

 
$
(134,885
)
 
$
121,146


Condensed Consolidating Statements of Comprehensive Income
For the Twelve Weeks ended October 4, 2014

 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
122,177

 
$
122,182

 
$
11,517

 
$
(133,699
)
 
$
122,177

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs

 
(138
)
 

 

 
(138
)
Currency translation adjustments

 

 
(11,454
)
 

 
(11,454
)
Equity in other comprehensive loss of subsidiaries
(11,592
)
 
(11,454
)
 

 
23,046

 

Other comprehensive loss
(11,592
)
 
(11,592
)
 
(11,454
)
 
23,046

 
(11,592
)
Comprehensive income
$
110,585

 
$
110,590

 
$
63

 
$
(110,653
)
 
$
110,585




23

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Statements of Comprehensive Income
For the Forty Weeks ended October 10, 2015

 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
418,579

 
$
418,914

 
$
42,478

 
$
(461,392
)
 
$
418,579

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs

 
(446
)
 

 

 
(446
)
Currency translation adjustments

 

 
(19,270
)
 

 
(19,270
)
Equity in other comprehensive loss of subsidiaries
(19,716
)
 
(19,270
)
 

 
38,986

 

Other comprehensive loss
(19,716
)
 
(19,716
)
 
(19,270
)
 
38,986

 
(19,716
)
Comprehensive income
$
398,863

 
$
399,198

 
$
23,208

 
$
(422,406
)
 
$
398,863



Condensed Consolidating Statements of Comprehensive Income
For the Forty Weeks ended October 4, 2014

 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
409,391

 
$
409,418

 
$
33,741

 
$
(443,159
)
 
$
409,391

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs

 
(461
)
 

 

 
(461
)
Currency translation adjustments

 

 
(8,040
)
 

 
(8,040
)
Equity in other comprehensive loss of subsidiaries
(8,501
)
 
(8,040
)
 

 
16,541

 

Other comprehensive loss
(8,501
)
 
(8,501
)
 
(8,040
)
 
16,541

 
(8,501
)
Comprehensive income
$
400,890

 
$
400,917

 
$
25,701

 
$
(426,618
)
 
$
400,890





24

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)



Condensed Consolidating Statements of Cash Flows
For the Forty weeks ended October 10, 2015

 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$

 
$
526,749

 
$
(6,661
)
 
$

 
$
520,088

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(159,442
)
 
(1,790
)
 

 
(161,232
)
Business acquisitions, net of cash acquired

 
(18,583
)
 
(310
)
 

 
(18,893
)
Proceeds from sales of property and equipment

 
174

 
4

 

 
178

Net cash used in investing activities

 
(177,851
)
 
(2,096
)
 

 
(179,947
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Increase in bank overdrafts

 
18,535

 
4,920

 

 
23,455

Borrowings under credit facilities

 
509,200

 

 

 
509,200

Payments on credit facilities

 
(852,600
)
 

 

 
(852,600
)
Dividends paid

 
(17,642
)
 

 

 
(17,642
)
Proceeds from the issuance of common stock, primarily for employee stock purchase plan

 
3,870

 

 

 
3,870

Tax withholdings related to the exercise of stock appreciation rights

 
(11,713
)
 

 

 
(11,713
)
Excess tax benefit from share-based compensation

 
10,291

 

 

 
10,291

Repurchase of common stock

 
(1,820
)
 

 

 
(1,820
)
Other

 
(294
)
 

 

 
(294
)
Net cash (used in) provided by financing activities

 
(342,173
)
 
4,920

 

 
(337,253
)
Effect of exchange rate changes on cash

 

 
(2,213
)
 

 
(2,213
)
Net increase (decrease) in cash and cash equivalents

 
6,725

 
(6,050
)
 

 
675

Cash and cash equivalents, beginning of period
9

 
65,345

 
39,326

 
(9
)
 
104,671

Cash and cash equivalents, end of period
$
9

 
$
72,070

 
$
33,276

 
$
(9
)
 
$
105,346




25

Table of Contents
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
For the Twelve and Forty Week Periods Ended October 10, 2015 and October 4, 2014
(in thousands, except per share data)
(unaudited)


Condensed Consolidating Statements of Cash Flows
For the Forty weeks ended October 4, 2014

 
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating activities
$

 
$
521,116

 
$
19,178

 
$

 
$
540,294

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(159,621
)
 
(1,921
)
 

 
(161,542
)
Business acquisitions, net of cash acquired

 
(2,059,986
)
 
(830
)
 

 
(2,060,816
)
Proceeds from sales of property and equipment

 
692

 
18

 

 
710

Net cash used in investing activities

 
(2,218,915
)
 
(2,733
)
 

 
(2,221,648
)
Cash flows from financing activities:
 
 
 
 
 
 

 
 
Increase in bank overdrafts

 
3,375

 

 
(9
)
 
3,366

Borrowings under credit facilities

 
1,940,700

 

 

 
1,940,700

Payments on credit facilities

 
(1,258,400
)
 

 

 
(1,258,400
)
Dividends paid

 
(17,561
)
 

 

 
(17,561
)
Proceeds from the issuance of common stock, primarily for employee stock purchase plan

 
5,506

 

 

 
5,506

Tax withholdings related to the exercise of stock appreciation rights

 
(4,730
)
 

 

 
(4,730
)
Excess tax benefit from share-based compensation

 
5,698

 

 

 
5,698

Repurchase of common stock

 
(839
)
 

 

 
(839
)
Contingent consideration related to previous business acquisition

 
(10,047
)
 

 

 
(10,047
)
Other

 
(801
)
 

 

 
(801
)
Net cash provided by financing activities

 
662,901

 

 
(9
)
 
662,892

Effect of exchange rate changes on cash

 

 
(4,345
)
 

 
(4,345
)
Net (decrease) increase in cash and cash equivalents

 
(1,034,898
)
 
12,100

 
(9
)
 
(1,022,807
)
Cash and cash equivalents, beginning of period
9

 
1,106,766

 
5,696

 

 
1,112,471

Cash and cash equivalents, end of period
$
9

 
$
71,868

 
$
17,796

 
$
(9
)
 
$
89,664




26

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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 our unaudited condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report. Our first quarter consists of 16 weeks divided into four equal periods. Our remaining three quarters consist of 12 weeks with each quarter divided into three equal periods, with the exception of the fourth quarter of fiscal 2014 which contained 13 weeks due to our 53-week fiscal year in 2014. Our next 53-week fiscal year is 2020. Unless the context otherwise requires, "Advance," "we," "us," "our," and similar terms refer to Advance Auto Parts, Inc., its predecessor, its subsidiaries and their respective operations.

Certain statements in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements are usually identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “projection,” “should,” “strategy,” “will,” or similar expressions. We intend for any forward-looking statements to be covered by, and we claim the protection under, the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgments, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available.

Although we believe that our plans, intentions and expectations as reflected in or suggested by any forward-looking statements are reasonable, we do not guarantee or give assurance that such plans, intentions or expectations will be achieved. Actual results may differ materially from our anticipated results described or implied in our forward-looking statements, and such differences may be due to a variety of factors. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.

Listed below and discussed in our Annual Report on Form 10-K for the year ended January 3, 2015 (filed with the Securities and Exchange Commission, or SEC, on March 3, 2015), which we refer to as our 2014 Form 10-K, are some important risks, uncertainties and contingencies which could cause our actual results, performance or achievements to be materially different from any forward-looking statements made or implied in this report. These include, but are not limited to, the following:
 
a decrease in demand for our products;
competitive pricing and other competitive pressures;
the risk that the anticipated benefits of the acquisition of General Parts International, Inc. (“GPI”), including synergies, may not be fully realized or may take longer to realize than expected, that we may experience difficulty integrating GPI’s operations into our operations, or that management's attention may be diverted from our other businesses in association with the acquisition of GPI;
the possibility that the acquisition of GPI may not advance our business strategy or prove to be an accretive investment or may impact third-party relationships, including customers, wholesalers, independently-owned and jobber stores and suppliers;
the risk that the additional indebtedness from the new financing agreements in association with the acquisition of GPI may limit our operating flexibility or otherwise strain our liquidity and financial condition;
the risk that we may experience difficulty retaining key GPI employees;
our ability to implement our business strategy;
our ability to expand our business, including the location of available and suitable real estate for new store locations, the risk that sales cannibalization will occur or become more significant as we increase our presence in existing markets, the integration of any acquired businesses and the continued increase in supply chain capacity and efficiency;
our dependence on our suppliers to provide us with products that comply with safety and quality standards;
the risk that we may experience difficulty in successfully implementing announced leadership changes; the ability of the persons appointed to lead and provide results in their new roles; potential disruption to our business resulting from announced leadership changes; the impact of announced leadership changes on our relationships with customers, suppliers and other business partners; and our ability to attract, develop and retain executives and other employees, or Team Members;


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the potential for fluctuations in the market price of our common stock and the resulting exposure to securities class action litigations;
deterioration in general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, higher tax rates or uncertain credit markets;
regulatory and legal risks, including being named as a defendant in administrative investigations or litigation, and the incurrence of legal fees and costs, the payment of fines or the payment of sums to settle litigation cases or administrative investigations or proceedings;
a security breach or other cyber security incident;
business interruptions due to the occurrence of natural disasters, extended periods of unfavorable weather, computer system malfunction, wars or acts of terrorism; and
the impact of global climate change or legal and regulatory responses to such change.

We assume no obligations to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the SEC and you should not place undue reliance on those statements.

Introduction

We are the largest automotive aftermarket parts provider in North America, serving both "do-it-for me", or Commercial, and "do-it-yourself", or DIY, customers in the automotive aftermarket. As of October 10, 2015, we operated a total of 5,240 stores and 118 distribution branches. We operated primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. Our stores operate primarily under the trade names "Advance Auto Parts," "Autopart International" and "Carquest," and our distribution branches operate under the "Worldpac" trade name. In addition, we serve approximately 1,300 independently-owned Carquest stores ("independent stores").

Our stores and branches offer a broad selection of brand name, original equipment manufacturer ("OEM") and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. Through our integrated operating approach, we serve our Commercial and DIY customers from our store locations and online at www.AdvanceAutoParts.com, www.Carquest.com and www.Worldpac.com. Our DIY customers can elect to pick up merchandise ordered online at a conveniently located store or have their purchases shipped directly to them. Our Commercial customers consist primarily of delivery customers for whom we deliver products from our store and branch locations to our Commercial customers’ places of business, including independent garages, service stations and auto dealers. Our Commercial customers can conveniently place their orders online.

Management Overview

We generated diluted earnings per share, or diluted EPS, of $1.63 during our twelve weeks ended October 10, 2015 (or the third quarter of Fiscal 2015) compared to $1.66 for the comparable period of Fiscal 2014. The decrease in our diluted EPS was driven primarily by costs associated with the integration of GPI, store consolidations and support center restructuring. Excluding the impact of these costs, we saw improvement in our SG&A rate driven by lower incentive compensation, overall lower administrative costs and synergy savings, partially offset by expense de-leverage as a result of our low comparable store sales growth. When adjusted for the following comparable adjustments, our comparable earnings per diluted share ("Comparable Cash EPS") was $1.95 during the third quarter of Fiscal 2015 compared to $1.89 during the comparable period of Fiscal 2014:
 
 
Q3 2015
 
Q3 2014
GPI integration, store consolidation and support center restructuring
 
$
0.24

 
$
0.15

Amortization related to the acquired intangible assets from GPI
 
$
0.08

 
$
0.08


Refer to the "Reconciliation of Non-GAAP Financial Measures" section for further details of our comparable adjustments.

Our comparable store sales increased 0.5% compared to the third quarter of Fiscal 2014 driven by modest growth in our Commercial sales, with our DIY sales essentially flat. We saw an encouraging start to the quarter; however, our comparable store sales trends decelerated towards the middle of the quarter. We attribute this deceleration to the integration of GPI which has continued to have a more prolonged impact on our core commercial business. This was partially due to continued sales softness within our Carquest stores as the teams in those stores continue to work through a heavier share of the integration change coupled with some category sales softness. We are focused on finishing our integration activities as quickly as possible


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to minimize the distractions and increase the focus on operational execution. For example, we plan to move faster on capabilities such as our daily delivery expansion, accelerate our store consolidations and store profitability work, and grow our SpeedPerks customer loyalty and TechNet programs.

Summary of Third Quarter Financial Results

A high-level summary of our financial results for the third quarter of Fiscal 2015 is included below:
 
Total sales during the third quarter of Fiscal 2015 were $2,295.2 million, an increase of 0.3% as compared to the third quarter of Fiscal 2014. This increase was primarily driven by a comparable store sales increase of 0.5% and new stores opened during the past 12 months, partially offset by the portion of sales that do not transfer from store consolidations and a net decrease in the number of independent stores served.
Our operating income for the third quarter of Fiscal 2015 was $205.5 million, a decrease of $3.6 million from the comparable period of Fiscal 2014. As a percentage of total sales, operating income was 9.0%, a decrease of 18 basis points versus the comparable period of Fiscal 2014, inclusive of integration and restructuring expenses.
Our inventory balance as of October 10, 2015 increased $204.6 million, or 5.2%, over our inventory balance as of January 3, 2015, driven mainly by transitional inventory growth resulting from our product integration and the consolidation of our Carquest stores and the opening of new stores and branches.
We generated operating cash flow of $520.1 million during the forty weeks ended October 10, 2015, a decrease of 3.7% from the comparable period in Fiscal 2014, primarily due to cash outflows associated with inventory, net of accounts payable, partially offset by higher earnings and fluctuations in accounts receivable, accrued expenses and other assets due to the timing of payments.

Refer to the "Results of Operations" and "Liquidity and Capital Resources" sections for further details of our income statement and cash flow results, respectively.

Business and Industry Update

In 2015, we have two essential priorities - (i) deliver base business results by executing under our key strategies of Superior Availability and Service Leadership and (ii) successfully achieve the goals of the multi-year GPI integration plan. Our key strategies remain consistent with 2014. Superior Availability is aimed at product availability and maximizing the speed, reliability and efficiency of our supply chain. Service Leadership leverages our product availability in addition to more consistent execution of customer-facing initiatives to strengthen our integrated operating approach of serving our customers in our stores and on-line. Through these two key strategies and the integration of GPI, we believe we can continue to build on the initiatives discussed below to produce favorable financial results over the long term. Sales to Commercial customers remain the largest opportunity for us to increase our overall market share in the automotive aftermarket industry. Our Commercial sales, as a percentage of total sales, were 58% for both the third quarter of Fiscal 2015 and Fiscal 2014.

We continue to make progress in our strategic priorities, which include:

Growing our Commercial business by meeting customers' needs through our family of store names and brands, increased volume with national and regional accounts, growth in our commercial marketing programs in our AAP and Carquest US stores, and ongoing GPI integration and store consolidations/conversions;
Improving localized parts availability through our larger HUB stores, expansion of the cross-sourcing network between store brands, and leveraging the advancement of our supply chain infrastructure, including an increase in stores receiving daily deliveries from our distribution centers and the late-2014 opening of our Hartford, CT distribution center;
Maintaining a steady new store growth rate including new markets utilizing both Advance Auto Parts and Carquest brands and renewed emphasis and investment in our DIY business, including the continued roll-out of our Speedperks loyalty program and other new marketing programs; and
Transitioning to a more productive and efficient single selling environment in our stores combining Commercial and DIY responsibilities.

During 2015, we have focused on the foundational investments in our integration plan, which we are confident will begin generating results for our business in 2016 and beyond. We previously made good progress with the initial phases of our integration plan in Fiscal 2014, which included (i) realigning our store support centers ("SSC"), (ii) completing negotiations with vendors, (iii) developing cross-sourcing networks between all of our stores and branches and (iv) completing the first 110 AAP/CQUS consolidations and conversions. Beginning in late 2014 and into early 2015, we moved into the more operational phase of the integration including (i) integration of our AAP/CQUS field organizations, (ii) product/brand conversions and


29

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alignment of pricing, and (iii) a heavier volume of store consolidations and conversions. Later phases of the integration occurring in 2016 will include the roll-out of a common electronic parts catalog and beginning of the integration of our supply chain networks. These critical steps of the integration plan heavily impact virtually all of our team members throughout the SSC, supply chain teams and stores as well as many of our Commercial customers who are supported by these teams.
 
The automotive aftermarket industry is influenced by a number of general macroeconomic factors similar to those affecting the overall retail and distribution industry. These factors include, but are not limited to, fuel costs, unemployment rates, consumer confidence and spending habits, and competition. We believe the two key drivers of demand within the automotive aftermarket are (i) the number of miles driven and (ii) the number and average age of vehicles on the road.

Favorable industry dynamics include:
 
an increase in the number of vehicles and stabilization of the average age of vehicles;
a long-term expectation that miles driven will continue to increase based on historical trends; and
a steadily improving job market and lower fuel prices.
 
Conversely, the factors negatively affecting the automotive aftermarket industry include:
 
deferral of elective automotive maintenance in the near term as more consumers contemplate new automobile purchases; and
longer maintenance and part failure intervals on newer cars due to improved quality.

We remain encouraged by the (i) stability of the automotive aftermarket industry and (ii) initiatives that we have underway to support our base business and integration strategies.

Store Development

We serve our Commercial and DIY customers in a similar fashion through four different store brands. The table below sets forth detail of our store development activity for the twelve and forty weeks ended October 10, 2015, including the consolidation and conversion of stores as part of our integration plans, and the number of locations with Commercial delivery programs. During Fiscal 2015, we anticipate adding approximately 110 to 120 new stores and branches.
 
AAP
 
AI
 
BWP
 
CARQUEST
 
WORLDPAC
 
Total
July 18, 2015
3,972

 
182

 
35

 
1,063

 
117

 
5,369

New (1)
13

 
1

 

 
2

 
1

 
17

Closed
(2
)
 

 

 

 

 
(2
)
Consolidated (2)
(1
)
 

 
(1
)
 
(24
)