ADVANCE AUTO PARTS INC - Quarter Report: 2022 April (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
________________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 23, 2022
☐ 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 | 54-2049910 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
4200 Six Forks Road, Raleigh, North Carolina 27609
(Address of principal executive offices) (Zip Code)
(540) 362-4911
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.0001 par value | AAP | New York Stock Exchange | ||||||||||||
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 20, 2022, the number of shares of the registrant’s common stock outstanding was 60,639,825 shares.
| TABLE OF CONTENTS | |||||||||||
Page | |||||||||||
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “should,” “strategy,” “will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans and objectives, and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the timing and implementation of strategic initiatives, including with respect to labor shortages or disruptions and the impact on our ability to complete store openings, deterioration of general macroeconomic conditions, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global pandemic. Please refer to “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
1
PART I. FINANCIAL INFORMATION
ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data) (Unaudited)
| Assets | April 23, 2022 | January 1, 2022 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 138,733 | $ | 601,428 | |||||||
| Receivables, net | 957,799 | 782,785 | |||||||||
| Inventories | 4,778,849 | 4,659,018 | |||||||||
| Other current assets | 182,399 | 232,245 | |||||||||
| Total current assets | 6,057,780 | 6,275,476 | |||||||||
Property and equipment, net of accumulated depreciation of $2,471,936 and $2,403,567 | 1,567,986 | 1,528,311 | |||||||||
| Operating lease right-of-use assets | 2,687,581 | 2,671,810 | |||||||||
| Goodwill | 993,820 | 993,744 | |||||||||
| Other intangible assets, net | 642,120 | 651,217 | |||||||||
| Other assets | 53,194 | 73,651 | |||||||||
| Total assets | $ | 12,002,481 | $ | 12,194,209 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 3,942,388 | $ | 3,922,007 | |||||||
| Accrued expenses | 617,793 | 777,051 | |||||||||
| Other current liabilities | 492,393 | 481,249 | |||||||||
| Total current liabilities | 5,052,574 | 5,180,307 | |||||||||
| Long-term debt | 1,187,170 | 1,034,320 | |||||||||
| Noncurrent operating lease liabilities | 2,330,532 | 2,337,651 | |||||||||
| Deferred income taxes | 420,336 | 410,606 | |||||||||
| Other long-term liabilities | 102,189 | 103,034 | |||||||||
| Total liabilities | 9,092,801 | 9,065,918 | |||||||||
Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, nonvoting, $0.0001 par value | — | — | |||||||||
Common stock, voting, $0.0001 par value | 8 | 8 | |||||||||
| Additional paid-in capital | 862,451 | 845,407 | |||||||||
| Treasury stock, at cost | (2,564,757) | (2,300,288) | |||||||||
| Accumulated other comprehensive loss | (41,065) | (22,627) | |||||||||
| Retained earnings | 4,653,043 | 4,605,791 | |||||||||
| Total stockholders’ equity | 2,909,680 | 3,128,291 | |||||||||
| Total liabilities and stockholders’ equity | $ | 12,002,481 | $ | 12,194,209 | |||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
2
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except per share data) (Unaudited)
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Net sales | $ | 3,374,210 | $ | 3,330,370 | |||||||
Cost of sales, including purchasing and warehousing costs | 1,867,690 | 1,845,444 | |||||||||
| Gross profit | 1,506,520 | 1,484,926 | |||||||||
Selling, general and administrative expenses | 1,303,250 | 1,232,797 | |||||||||
| Operating income | 203,270 | 252,129 | |||||||||
| Other, net: | |||||||||||
| Interest expense | (12,868) | (11,191) | |||||||||
| Loss on early redemptions of senior unsecured notes | (7,408) | — | |||||||||
| Other income, net | 136 | 4,836 | |||||||||
| Total other, net | (20,140) | (6,355) | |||||||||
| Income before provision for income taxes | 183,130 | 245,774 | |||||||||
| Provision for income taxes | 43,339 | 59,844 | |||||||||
| Net income | $ | 139,791 | $ | 185,930 | |||||||
| Basic earnings per common share | $ | 2.28 | $ | 2.83 | |||||||
| Weighted-average common shares outstanding | 61,261 | 65,688 | |||||||||
| Diluted earnings per common share | $ | 2.26 | $ | 2.81 | |||||||
| Weighted-average common shares outstanding | 61,732 | 66,102 | |||||||||
Condensed Consolidated Statements of Comprehensive Income
(in thousands) (Unaudited)
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Net income | $ | 139,791 | $ | 185,930 | |||||||
| Other comprehensive (loss) income: | |||||||||||
Changes in net unrecognized other postretirement benefit (costs), net of tax of $9 and $19 | 24 | (54) | |||||||||
| Currency translation adjustments | (18,462) | 5,347 | |||||||||
| Total other comprehensive (loss) income | (18,438) | 5,293 | |||||||||
| Comprehensive income | $ | 121,353 | $ | 191,223 | |||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
3
Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) (Unaudited) | |||||||||||||||||||||||||||||||||||||||||
| Sixteen Weeks Ended April 23, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 62,009 | $ | 8 | $ | 845,407 | $ | (2,300,288) | $ | (22,627) | $ | 4,605,791 | $ | 3,128,291 | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 139,791 | 139,791 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | (18,438) | — | (18,438) | ||||||||||||||||||||||||||||||||||
| Issuance of shares upon the exercise of stock options | 1 | — | 233 | — | — | — | 233 | ||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | 234 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 16,978 | — | — | — | 16,978 | ||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | 10 | — | 933 | — | — | — | 933 | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (1,156) | — | — | (264,469) | — | — | (264,469) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($1.50 per common share) | — | — | — | — | — | (92,539) | (92,539) | ||||||||||||||||||||||||||||||||||
| Other | — | — | (1,100) | — | — | — | (1,100) | ||||||||||||||||||||||||||||||||||
| Balance at April 23, 2022 | 61,098 | $ | 8 | $ | 862,451 | $ | (2,564,757) | $ | (41,065) | $ | 4,653,043 | $ | 2,909,680 | ||||||||||||||||||||||||||||
| Sixteen Weeks Ended April 24, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at Cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | 66,361 | $ | 8 | $ | 783,709 | $ | (1,394,080) | $ | (26,759) | $ | 4,196,634 | $ | 3,559,512 | ||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 185,930 | 185,930 | ||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 5,293 | — | 5,293 | ||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | 227 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 16,260 | — | — | — | 16,260 | ||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | 13 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (1,162) | — | — | (183,647) | — | — | (183,647) | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($1.00 per common share) | — | — | — | — | — | (81,746) | (81,746) | ||||||||||||||||||||||||||||||||||
| Other | — | — | (35) | — | — | — | (35) | ||||||||||||||||||||||||||||||||||
| Balance at April 24, 2021 | 65,439 | $ | 8 | $ | 799,934 | $ | (1,577,727) | $ | (21,466) | $ | 4,300,818 | $ | 3,501,567 | ||||||||||||||||||||||||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
4
Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands) (Unaudited)
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 139,791 | $ | 185,930 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 85,581 | 77,253 | |||||||||
| Share-based compensation | 16,978 | 16,260 | |||||||||
| Loss and impairment of long-lived assets | 1,237 | 4,732 | |||||||||
| Loss on early redemptions of senior unsecured notes | 7,408 | — | |||||||||
| Provision for deferred income taxes | 9,681 | 14,660 | |||||||||
| Other, net | 1,020 | 543 | |||||||||
| Net change in: | |||||||||||
| Receivables, net | (174,895) | (53,982) | |||||||||
| Inventories | (119,550) | 63,883 | |||||||||
| Accounts payable | 20,225 | 96,094 | |||||||||
| Accrued expenses | (98,978) | (50,949) | |||||||||
| Other assets and liabilities, net | 56,562 | (24,492) | |||||||||
| Net cash (used in) provided by operating activities | (54,940) | 329,932 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (114,854) | (70,884) | |||||||||
| Proceeds from sales of property and equipment | 828 | 590 | |||||||||
| Net cash used in investing activities | (114,026) | (70,294) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under credit facilities | 275,000 | — | |||||||||
| Payments on credit facilities | (275,000) | — | |||||||||
| Borrowings on senior unsecured notes | 348,618 | — | |||||||||
| Payments on senior unsecured notes | (201,081) | — | |||||||||
| Dividends paid | (154,796) | (33,146) | |||||||||
| Repurchases of common stock | (264,469) | (183,647) | |||||||||
| Other, net | (2,007) | 104 | |||||||||
| Net cash used in financing activities | (273,735) | (216,689) | |||||||||
| Effect of exchange rate changes on cash | (19,994) | 2,292 | |||||||||
| Net (decrease) increase in cash and cash equivalents | (462,695) | 45,241 | |||||||||
Cash and cash equivalents, beginning of period | 601,428 | 834,992 | |||||||||
Cash and cash equivalents, end of period | $ | 138,733 | $ | 880,233 | |||||||
| Non-cash transactions: | |||||||||||
| Accrued purchases of property and equipment | $ | 15,272 | $ | 3,505 | |||||||
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
5
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
1. Nature of Operations and Basis of Presentation
Description of Business
Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“professional”) and “do-it-yourself” (“DIY”) customers. The accompanying condensed consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,” “we,” “us” or “our”).
As of April 23, 2022, we operated a total of 4,687 stores and 311 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of April 23, 2022, we served 1,318 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands. Our stores operate primarily under the trade names “Advance Auto Parts” and “Carquest” and our branches operate under the “Worldpac” and “Autopart International” trade names.
The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting principles. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2021 as filed with the SEC on February 15, 2022.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Our first quarter of the year contains sixteen weeks. Our remaining three quarters each consist of twelve weeks.
2. Significant Accounting Policies
Revenues
The following table summarizes disaggregated revenue from contracts with customers by product group:
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Percentage of Sales, by Product Group: | |||||||||||
| Parts and Batteries | 66 | % | 66 | % | |||||||
| Accessories and Chemicals | 20 | 21 | |||||||||
| Engine Maintenance | 13 | 12 | |||||||||
| Other | 1 | 1 | |||||||||
| Total | 100 | % | 100 | % | |||||||
3. Inventories
Inventories are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 90.3% of inventories as of April 23, 2022 and 89.8% of inventories as of January 1, 2022. Under the LIFO method, our cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in the sixteen weeks ended April 23, 2022 and prior years. As a result of changes in the LIFO reserve, we recorded an increase to Cost of sales of $81.5 million and $3.1 million for the sixteen weeks ended April 23, 2022 and April 24, 2021 to state inventories at LIFO.
6
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
An actual valuation of inventory under the LIFO method is performed by us at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.
Inventory balances were as follows:
| April 23, 2022 | January 1, 2022 | ||||||||||
| Inventories at first in, first out (“FIFO”) | $ | 4,827,206 | $ | 4,625,900 | |||||||
| Adjustments to state inventories at LIFO | (48,357) | 33,118 | |||||||||
| Inventories at LIFO | $ | 4,778,849 | $ | 4,659,018 | |||||||
4. Intangible Assets
Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $9.5 million and $9.7 million for the sixteen weeks ended April 23, 2022 and April 24, 2021.
5. Receivables, net
Receivables, net, consisted of the following:
| April 23, 2022 | January 1, 2022 | ||||||||||
| Trade | $ | 652,625 | $ | 506,725 | |||||||
| Vendor | 224,216 | 201,933 | |||||||||
| Other | 93,138 | 84,289 | |||||||||
| Total receivables | 969,979 | 792,947 | |||||||||
| Less: allowance for credit losses | (12,180) | (10,162) | |||||||||
| Receivables, net | $ | 957,799 | $ | 782,785 | |||||||
6. Long-term Debt and Fair Value of Financial Instruments
Long-term debt consists of the following:
| April 23, 2022 | January 1, 2022 | ||||||||||
4.50% Senior Unsecured Notes due December 1, 2023 | $ | — | $ | 193,220 | |||||||
1.75% Senior Unsecured Notes due October 1, 2027 | 346,556 | 346,382 | |||||||||
3.90% Senior Unsecured Notes due April 15, 2030 | 495,157 | 494,718 | |||||||||
3.50% Senior Unsecured Notes due March 15, 2032 | 345,457 | — | |||||||||
| Total long-term debt | $ | 1,187,170 | $ | 1,034,320 | |||||||
| Fair value of long-term debt | $ | 1,104,000 | $ | 1,092,000 | |||||||
Fair Value of Financial Assets and Liabilities
The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of our Cash and cash equivalents, Receivables, net, Accounts payable and Accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
7
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Bank Debt
As of April 23, 2022 and January 1, 2022, we had no outstanding borrowings, $1.2 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility (the “Credit Agreement”).
As of April 23, 2022 and January 1, 2022, we had $90.2 million and $92.0 million of bilateral letters of credit issued separately from the Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.
We were in compliance with financial covenants required by our debt arrangements as of April 23, 2022.
Senior Unsecured Notes
Our 4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69% of the principal amount of $450.0 million. The 2023 Notes bear interest, payable semi-annually in arrears on June 1 and December 1, at a rate of 4.50% per year. Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of the 2023 Notes with the net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges related to tender premiums and debt issuance costs of $30.5 million and $1.4 million. On April 4, 2022, we redeemed the remaining $193.2 million principal amount of our outstanding 2023 Notes with the net proceeds from the issuance of the 3.50% senior unsecured notes due March 15, 2032 (the “2032 Notes”). In connection with this early redemption, we incurred charges related to the make-whole provision and debt issuance costs of $7.0 million and $0.4 million.
Our 3.90% senior unsecured notes due April 15, 2030 (the “Original Notes”) were issued April 16, 2020, at 99.65% of the principal amount of $500.0 million, and were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The Original Notes bear interest, payable semi-annually in arrears on April 15 and October 15, at a rate of 3.90% per year. On July 28, 2020, we completed an exchange offer whereby the Original Notes in the aggregate principal amount of $500.0 million were exchanged for a like principal amount (the “Exchange Notes” or “2030 Notes”), and which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes.
Our 1.75% senior unsecured notes due October 1, 2027 (the “2027 Notes”) were issued September 29, 2020, at 99.67% of the principal amount of $350.0 million. The 2027 Notes bear interest, payable semi-annually in arrears on April 1 and October 1, at a rate of 1.75% per year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.
Our 2032 Notes were issued March 4, 2022, at 99.61% of the principal amount of $350.0 million. The 2032 Notes bear interest, payable semi-annually in arrears on March 15 and September 15, at a rate of 3.50% per year. In connection with the 2032 Notes offering, we incurred $3.2 million of debt issuance costs.
We may redeem some or all of the 2032 Notes at any time or from time to time, prior to December 15, 2031, at the redemption price described in the related indenture for the 2032 Notes (the “Indenture”). In addition, in the event of a change of control triggering event, as defined in the Indenture, we will be required to offer to repurchase the 2032 Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. Currently, the 2032 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated unsecured basis by guarantor and subsidiary guarantees, as defined by the Indenture.
Debt Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of ours totaling $44.5 million and $31.7 million as of April 23, 2022 and January 1, 2022. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements is $105.8 million and $86.9 million as of April 23, 2022 and January 1, 2022. We believe that the likelihood of performance under these guarantees is remote.
8
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
7. Leases
Substantially all of our leases are for facilities and vehicles. The initial term for facilities is typically five years to ten years, with renewal options at -year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically three years to six years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease liabilities consisted of the following:
| April 23, 2022 | January 1, 2022 | ||||||||||
| Total operating lease liabilities | $ | 2,798,628 | $ | 2,802,772 | |||||||
| Less: Current portion of operating lease liabilities | (468,096) | (465,121) | |||||||||
| Noncurrent operating lease liabilities | $ | 2,330,532 | $ | 2,337,651 | |||||||
The current portion of operating lease liabilities is included in Other current liabilities in the accompanying Condensed Consolidated Balance Sheets.
Total lease cost is included in Cost of sales and Selling, general and administrative expenses (“SG&A”) in the accompanying Condensed Consolidated Statements of Operations and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Operating lease cost | $ | 173,035 | $ | 161,984 | |||||||
| Variable lease cost | 53,296 | 43,525 | |||||||||
| Total lease cost | $ | 226,331 | $ | 205,509 | |||||||
The future maturity of lease liabilities as of April 23, 2022 were as follows:
| Remainder of 2022 | $ | 355,398 | |||
| 2023 | 543,223 | ||||
| 2024 | 471,972 | ||||
| 2025 | 436,146 | ||||
| 2026 | 330,471 | ||||
| Thereafter | 989,142 | ||||
| Total lease payments | 3,126,352 | ||||
| Less: Imputed interest | (327,724) | ||||
| Total operating lease liabilities | $ | 2,798,628 | |||
As of April 23, 2022, our operating lease liabilities included $72.3 million related to options to extend lease terms that are reasonably certain of being exercised and excluded $89.1 million of legally binding minimum lease payments for leases signed but not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate for our operating leases were 7.1 years and 3.0% as of April 23, 2022. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
Other information relating to our lease liabilities is as follows:
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 190,542 | $ | 185,083 | |||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 147,015 | $ | 118,448 | |||||||
8. Share Repurchase Program
On February 8, 2022, our Board of Directors authorized an additional $1.0 billion to the existing share repurchase program. This authorization is incremental to the $1.7 billion that was previously authorized by our Board of Directors. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.
During the sixteen weeks ended April 23, 2022, we repurchased 1.1 million shares of our common stock at an aggregate cost of $248.2 million, or an average price of $231.41 per share, in connection with our share repurchase program. During the sixteen weeks ended April 24, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $170.4 million, or an average price of $157.84 per share, in connection with our share repurchase program. We had $1.3 billion remaining under our share repurchase program as of April 23, 2022.
9. Earnings per Share
The computations of basic and diluted earnings per share are as follows:
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Numerator | |||||||||||
| Net income applicable to common shares | $ | 139,791 | $ | 185,930 | |||||||
| Denominator | |||||||||||
| Basic weighted-average common shares | 61,261 | 65,688 | |||||||||
| Dilutive impact of share-based awards | 471 | 414 | |||||||||
Diluted weighted-average common shares (1) | 61,732 | 66,102 | |||||||||
| Basic earnings per common share | $ | 2.28 | $ | 2.83 | |||||||
| Diluted earnings per common share | $ | 2.26 | $ | 2.81 | |||||||
(1)For the sixteen weeks ended April 23, 2022 and April 24, 2021, 21 thousand and 43 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
(Unaudited)
10. Share-Based Compensation
During the sixteen weeks ended April 23, 2022, we granted 157 thousand time-based RSUs, 58 thousand market-based RSUs and 114 thousand Stock Options. The general terms of the time-based and market-based RSUs are similar to awards previously granted by us. We grant options to purchase common stock to certain employees under our 2014 Long-Term Incentive Plan. The options are granted at an exercise price equal to the closing market price of Advance's common stock on the date of the grant, expire after ten years and vest one-third annually over three years after the date of grant. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.
The weighted-average fair values of the time-based and market-based RSUs granted during the sixteen weeks ended April 23, 2022 were $205.63 and $205.52 per share. The fair value of each market-based RSU was determined using a Monte Carlo simulation model. For time-based RSUs, the fair value of each award was determined based on the market price of our stock on the date of grant adjusted for expected dividends during the vesting period, as applicable.
The weighted-average fair value of stock options granted during the sixteen weeks ended April 23, 2022 was $53.98 per share. The fair value was estimated on the date of grant by applying the Black-Scholes option-pricing valuation model.
| Sixteen Weeks Ended | |||||
| April 23, 2022 | |||||
Risk-free interest rate (1) | 1.9 | % | |||
Expected term (2) | 6 years | ||||
Expected volatility (3) | 34.0 | % | |||
Expected dividend yield (4) | 2.6 | % | |||
(1) The risk-free interest rate is based on the yield in effect at grant for zero-coupon U.S. Treasury notes with maturities equivalent to the expected term of the stock options.
(2) The expected term represents the period of time options granted are expected to be outstanding. As we do not have sufficient historical data, we utilized the simplified method provided by the SEC to calculate the expected term as the average of the contractual term and vesting period.
(3) Expected volatility is the measure of the amount by which the stock price has fluctuated or is expected to fluctuate. We utilized historical trends and the implied volatility of our publicly traded financial instruments in developing the volatility estimate for our stock options.
(4) The expected dividend yield is calculated based on our expected quarterly dividend and the three month average stock price as of the grant date.
Total income tax benefit related to share-based compensation expense for the sixteen weeks ended April 23, 2022 was $4.2 million. As of April 23, 2022, there was $101.5 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted-average period of 1.7 years.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 1, 2022 (filed with the SEC on February 15, 2022), which we refer to as our 2021 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Management Overview
Net sales increased 1.3% in the first quarter of 2022 compared with the same period in the prior year, primarily driven by growing consumer demand, namely in our professional and independent businesses. Our regional strength in comparable store sales was led by the West and Canada, along with a strong recovery in Florida and the Mid-Atlantic. Category growth was led by motor oil, batteries and brakes.
We generated Diluted earnings per share (“Diluted EPS”) of $2.26 during our first quarter of 2022 compared with $2.81 for the comparable period of 2021. When adjusted for non-operational items outlined in the following table, our Adjusted diluted earnings per share (“Adjusted EPS”) for the sixteen weeks ended April 23, 2022 and April 24, 2021 was $3.57 and $3.34.
| Sixteen Weeks Ended | |||||||||||
| April 23, 2022 | April 24, 2021 | ||||||||||
| Last-in, first-out (“LIFO”) impacts | $ | 0.99 | $ | 0.03 | |||||||
| Transformation expenses | 0.13 | 0.40 | |||||||||
| General Parts International, Inc. (“GPI”) amortization of acquired intangible assets | 0.10 | 0.10 | |||||||||
| Other adjustments | 0.09 | — | |||||||||
| Total adjustments, net of tax | $ | 1.31 | $ | 0.53 | |||||||
Refer to “Reconciliation of Non-GAAP Financial Measures” for a definition and reconciliation of Adjusted EPS and other non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP.
A high-level summary of our financial results for the first quarter of 2022 includes:
•Net sales during the first quarter of 2022 was $3.4 billion, an increase of 1.3% compared with the first quarter of 2021, primarily driven by our professional and independent businesses. Comparable store sales increased 0.6%.
•Gross profit margin for the first quarter of 2022 was 44.6% of Net sales, flat compared with the first quarter of 2021. Gross profit was impacted favorably due to our ongoing category management initiatives, including strategic pricing and owned brand expansion. These were offset by LIFO expense, inflationary costs and unfavorable channel and product mix.
•SG&A expenses for the first quarter of 2022 was 38.6% of Net sales, an increase of 161 basis points compared with the first quarter of 2021. This unfavorable impact was primarily driven by inflationary cost increases in store labor, fuel and delivery and start-up costs from new store openings compared with prior year, partially offset by a year over year decrease in COVID-19 related expenses and incentive compensation.
Business and Risks Update
We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience, margin expansion and driving consistent execution for both professional and DIY customers. To achieve these improvements, we have undertaken planned strategic initiatives to help build a foundation for long-term success across the organization, which include:
•Continued development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
•Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network.
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•Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the iconic DieHard® brand.
•Progress in the implementation of a more efficient end-to-end supply chain process to deliver our broad assortment and to help lessen the impact of external constraints.
•Enhancement of Advance Same Day® Curbside Pick Up, Advance Same Day® Home Delivery and our mobile application and e-commerce performance.
•Actively pursuing new store openings, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independent Carquest network.
•Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures.
Industry Update
Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry, and include but are not limited to:
•Inflationary pressures, including logistics and labor
•Global supply chain disruptions
•Fuel costs
•Unemployment rates
•Consumer confidence
•Competition
•Changes in new car sales
•Miles driven
•Economic and geopolitical uncertainty
Stores and Branches
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During the sixteen weeks ended April 23, 2022, 35 stores and branches were opened and nine were closed or consolidated, resulting in a total of 4,998 stores and branches compared with a total of 4,972 stores and branches as of January 1, 2022.
Results of Operations
| Sixteen Weeks Ended | $ Favorable/ (Unfavorable) | Basis Points | |||||||||||||||||||||||||||||||||
| ($ in millions) | April 23, 2022 | April 24, 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 3,374.2 | 100.0 | % | $ | 3,330.4 | 100.0 | % | $ | 43.8 | — | ||||||||||||||||||||||||
| Cost of sales | 1,867.7 | 55.4 | 1,845.4 | 55.4 | (22.3) | (6) | |||||||||||||||||||||||||||||
| Gross profit | 1,506.5 | 44.6 | 1,484.9 | 44.6 | 21.5 | 6 | |||||||||||||||||||||||||||||
| SG&A | 1,303.3 | 38.6 | 1,232.8 | 37.0 | (70.5) | (161) | |||||||||||||||||||||||||||||
| Operating income | 203.3 | 6.0 | 252.1 | 7.6 | (49.0) | (155) | |||||||||||||||||||||||||||||
| Interest expense | (12.9) | (0.4) | (11.2) | (0.3) | (1.7) | (5) | |||||||||||||||||||||||||||||
| Loss on early redemptions of senior unsecured notes | (7.4) | (0.2) | 0.0 | — | (7.4) | (22) | |||||||||||||||||||||||||||||
| Other income, net | 0.1 | 0.0 | 4.8 | 0.1 | (4.7) | (14) | |||||||||||||||||||||||||||||
| Provision for income taxes | 43.3 | 1.3 | 59.8 | 1.8 | 16.5 | 51 | |||||||||||||||||||||||||||||
| Net income | $ | 139.8 | 4.1 | % | $ | 185.9 | 5.6 | % | $ | (46.3) | (145) | ||||||||||||||||||||||||
Note: Table amounts may not foot due to rounding.
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Net Sales
Net sales for the sixteen weeks ended April 23, 2022 increased 1.3% compared with the same period in 2021, primarily driven by growth in our professional and independent businesses. Comparable store sales increased 0.6% for the sixteen weeks ended April 23, 2022 compared with the sixteen weeks ended April 24, 2021. Category growth was led by motor oil, batteries and brakes.
We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores in comparable store sales from the original date of opening.
Gross Profit
Gross profit for the sixteen weeks ended April 23, 2022 was $1.5 billion, or 44.6% of Net sales, and was flat compared with the sixteen weeks ended April 24, 2021. During the sixteen weeks ended April 23, 2022, improvements in strategic pricing and owned brand expansion were offset by LIFO expense, inflationary costs and unfavorable channel and product mix.
As a result of changes in our LIFO reserve, an expense of $81.5 million and $3.1 million were included in the sixteen weeks ended April 23, 2022 and April 24, 2021.
Selling, General and Administrative Expenses
SG&A expenses for the sixteen weeks ended April 23, 2022 were $1.3 billion, or 38.6% of Net sales, compared with $1.2 billion, or 37.0% of Net sales, for the sixteen weeks ended April 24, 2021. This increase in SG&A as a percentage of Net sales was primarily driven by increased inflationary pressures in store labor as well as higher fuel and delivery expenses associated with the recovery of the professional business. Additionally, we incurred higher start-up costs from new store openings when compared with the prior year. These costs were partially offset by a year over year decrease in COVID-19 related expenses and incentive compensation.
Loss on Early Redemptions of Senior Unsecured Notes
During the sixteen weeks ended April 23, 2022, we incurred charges related to a make-whole provision and debt issuance costs of $7.0 million and $0.4 million in connection with the early redemption of our senior unsecured notes due 2023.
Provision for Income Taxes
Our Provision for income taxes for the sixteen weeks ended April 23, 2022 was $43.3 million, compared with $59.8 million for the sixteen weeks ended April 24, 2021. Our effective tax rate was 23.7% and 24.3% for the sixteen weeks ended April 23, 2022 and April 24, 2021. The decrease in tax expense resulted from lower Income before provision for income taxes compared with prior year, as well as a benefit relating to the vesting of share-based awards.
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Reconciliation of Non-GAAP Financial Measures
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures, including Adjusted net income and Adjusted EPS, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. We have presented these non-GAAP financial measures as we believe that the presentation of our financial results that exclude (1) LIFO impacts; (2) transformation expenses under our strategic business plan; (3) non-cash amortization related to the acquired GPI intangible assets; and (4) other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to store closure and consolidation activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors to evaluate our performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.
LIFO Impacts — To assist in comparing our current operating results with the operational performance of other companies in our industry, the impact of LIFO on our results of operations is a reconciling item to arrive at non-GAAP financial measures.
Transformation Expenses — Costs incurred in connection with our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses include, but are not limited to the following:
•Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and team member severance in connection with our voluntary retirement program and continued optimization of our organization.
•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
•Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise.
GPI Amortization of Acquired Intangible Assets — As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable lease agreements, which we expect to be subject to amortization through 2025.
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We have included a reconciliation of this information to the most comparable GAAP measures in the following table:
| Sixteen Weeks Ended | |||||||||||
| (in thousands, except per share data) | April 23, 2022 | April 24, 2021 | |||||||||
| Net income (GAAP) | $ | 139,791 | $ | 185,930 | |||||||
| Cost of sales adjustments: | |||||||||||
| LIFO impacts | 81,475 | 3,147 | |||||||||
| Transformation expenses: | |||||||||||
| Other significant costs | 56 | 2,303 | |||||||||
| SG&A adjustments: | |||||||||||
| GPI amortization of acquired intangible assets | 8,439 | 8,547 | |||||||||
| Transformation expenses: | |||||||||||
| Restructuring costs | 1,491 | 20,742 | |||||||||
| Third-party professional services | 6,924 | 8,034 | |||||||||
| Other significant costs | 1,979 | 3,883 | |||||||||
Other income adjustment (1) | 7,408 | (36) | |||||||||
Provision for income taxes on adjustments (2) | (26,943) | (11,655) | |||||||||
| Adjusted net income (Non-GAAP) | $ | 220,620 | $ | 220,895 | |||||||
| Diluted earnings per share (GAAP) | $ | 2.26 | $ | 2.81 | |||||||
| Adjustments, net of tax | 1.31 | 0.53 | |||||||||
| Adjusted EPS (Non-GAAP) | $ | 3.57 | $ | 3.34 | |||||||
(1)During the sixteen weeks ended April 23, 2022, we incurred charges related to a make-whole provision and debt issuance costs of $7.0 million and $0.4 million, in connection with the early redemption of our 2023 Notes.
(2)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.
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Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities, including payment of interest on our long-term debt. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, in consideration of ongoing uncertainties related to COVID-19 and general macroeconomic conditions, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity, change. Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our results of operations, available cash and cash equivalents and available borrowings under our credit facility will be sufficient to fund our obligations for the long term.
During the sixteen weeks ended April 24, 2022, we issued our 3.50% senior unsecured notes due 2032 (the “2032 Notes”). Refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein for further details. Proceeds from our 2032 Notes were utilized to fund the early redemption of our 2023 Notes and supplement operational and capital expenditures.
Share Repurchase Program
On February 8, 2022, our Board of Directors authorized an additional $1 billion towards the existing share repurchase program. This authorization is incremental to the $1.7 billion that was previously authorized by our Board of Directors. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.
During the sixteen weeks ended April 23, 2022, we repurchased 1.1 million shares of our common stock at an aggregate cost of $248.2 million, or an average price of $231.41 per share, in connection with our share repurchase program. During the sixteen weeks ended April 24, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $170.4 million, or an average price of $157.84 per share, in connection with our share repurchase program. We had $1.3 billion remaining under our share repurchase program as of April 23, 2022.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| Sixteen Weeks Ended | |||||||||||
| (in thousands) | April 23, 2022 | April 24, 2021 | |||||||||
| Cash flows (used in) provided by operating activities | $ | (54,940) | $ | 329,932 | |||||||
| Cash flows used in investing activities | (114,026) | (70,294) | |||||||||
| Cash flows used in financing activities | (273,735) | (216,689) | |||||||||
| Effect of exchange rate changes on cash | (19,994) | 2,292 | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (462,695) | $ | 45,241 | |||||||
Operating Activities
For the sixteen weeks ended April 23, 2022, Cash flows provided by operating activities decreased by $384.9 million to $54.9 million of cash used in operating activities compared with the same period of prior year. The net decrease in operating cash flows compared with the prior year was primarily driven by a decrease in overall working capital, primarily driven by an increase in cash used by Inventories, Receivables, net, and Accrued expenses, as well as a decrease in cash provided by Accounts payable.
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Investing Activities
For the sixteen weeks ended April 23, 2022, Cash flows used in investing activities increased by $43.7 million to $114.0 million compared with the same period of prior year. Cash used in investing activities for the sixteen weeks ended April 23, 2022 consisted primarily of purchases of property and equipment of $114.9 million attributable to investments in information technology as we remain focused on a complete back office integration throughout the enterprise and supply chain.
Financing Activities
For the sixteen weeks ended April 23, 2022, Cash flows used in financing activities was $273.7 million, an increase of $57.0 million compared with the same period of prior year. The increase in cash used in financing activities over prior year was primarily a result of the early redemption of our 2023 Notes during the sixteen weeks ended April 23, 2022. Additionally, dividends paid increased $121.7 million and share repurchases of our common stock increased $77.8 million during the sixteen weeks ended April 23, 2022 compared with the sixteen weeks ended April 24, 2021. The increase in cash used was partially offset by the net proceeds received from the issuance of the 2032 Notes.
From April 24, 2022 through the date of issuance of the condensed consolidated financial statements, we borrowed $210.0 million and repaid $110.0 million under the Credit Agreement. As of the date of issuance, we had $100.0 million of borrowings outstanding under the Credit Agreement.
Our Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. On May 18, 2022, we declared a regular cash dividend of $1.50 per share to be paid on July 1, 2022 to all common stockholders of record as of June 17, 2022.
Long-Term Debt
On March 4, 2022, we issued $350.0 million aggregate principal amount of our 2032 Notes. The 2032 Notes were issued at 99.61% of the principal amount of $350.0 million, are due March 15, 2032 and bear interest at 3.50% per year payable semi-annually in arrears on March 15 and September 15 of each year.
On April 3, 2022, we redeemed the remaining $193.2 million principal amount of our outstanding 2023 Notes. In connection with this early redemption, we incurred charges related to the make-whole provision and debt issuance costs of $7.0 million and $0.4 million.
For additional information, refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Condensed Consolidated Financial Statements included herein.
As of April 23, 2022, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa2. The current outlooks by Standard & Poor’s and Moody’s are positive and stable. The current pricing grid used to determine our borrowing rate under the Credit Agreement is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may be limited. In addition, declines could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
With respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee, Advance Stores, a wholly owned subsidiary of the Issuer, serves as the guarantor (“Guarantor Subsidiary”). The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiary. Our captive insurance subsidiary, an insignificant wholly owned subsidiary of the Issuer, does not serve as guarantor of our senior unsecured notes.
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Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.
During the sixteen weeks ended April 23, 2022, there were no changes to the critical accounting policies discussed in our 2021 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2021 Form 10-K.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since January 1, 2022. Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our 2021 Form 10-K.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of our internal controls may vary over time.
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of April 23, 2022. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended April 23, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleged that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020, the court granted in part and denied in part our motion to dismiss. On November 6, 2020, the court granted the plaintiff’s motion for class certification. On March 15, 2021, we moved for reconsideration of the order denying in part our motion to dismiss, and on October 15, 2021, we filed a motion for summary judgment, seeking full dismissal of the case. Following mediation, on November 5, 2021, the parties executed a confidential binding term sheet to settle all claims and on December 23, 2021, the parties executed a settlement agreement fully documenting their agreement. The settlement agreement received preliminary approval from the court on January 11, 2022 and remains subject to final court approval. The settlement amount of $49.3 million will be fully covered by our insurance carriers, and the settlement is subject to court approval.
ITEM 1A.RISK FACTORS
Please refer to “Item 1A. Risk Factors” found in our 2021 Form 10-K filed for the year ended January 1, 2022 for risks that, if they were to occur, could materially adversely affect our business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of our common stock.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the information with respect to repurchases of our common stock for the quarter ended April 23, 2022:
Total Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) (in thousands) | |||||||||||||||||||||||
| January 2, 2022 to January 29, 2022 | 646,647 | $ | 235.05 | 646,584 | $ | 1,393,552 | ||||||||||||||||||||
| January 30, 2022 to February 26, 2022 | 430,251 | $ | 225.67 | 425,922 | $ | 1,297,338 | ||||||||||||||||||||
| February 27, 2022 to March 26, 2022 | 77,970 | $ | 203.17 | — | $ | 1,297,338 | ||||||||||||||||||||
| March 27, 2022 to April 23, 2022 | 1,365 | $ | 202.68 | — | $ | 1,297,338 | ||||||||||||||||||||
| Total | 1,156,233 | $ | 229.37 | 1,072,506 | ||||||||||||||||||||||
(1)The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $17.0 million, or an average price of $203.20 per share, during the sixteen weeks ended April 23, 2022.
(2)On February 8, 2022, our Board of Directors authorized an additional $1 billion to the existing share repurchase program. This authorization is incremental to the $1.7 billion that was previously authorized by our Board of Directors.
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ITEM 6.EXHIBITS
| Incorporated by Reference | ||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | ||||||||||
| 10-Q | 3.1 | 8/14/2018 | ||||||||||||
| 10-Q | 3.2 | 8/18/2020 | ||||||||||||
| 8-K | 4.1 | 3/4/2022 | ||||||||||||
| 8-K | 4.2 | 3/4/2022 | ||||||||||||
10.1* | ||||||||||||||
10.2* | ||||||||||||||
10.3* | ||||||||||||||
10.4* | ||||||||||||||
| 10-K | 22.1 | 2/15/2022 | ||||||||||||
31.1* | ||||||||||||||
31.2* | ||||||||||||||
32.1** | ||||||||||||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document. | |||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||
| 104.1* | Cover Page Interactive Data file (Embedded within Inline XBRL Documents and Included in Exhibit 101). | |||||||||||||
* Filed herewith
** Furnished herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ADVANCE AUTO PARTS, INC. | ||||||||
| Date: May 24, 2022 | /s/ William J. Pellicciotti Jr. | |||||||
| William J. Pellicciotti Jr. Senior Vice President, Controller and Chief Accounting Officer | ||||||||
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