Advance Auto Parts Inc 10-K for FY2020
Advance Auto Parts Inc (AAP)
10-K
2021-02-22
For: 2021-01-02
View Original
Added on
April 10, 2026
About this 10-K
Advance Auto Parts Inc filed this 10-K on February 22, 2021, covering the fiscal year ended January 2, 2021 (FY2020).
Headline figures
Fiscal year ended January 2, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $10.11B
- up 4.1% from $9.71B a year earlier
- Net income
- $493.02M
- up 1.3% from net income of $486.9M a year earlier
- Diluted EPS
- $7.14
- up 4.4% from $6.84 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
________________________________________________
For the fiscal year ended January 2 , 2021
For the transition period from ________ to ________.
Commission file number 001-16797
________________________
(Exact name of registrant as specified in its charter)
________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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 | ||||||||||||
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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.
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.
| ☒ | 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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of the last business day of the registrant’s most recently completed second fiscal quarter, July 10, 2020, the aggregate market value of common stock held by non-affiliates of the registrant was $9,274,738,343 , based on the last sales price on July 10, 2020, as reported by the New York Stock Exchange.
As of February 17, 2021, the number of shares of the registrant’s common stock outstanding was 65,524,420 shares.
Documents Incorporated by Reference:
| TABLE OF CONTENTS | |||||||||||
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FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements are usually identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “projection,” “should,” “strategy,” “will,” or similar expressions. These statements are based upon assessments and assumptions of management in light of historical results and trends, current conditions and potential future developments that often involve judgment, estimates, assumptions and projections. Forward-looking statements reflect current views about our plans, strategies and prospects, which are based on information currently available as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not place undue reliance on those statements. Refer to “Item 1A. Risk Factors” included in this report and other filings made by us with the Securities and Exchange Commission (“SEC”) for additional description of risks that could materially affect our actual results.
1
PART I
Item 1. Business.
Unless the context otherwise requires, “Advance,” “we,” “us,” “our,” and similar terms refer to Advance Auto Parts, Inc., its subsidiaries and their respective operations on a consolidated basis. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to December 31st of each year. Our fiscal year ended January 2, 2021 (“2020”), included 53 weeks of operation. Fiscal year ended December 28, 2019 (“2019”) and fiscal year ended December 29, 2018 (“2018”) included 52 weeks of operations.
Overview
We are a leading automotive aftermarket parts provider in North America, serving both professional installers (“Professional”) and “do-it-yourself” (“DIY”) customers, as well as independently owned operators. Our stores and branches offer a broad selection of brand name, original equipment manufacturer (“OEM”) and private label automotive replacement parts, accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles and light and heavy duty trucks. As of January 2, 2021, we operated 4,806 total stores and 170 branches primarily under the trade names “Advance Auto Parts,” “Autopart International,” “Carquest” and “Worldpac.”
We were founded in 1929 as Advance Stores Company, Incorporated and operated as a retailer of general merchandise until the 1980s. During the 1980s, we began targeting the sale of automotive parts and accessories to DIY customers. We initiated our Professional delivery program in 1996 and have steadily increased our sales to Professional customers since 2000. We have grown significantly as a result of comparable store sales growth, new store openings and strategic acquisitions. Advance Auto Parts, Inc., a Delaware corporation, was incorporated in 2001 in conjunction with the acquisition of Discount Auto Parts, Inc. In 2014, we acquired General Parts International, Inc. (“GPI”), a privately held company that was a leading distributor and supplier of original equipment and aftermarket automotive replacement products for Professional markets operating under the Carquest and Worldpac trade names.
Stores and Branches
Through our integrated operating approach, we serve our Professional and DIY customers through a variety of channels ranging from traditional “brick and mortar” store locations to self-service e-commerce sites. We believe we are better able to meet our customers’ needs by operating under several trade names, which are as follows:
Advance Auto Parts — Our 4,287 stores as of January 2, 2021 are generally located in freestanding buildings with a focus on both Professional and DIY customers. The average size of an Advance Auto Parts store is approximately 7,700 square feet. These stores carry a wide variety of products serving aftermarket auto part needs for both domestic and import vehicles. Our Advance Auto Parts stores carry a product offering of approximately 21,000 stock keeping units (“SKUs”), generally consisting of a custom mix of product based on each store’s respective market. Supplementing the inventory on-hand at our stores, additional less common SKUs are available in many of our larger stores (known as “HUB” stores). These additional SKUs are typically available on a same-day or next-day basis.
Autopart International — Our 161 stores as of January 2, 2021 operate primarily in the Northeastern and Mid-Atlantic regions of the United States with a focus on Professional customers. These stores specialize in imported aftermarket and private label branded auto parts. Autopart International stores offer approximately 47,000 SKUs.
Carquest — Our 358 stores as of January 2, 2021, including 145 stores in Canada, are generally located in freestanding buildings with a primary focus on Professional customers, but also serve DIY customers. The average size of a Carquest store is approximately 7,200 square feet. These stores carry a wide variety of products serving the aftermarket auto part needs for both domestic and import vehicles with a product offering of approximately 19,000 SKUs. As of January 2, 2021, Carquest also served 1,277 independently owned stores that operate under the “Carquest” name.
Worldpac — Our 170 branches as of January 2, 2021 principally serve Professional customers utilizing an efficient and sophisticated on-line ordering and fulfillment system. Worldpac branches are generally larger than our other store locations averaging approximately 25,000 square feet in size. Worldpac specializes in imported, OEM parts. Worldpac’s complete product offering includes over 200,000 SKUs for import and domestic vehicles.
As part of our transformation efforts, we have consolidated 8 Autopart International (“AI”) stores into the Worldpac format during 2020. Under our strategic business plan, we plan to continue integrating the operations of AI and Worldpac.
2
Our Products
The following table shows some of the types of products that we sell by major category of items:
| Parts & Batteries | Accessories & Chemicals | Engine Maintenance | ||||||
| Batteries and battery accessories | Air conditioning chemicals and accessories | Air filters | ||||||
| Belts and hoses | Air fresheners | Fuel and oil additives | ||||||
| Brakes and brake pads | Antifreeze and washer fluid | Fuel filters | ||||||
| Chassis parts | Electrical wire and fuses | Grease and lubricants | ||||||
| Climate control parts | Electronics | Motor oil | ||||||
| Clutches and drive shafts | Floor mats, seat covers and interior accessories | Oil filters | ||||||
| Engines and engine parts | Hand and specialty tools | Part cleaners and treatments | ||||||
| Exhaust systems and parts | Lighting | Transmission fluid | ||||||
| Hub assemblies | Performance parts | |||||||
| Ignition components and wire | Sealants, adhesives and compounds | |||||||
| Radiators and cooling parts | Tire repair accessories | |||||||
| Starters and alternators | Vent shades, mirrors and exterior accessories | |||||||
| Steering and alignment parts | Washes, waxes and cleaning supplies | |||||||
| Wiper blades | ||||||||
We provide our customers with quality products that are often offered at a good, better or best recommendation differentiated by price and quality. We accept customer returns for many new, core and warranty products.
Our Customers
Our Professional customers consist primarily of customers for whom we deliver product from our store or branch locations to their places of business, including garages, service stations and auto dealers. Our Professional sales represented approximately 57%, 60% and 58% of our sales in 2020, 2019 and 2018. We also serve 1,277 independently owned Carquest stores with shipments directly from our distribution centers. Our DIY customers are primarily served through our stores, but can also order online to pick up merchandise at a conveniently located store or have their purchases shipped directly to them. Except where prohibited, we also provide a variety of services at our stores free of charge to our customers, including:
•Battery and wiper installation;
•Check engine light scanning;
•Electrical system testing, including batteries, starters and alternators;
•“How-To” video clinics;
•Oil and battery recycling; and
•Loaner tool programs.
We also serve our customers online at www.AdvanceAutoParts.com. Our Professional customers can conveniently place their orders electronically, including through MyAdvance.com, by phone, or in-store and we deliver product from our store or branch locations to their places of business.
Store Development
The key factors used in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. As of January 2, 2021, 4,809 stores and branches were located in 49 U.S. states and 2 U.S. territories and 167 stores and branches were located in 9 Canadian provinces.
We serve our stores and branches primarily from our principal corporate offices in Raleigh, NC and Roanoke, VA. We also maintain store support centers in Newark, CA and Norton, MA.
3
Supply Chain
Our supply chain consists of a network of distribution centers, HUBs, stores and branches that enable us to provide same-day or next-day availability to our customers. As of January 2, 2021, we operated 51 distribution centers, ranging in size from approximately 50,000 to 950,000 square feet with total square footage of approximately 11.6 million.
Merchandise, Marketing and Advertising
In 2020, we purchased merchandise from over 1,100 vendors, with no single vendor accounting for more than 10% of purchases. Our purchasing strategy involves negotiating agreements to purchase merchandise over a specified period of time along with other provisions, including pricing, volume and payment terms.
Our merchandising strategy is to carry a broad selection of high quality and reputable brand name automotive parts and accessories that we believe will appeal to our Professional customers and also generate DIY customer traffic. Some of our brands include Bosch®, Castrol®, Dayco®, Denso®, Gates®, Moog®, Monroe®, NGK®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high-quality private label products with a goal of appealing to value-conscious customers. These lines of merchandise include chemicals, interior automotive accessories, batteries and parts under various private label names such as Autocraft®, Autopart International®, Driveworks®, Tough One® and Wearever® as well as the Carquest® brand.
On December 23, 2019, we purchased the DieHard® brand for a cash purchase price of $200.0 million. This purchase gave us the right to sell DieHard® batteries and enables us to extend the DieHard® brand into other automotive and vehicular categories. We granted the seller an exclusive royalty-free, perpetual license to develop, market and sell DieHard® branded products in certain non-automotive categories.
Our marketing and advertising program is designed to drive brand awareness, consideration by consumers and omnichannel traffic by position in aftermarket auto parts category. We strive to exceed our customers’ expectations end-to-end through a comprehensive online and in-store pick up experience, extensive parts assortment, quality brands, experienced parts professionals, Professional programs that are designed to build loyalty with our customers and our DIY customer loyalty program. Our DIY campaign was developed around a multi-channel communications plan that brings together radio, television, digital marketing, social media, sponsorships, store execution, public relations and Speed Perks.
Seasonality
Our business is somewhat seasonal in nature, with the highest sales usually occurring in the spring and summer months. In addition, our business can be affected by weather conditions. While unusually heavy precipitation tends to soften sales as elective maintenance is deferred during such periods, extremely hot or cold weather tends to enhance sales by causing automotive parts to fail at an accelerated rate. Our fourth quarter is generally our most volatile as weather and spending trade-offs typically influence our Professional and DIY sales.
Human Capital Management
As of January 2, 2021, we employed approximately 40,000 full-time Team Members and approximately 28,000 part-time Team Members. Our workforce consisted of 82% of our Team Members employed in store-level operations, 12% employed in distribution and 6% employed in our corporate offices. As of January 2, 2021, approximately 1.2% of our Team Members were represented by labor unions. We believe our People are Our Best Part, and we have adopted six Cultural Beliefs to help us foster a culture that fully engages our Team Members with our business: Speak Up, Be Accountable, Take Action, Move Forward, Grow Talent and Champion Inclusion. Our Cultural Belief of Grow Talent highlights the importance to us of developing our Team Members in their careers, and we seek to not only recruit the best talent, but also retain and promote the best talent. Through another of our Cultural Beliefs, Champion Inclusion, we seek to fully leverage the ideas and talents of all our Team Members in caring for our customers. We encourage our Team Members to Speak Up and promote their engagement through a variety of programs and networks within our organization. In 2020, we had record response to our annual organizational health survey, evidencing high engagement company wide, and we plan to continue to invest in our Team Members to help create long-term value for our stakeholders.
4
Intellectual Property
We own a number of trade names, service marks and trademarks, including “Advance Auto Parts®,” “Advance Same DayTM,” “Autopart International®,” “Carquest®,” “CARQUEST Technical Institute®,” “DieHard®,” “DriverSide®,” “MotoLogic®,” “MotoShop®,” “speedDIAL®,” “TECH-NET Professional Auto Service®” and “Worldpac®” for use in connection with the automotive parts business. In addition, we own and have registered a number of trademarks for our private label brands. We believe that these trade names, service marks and trademarks are important to our merchandising strategy. We do not know of any infringing uses that would materially affect the use of these trade names and marks and we actively defend and enforce them.
Competition
We operate in both the Professional and DIY markets of the automotive aftermarket industry. Our primary competitors are (i) both national and regional chains of automotive parts stores, including AutoZone, Inc., NAPA, O’Reilly Automotive, Inc., The Pep Boys-Manny, Moe & Jack and Auto Plus (formerly Uni-Select USA, Inc.), (ii) internet-based retailers, (iii) discount stores and mass merchandisers that carry automotive products, (iv) wholesalers or jobbers stores, including those associated with national parts distributors or associations, (v) independently owned stores and (vi) automobile dealers that supply parts. We believe that chains of automotive parts stores that, like us, have multiple locations in one or more markets, have competitive advantages in customer service, marketing, inventory selection, purchasing and distribution as compared to independent retailers and jobbers that are not part of a chain or associated with other retailers or jobbers. The principal methods of competition in our business include customer service, product offerings, availability, quality, price and store location.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing collection, transportation and recycling of automotive lead-acid batteries, used motor oil and other recyclable items and ownership and operation of real property. We sell products containing hazardous materials as part of our business. In addition, our customers may bring automotive lead-acid batteries, used motor oil or other recyclable items onto our properties. We currently provide collection and recycling programs for used lead-acid batteries, used oil and other recyclable items at a majority of our stores as a service to our customers. Pursuant to agreements with third-party vendors, lead-acid batteries, used motor oil and other recyclable items are collected by our Team Members, deposited onto pallets or into vendor supplied containers and stored by us until collected by the third-party vendors for recycling or proper disposal. The terms of our contracts with third party vendors require that they are in compliance with all applicable laws and regulations. Our third-party vendors who arrange for the removal, disposal, treatment or other handling of hazardous or toxic substances may be liable for the costs of removal or remediation at any affected disposal, treatment or other site affected by such substances. Based on our experience, we do not believe that there are any material environmental costs associated with the current business practice of accepting lead-acid batteries, used oil and other recyclable items as these costs are borne by the respective third-party vendors.
We own and lease real property. Under various environmental laws and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. These laws often impose joint and several liability and may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous or toxic substances. Other environmental laws and common law principles also could be used to impose liability for releases of hazardous materials into the environment or work place, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. From time to time, we receive notices from the U.S. Environmental Protection Agency and state environmental authorities indicating that there may be contamination on properties we own, lease or operate or may have owned, leased or operated in the past or on adjacent properties for which we may be responsible. Compliance with these laws and regulations and clean-up of released hazardous substances have not had a material impact on our operations to date.
We are also subject to numerous regulations including those related to labor and employment, discrimination, anti-bribery/anti-corruption, product quality and safety standards, data privacy and taxes. Compliance with any such laws and regulations has not had a material adverse effect on our operations to date. For more information, see the following disclosures in “Part I. Item 1A, Risk Factors” elsewhere in this report.
5
Available Information
Our Internet address is www.AdvanceAutoParts.com. Our website and the information contained therein or linked thereto are not part of this Annual Report on Form 10-K for 2020. We make available free of charge through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish them to the SEC. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at www.sec.gov.
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Item 1A. Risk Factors.
You should consider carefully the risks and uncertainties described below together with the other information included in this Annual Report on Form 10-K, including without limitation our consolidated financial statements and related notes thereto and “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies.” The occurrence of any of the following risks 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.
Risks Related to Our Operations and Growth Strategy
If we are unable to successfully implement our business strategy, including increasing sales to Professional and DIY customers, expanding our margins and increasing our return on invested capital, our business, financial condition, results of operations and cash flows could be adversely affected.
We have identified several initiatives as part of our business strategy to increase sales to both Professional and DIY customers and expand our margins in order to increase our earnings and cash flows. We are currently making and expect to continue to make significant investments to pursue our strategic initiatives. If we are unable to implement our strategic initiatives efficiently and effectively, our business, financial condition, results of operations and cash flows could be adversely affected. We could also be adversely affected if we have not appropriately prioritized and balanced our initiatives or if we are unable to effectively manage change throughout our organization. Implementing strategic initiatives could disrupt or reduce the efficiency of our operations and may not provide the anticipated benefits, or may provide them on a delayed schedule or at a higher cost. These risks increase when significant changes are undertaken.
If we are unable to successfully implement our growth strategy, keep existing store locations or open new locations in desirable places on favorable terms, it could adversely affect our business, financial condition, results of operations and cash flows.
We intend to continue to expand the markets we serve as part of our growth strategy, which may include opening new stores or branches, as well as expansion of our online business. We may also grow our business through strategic acquisitions. As we expand our market presence, it becomes more critical that we have consistent and effective execution across all of our Company’s locations and brands. We are unsure whether we will be able to open and operate new locations on a timely or sufficiently profitable basis, or that opening new locations in markets we already serve will not harm the profitability or comparable store sales of existing locations. The newly opened and existing locations’ profitability will depend on the competition we face as well as our ability to properly stock, market and price the products desired by customers in these markets. The actual number and format of any new locations to be opened and the success of our growth strategy will depend on a number of factors, including, among other things:
•the availability of desirable locations;
•the negotiation of acceptable lease or purchase terms for new locations;
•the availability of financial resources, including access to capital at cost-effective interest rates;
•our ability to expand our on-line offerings and sales; and
•our ability to manage the expansion and to hire, train and retain qualified Team Members.
We compete with other retailers and businesses for suitable locations for our stores. Local land use and zoning regulations, environmental regulations and other regulatory requirements may impact our ability to find suitable locations and influence the cost of constructing, renovating and operating our stores. In addition, real estate, zoning, construction and other delays may adversely affect store openings and renovations and increase our costs. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores. The termination or expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. If we determine to close or relocate a store subject to a lease, we may remain obligated under the applicable lease for the balance of the lease term. In addition to potentially incurring costs related to lease obligations, we may also incur severance or other facility closure costs for stores that are closed or relocated.
7
Omnichannel growth in our business is complex and if we are unable to successfully maintain a relevant omnichannel experience for our customers, our sales and results of operations could adversely be impacted.
Our business has become increasingly omnichannel as we strive to deliver a seamless shopping experience to our customers through both online and in-store shopping experiences. Operating an e-commerce platform is a complex undertaking and exposes us to risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand, and develop our internet operations, website, mobile applications and software and other related operational systems. Continuing to improve our e-commerce platform involves substantial investment of capital and resources, increasing supply chain and distribution capabilities, attracting, developing and retaining qualified personnel with relevant subject matter expertise and effectively managing and improving the customer experience. Omnichannel and e-commerce retail are competitive and evolving environments. Insufficient, untimely or inadequately prioritized or ineffectively implemented investments could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
Enhancing the customer experience through omnichannel programs such as buy-online-pickup-in-store, new or expanded delivery options, the ability to shop through a mobile application or other similar programs depends in part on the effectiveness of our inventory management processes and systems, the effectiveness of our merchandising strategy and mix, our supply chain and distribution capabilities, and the timing and effectiveness of our marketing activities, particularly our promotions. Costs associated with implementing omnichannel initiatives may be higher than expected, and the initiatives may not result in increased sales, including same store sales, customer traffic, customer loyalty or other anticipated results. Website downtime and other technology disruptions in our e-commerce platform, including due to cyber-related issues or natural disasters, and supply and distribution delays and other related issues may affect the successful operation of our e-commerce platform. If we are not able to successfully operate or improve our e-commerce platform and omnichannel business, we may not be able to provide a relevant shopping experience or improve customer traffic, sales or margins, and our reputation, operations, financial condition, results of operations and cash flows could be materially adversely affected.
If we are unable to successfully integrate future acquisitions into our existing operations or implement joint ventures or other strategic relationships, it could adversely affect our business, financial condition, results of operations and cash flows.
We expect to continue to make strategic acquisitions and enter into strategic relationships as an element of our growth strategy. Acquisitions, joint ventures and other strategic relationships involve certain risks that could cause our growth and profitability to differ from our expectations. The success of these acquisitions and relationships depends on a number of factors, including among other things:
•our ability to continue to identify and acquire suitable targets or strategic partners, or to acquire additional companies or enter into strategic relationships, at favorable prices and/or with favorable terms;
•our ability to obtain the full benefits envisioned by strategic transactions or relationships;
•the risk that management’s attention may be distracted;
•our ability to attract and retain key personnel;
•our ability to successfully integrate the operations and systems of the acquired companies, and to achieve the strategic, operational, financial or other anticipated synergies of the acquisition or other transaction or relationship;
•the performance our of our strategic partners;
•we may incur significant transaction or integration costs that may not be offset by the synergies or other benefits achieved in the near term, or at all;
•we may become subject to additional operational risks, such as those associated with doing business internationally or expanding operations into new territories, geographies or channels; and
•we may assume or become subject to loss contingencies, known or unknown, of acquired companies, which could relate to past, present or future facts, events, circumstances or occurrences.
8
If we experience difficulties implementing various information systems, including our new enterprise resource planning system (“ERP”), our ability to conduct or business could be negatively impacted.
We are dependent on information systems to facilitate the day-to-day operations of the business and to produce timely, accurate and reliable information on financial and operational results. We are in process of implementing various information systems, including a new ERP. These implementations will require significant investment of human and financial resources, and we may experience significant delays, increased costs and other difficulties with these projects. Any significant disruption or deficiency in the design and implementation of these information systems could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. While we have invested meaningful resources in planning, project management and training, additional and serious implementation issues may arise as we integrate onto these new information systems that may disrupt our operations and negatively impact our business, financial condition, results of operations and cash flows.
If we are unable to maintain adequate supply chain capacity and improve supply chain efficiency, we will not be able to expand our business, which could adversely affect our business, financial condition, results of operations and cash flows.
Our store inventories are primarily replenished by shipments from our network of distribution centers, warehouses and HUB stores. As we expand our market presence, we will need to increase the efficiency and maintain adequate capacity of our supply chain network in order to achieve the business goal of reducing inventory costs while improving availability and movement of goods throughout our supply chain to meet consumer product needs and channel preferences. We continue to streamline and optimize our supply chain network and systems. If our investments in our supply chain do not provide the anticipated benefits, we could experience sub-optimal inventory levels or increases in our costs, which could adversely affect our business, financial condition, results of operations and cash flows.
We are dependent on our suppliers to supply us with products that comply with safety and quality standards at competitive prices.
We are dependent on our vendors continuing to supply us quality products on payment terms that are favorable to us. If our merchandise offerings do not meet our customers’ expectations regarding safety and quality, we could experience lost sales, increased costs and exposure to legal and reputational risk. Our suppliers are subject to applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to additional government regulation of their product design and/or manufacturing processes, the cost of the merchandise we purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our customers.
Our reliance on suppliers subjects us to various risks and uncertainties which could affect our financial results.
We source the products we sell from a wide variety of domestic and international suppliers. Our financial results depend on us securing acceptable terms with our suppliers for, among other things, the price of merchandise we purchase from them, funding for various forms of promotional programs, payment terms and terms covering returns and factory warranties. To varying degrees, our suppliers may be able to leverage their competitive advantages - for example, their financial strength, the strength of their brand with customers, their own stores or online channels or their relationships with other retailers - to our commercial disadvantage. Generally, our ability to negotiate favorable terms with our suppliers is more difficult with suppliers for whom our purchases represent a smaller proportion of their total revenues, consequently impacting our profitability from such vendor relationships. We have established standards for product safety and quality and workplace standards that we require all our suppliers to meet. We do not condone human trafficking, forced labor, child labor, harassment or abuse of any kind, and we expect our suppliers to operate within these same principles. Our ability to find qualified suppliers who can supply products in a timely and efficient manner that meet our standards can be challenging. Suppliers may also fail to invest adequately in design, production or distribution facilities, may reduce their customer incentives, advertising and promotional activities or change their pricing policies. If we encounter any of these issues with our suppliers, our business, financial condition, results of operations and cash flows could be adversely impacted.
9
We depend on the services of many qualified executives and other Team Members, whom we may not be able to attract, develop and retain.
Our success depends to a significant extent on the continued engagement, services and experience of our executives and other Team Members. We may not be able to retain our current executives and other key Team Members or attract and retain additional qualified executives and Team Members who may be needed in the future. Our ability to attract, develop and retain an adequate number of qualified Team Members depends on factors such as employee morale, our reputation, competition from other employers, availability of qualified personnel, our ability to offer competitive compensation and benefit packages and our ability to maintain a safe working environment. We also believe our future success will depend in part upon our ability to attract and retain highly skilled personnel for whom the market is highly competitive, particularly for individuals with certain types of technical skills. Failure to recruit or retain qualified employees may impair our efficiency and effectiveness and our ability to pursue growth opportunities. Additionally, turnover in executive or other key positions can disrupt progress in implementing business strategies, result in a loss of institutional knowledge, cause other Team Members to take on substantially more responsibility, resulting in greater workload demands and diverting attention away from key areas of the business, or otherwise negatively impact our growth prospects or future operating results.
We operate in a competitive labor market and there is a risk that market increases in compensation could have an adverse effect on our profitability. Market or government regulated increases to employee hourly wage rates, along with our ability to implement corresponding adjustments within our labor model and wage rates, could have a significant impact to the profitability of our business. In addition, approximately one percent of our Team Members are represented by unions. If these Team Members were to engage in a strike, work stoppage, or other slowdown, or if the terms and conditions in labor agreements were renegotiated, we could experience a disruption in our operations and higher ongoing labor costs. If we fail or are unable to maintain competitive compensation, our customer service and execution levels could suffer by reason of a declining quality of our workforce, which could adversely affect our business, financial condition, results of operations and cash flows.
Because we are involved in litigation from time to time, and are subject to numerous laws and governmental regulations, we could incur substantial judgments, fines, legal fees and other costs.
We are sometimes the subject of complaints or litigation, which may include class action litigation from customers, Team Members or others for various actions. From time to time, we are involved in litigation involving claims related to, among other things, breach of contract, tortious conduct, employment, discrimination, breach of laws or regulations (including The Americans With Disabilities Act), payment of wages, exposure to asbestos or potentially hazardous product, real estate and product defects. The damages sought against us in some of these litigation proceedings are substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows. For instance, we are currently subject to a putative securities class action regarding past public disclosures (see Item 3, "Legal Proceedings" of this Annual Report on Form 10-K) and to numerous lawsuits alleging injury as a result of exposure to asbestos-containing products (see Note 13, Contingencies, of the Notes to the Consolidated Financial Statements included herein).
We are subject to numerous federal, state and local laws and governmental regulations relating to, among other things, environmental protection, product quality and safety standards, building and zoning requirements, labor and employment, discrimination, anti-bribery/anti-corruption, data privacy and income taxes. Compliance with existing and future laws and regulations could increase the cost of doing business and adversely affect our results of operations. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs, as well as reputational risk. In addition, our capital and operating expenses could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.
10
We work diligently to maintain the privacy and security of our customer, supplier, Team Member and business information and the functioning of our computer systems, website and other on-line offerings. In the event of a security breach or other cyber security incident, we could experience adverse operational effects or interruptions and/or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace and substantial costs.
The nature of our business requires us to receive, retain and transmit certain personally identifiable information about our customers, suppliers and Team Members, some of which is entrusted to third-party service providers. While we have taken and continue to undertake significant steps to protect such personally identifiable information and other confidential information and to protect the functioning of our computer systems, website and other online offerings, a compromise of our data security systems or those of businesses we interact with could result in information related to our customers, suppliers, Team Members or business being obtained by unauthorized persons or adverse operational effects or interruptions, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We develop, maintain and update processes and systems in an effort to try to prevent this from occurring, but these actions are costly and require constant, ongoing attention as technologies change, privacy and information security regulations change, and efforts to overcome security measures by bad actors continue to become ever more sophisticated. The cost of complying with stricter and more complex data privacy (such as the California Consumer Privacy Act, which grants expanded rights to access and delete personal information and opt out of certain personal information sharing), data collection and information security laws and standards could also be significant to us. Such laws and standards may also increase our responsibility and liability in relation to personal data that we process, and we may be required to put in place additional mechanisms ensuring compliance with privacy laws and regulations.
Despite our efforts, our security measures may be breached in the future due to a cyber-attack, computer malware viruses, exploitation of hardware and software vulnerabilities, Team Member error, malfeasance, fraudulent inducement (including so-called “social engineering” attacks and “phishing” scams) or other acts. While we have experienced threats to our data and systems, including phishing attacks, to date we are not aware that we have experienced a material cyber-security breach that has in any manner hindered our operational capabilities. Unauthorized parties may in the future obtain access to our data or the data of our customers, suppliers or Team Members or may otherwise cause damage to or interfere with our equipment, our data and/or our network including our supply chain. While the Company maintains insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover losses in any particular situation. Any breach, damage to or interference with our equipment or our network, or unauthorized access in the future could result in significant operational difficulties including legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is always the risk that the confidentiality or accessibility of data held or utilized by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and possibly subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise, which may adversely impact our sales and profitability.
Hurricanes, tornadoes, earthquakes or other natural disasters, war or acts of terrorism, public health issues or pandemics or the threat of any of these incidents or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or Team Members, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to import into the United States due to business interruption (including regulation of exporting or importing), and if we cannot obtain such merchandise from other sources at similar costs and without an adverse delay, our sales and profit margins may be negatively affected.
In the event that commercial transportation, including the global shipping industry, is curtailed or substantially delayed, our business may be adversely impacted as we may have difficulty receiving merchandise from our suppliers and/or transporting it to our stores.
Terrorist attacks, war in the Middle East, geopolitical unrest or uncertainty or insurrection involving any oil producing country could result in an abrupt increase in the price of crude oil, gasoline and diesel fuel. Such price increases would increase the cost of doing business for us and our suppliers, and also negatively impact our customers’ disposable income, causing an adverse impact on our business, sales, profit margins and results of operations.
11
We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. These systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events or occasional system breakdowns related to ordinary use or wear and tear. If our computer systems or those of our business partners fail, we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any significant business interruptions may make it difficult or impossible to continue operations, and any disaster recovery or crisis management plans we may employ may not suffice in any particular situation to avoid a significant adverse impact to our business, financial condition and our results of operations.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The concern over climate change has led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions (“GHG”). For example, proposals that would impose mandatory requirements related to GHG continue to be considered by policy makers in the United States and elsewhere. Laws enacted to reduce GHG that directly or indirectly affect our suppliers (through an increase in their cost of production) or our business (through an impact on our inventory availability, cost of sales, operations or demand for the products we sell) could adversely affect our business, financial condition, results of operations and cash flows. Changes in automotive technology and compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers all of which could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
Risks Related to Our Industry and the Business Environment
The COVID-19 pandemic may significantly and adversely impact our business operations, demand for our products, availability of labor, access to inventory, our exposure to litigation, financial condition, results of operations and cash flows.
The COVID-19 pandemic significantly impacted our business as the uncertainty, volatility and disruption of a new public health crisis emerged in 2020. In our first fiscal quarter of 2020, we experienced disruption to our normal business operations from a number of factors, including the need to rapidly adopt new health and safety measures, significant impact to demand driven by stay at home orders and uncertainty around regulatory, economic and market conditions. The onset of the pandemic also created significant volatility in our stock price and may continue to create volatility, which may not be reflective of our actual business and competitive position. While we have taken numerous steps to mitigate the impact of the pandemic on our results of operations, many uncertainties could still materially impact our business, results of operations, cash flows, and financial condition.
Uncertainty remains about the severity and duration of the pandemic, including whether there will be additional “waves” or other continued periods of increases or spikes in the number of COVID-19 cases in future periods; the severity and transmission rate of “variations” or future mutations of COVID-19; and the development, efficacy, distribution and adoption rates of vaccines for COVID-19 and variants thereof. The risk of the spread of COVID-19 could adversely impact our ability to staff our stores or distribution centers, result in significant increased expenses related to store cleanings and Team Member benefits or negatively impact the operations of our suppliers, logistics or transportation providers, and our service providers or subcontractors. Additionally, while we have continued to prioritize the health and safety of our Team Members and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments and depending on the extent and severity of the pandemic, may incur significant increased operating costs associated with potential increases in insurance premiums, medical claims costs, and/or workers’ compensation claim costs, which could negatively affect our results of operations both during and after the pandemic.
While we have not experienced widespread store or distribution center closures, it is unknown how the current administration, specific locales or governmental and nongovernmental authorities of jurisdictions in which we and/or our suppliers, distributors and others that we do business with will respond to the continuation of the COVID-19 pandemic. Actions such as quarantine or shelter-in-place measures, limitations on access to unemployment compensation, economic measures and other governmental orders could cause disruption to our operations or those of our suppliers, distributors or others that we do business with.
12
If overall demand for the products we sell declines, our business, financial condition, results of operations and cash flows will suffer. Decreased demand could also negatively impact our stock price.
Overall demand for products sold by our stores depends on many factors and may decrease due to any number of reasons, including:
•a decrease in the total number of vehicles on the road or in the number of annual miles driven or significant increase in the use of ridesharing services, because fewer vehicles means less maintenance and repairs, and lower vehicle mileage, which decreases the need for maintenance and repair;
•the economy, as consumers reduce their discretionary spending by deferring vehicle maintenance or repair, sales may decline and as new car purchases increase, the number of cars requiring maintenance and repair may decrease.
•the weather, because milder weather conditions may lower the failure rates of automobile parts while extended periods of rain and winter precipitation may cause our customers to defer elective maintenance and repair of their vehicles;
•the average duration of vehicle manufacturer warranties and average age of vehicles being driven, because newer cars typically require fewer repairs and will be repaired by the manufacturers’ dealer networks using dealer parts pursuant to warranties (which have gradually increased in duration and/or mileage expiration over the recent past), while vehicles that are seven years old and older are generally no longer covered under manufacturers’ warranties and tend to need more maintenance and repair than newer vehicles;
•an increase in internet-based retailers, because potentially favorable prices and ease of use of purchasing parts via other websites on the internet may decrease the need for customers to visit and purchase their aftermarket parts from our physical stores and may cause fewer customers to order aftermarket parts on our website;
•technological advances, such as battery electric vehicles, and the increase in quality of vehicles manufactured, because vehicles that need less frequent maintenance or have lower part failure rates will require less frequent repairs using aftermarket parts and, in the case of battery electric vehicles, do not require oil changes; and
•the refusal of vehicle manufacturers to make available diagnostic, repair and maintenance information to the automotive aftermarket industry that our Professional and DIY customers require to diagnose, repair and maintain their vehicles, because this may force consumers to have a majority of diagnostic work, repairs and maintenance performed by the vehicle manufacturers’ dealer networks.
If we are unable to compete successfully against other companies in the automotive aftermarket industry, we may lose customers and our revenues may decline.
The sale of automotive parts, accessories and maintenance items is highly competitive and influenced by a number of factors, including name recognition, location, price, quality, product availability and customer service. We compete in both the Professional and DIY categories of the automotive aftermarket industry, primarily with: (i) national and regional chains of automotive parts stores, (ii) internet-based retailers, (iii) discount stores and mass merchandisers that carry automotive products, (iv) wholesalers or jobbers stores, including those associated with national parts distributors or associations (v) independently owned stores and (vi) automobile dealers that supply parts. These competitors and the level of competition vary by market. Some of our competitors may possess advantages over us in certain markets we share, including with respect to the level of marketing activities, number of stores, store locations, store layouts, operating histories, name recognition, established customer bases, vendor relationships, prices and product warranties. Internet-based retailers may possess cost advantages over us due to lower overhead costs, time and travel savings and ability to price competitively. In order to compete favorably, we may need to increase delivery speeds and incur higher shipping costs. Consolidation among our competitors could enhance their market share and financial position, provide them with the ability to achieve better purchasing terms and allow them to provide more competitive prices to customers for whom we compete.
In addition, our reputation is critical to our continued success. Customers are increasingly shopping, reading reviews and comparing products and prices on-line. If we fail to maintain high standards for; or receive negative publicity (whether through social media or traditional media channels) relating to, product safety and quality or our integrity and reputation, we could lose customers to our competition. The product we sell is branded both in brands of our vendors and in our owned private label brands. If the perceived quality or value of the brands we sell declines in the eyes of our customers, our results of operations could be negatively affected.
Competition may require us to reduce our prices below our normal selling prices or increase our promotional spending, which could lower our revenue and profitability. Competitive disadvantages may also prevent us from introducing new product lines, require us to discontinue current product offerings, or change some of our current operating strategies. If we do not have the resources, expertise and consistent execution, or otherwise fail to develop successful strategies, to address these potential competitive disadvantages, we may lose customers, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
13
Our inventory and ability to meet customer expectations may be adversely impacted by factors out of our control.
For that portion of our inventory manufactured and/or sourced outside the United States, geopolitical changes, changes in trade regulations or tariff rates, currency fluctuations, work stoppages, labor strikes, port delays, civil unrest, natural disasters, pandemics and other factors beyond our control may increase the cost of items we purchase or create shortages that could have a material adverse effect on our sales and profitability. In addition, unanticipated changes in consumer preferences or any unforeseen hurdles to meeting our customers’ needs for automotive products (particularly parts availability) in a timely manner could undermine our business strategy.
In addition, preparing for and responding to the continuing pandemic could divert management’s attention from our key strategic priorities, further increase costs as we prioritize health and safety matters for our Team Members and customers, increase vulnerability to information technology or cybersecurity related risks as more of our Team Members work remotely and otherwise continue to disrupt our business operations.
Even after the pandemic has subsided, we may experience adverse impacts to our business as a result of economic volatility or changes to the macroeconomic environment that have occurred or may occur. The pandemic could also amplify other risks and uncertainties described herein.
Deterioration of general macro-economic conditions, including unemployment, inflation or deflation, consumer debt levels, high fuel and energy costs, could have a negative impact on our business, financial condition, results of operations and cash flows due to impacts on our suppliers, customers and operating costs.
Our business depends on developing and maintaining close relationships with our suppliers and on our suppliers’ ability and willingness to sell quality products to us at favorable prices and terms. Many factors outside our control may harm these relationships and the ability or willingness of these suppliers to sell us products on favorable terms. Such factors include a general decline in the economy and economic conditions and prolonged recessionary conditions. These events could negatively affect our suppliers’ operations and make it difficult for them to obtain the credit lines or loans necessary to finance their operations in the short-term or long-term and meet our product requirements. Financial or operational difficulties that some of our suppliers may face could also increase the cost of the products we purchase from them or our ability to source product from them. We might not be able to pass our increased costs onto our customers. If our suppliers fail to develop new products we may not be able to meet the demands of our customers and our results of operations could be negatively affected.
In addition, the trend towards consolidation among automotive parts suppliers as well as the off-shoring of manufacturing capacity to foreign countries may disrupt or end our relationship with some suppliers, and could lead to less competition and result in higher prices. We could also be negatively impacted by suppliers who might experience bankruptcies, work stoppages, labor strikes, changes in foreign or domestic trade policies, changes in tariff rates or other interruptions to or difficulties in the manufacture or supply of the products we purchase from them.
Deterioration in macro-economic conditions or an increase in fuel costs or proposed or additional tariffs may have a negative impact on our customers’ net worth, financial resources, disposable income or willingness or ability to pay for accessories, maintenance or repair for their vehicles, resulting in lower sales. An increase in fuel costs may also reduce the overall number of miles driven by our customers resulting in fewer parts failures and a reduced need for elective maintenance.
Rising energy prices also directly impact our operating and product costs, including our store, supply chain, Professional delivery, utility and product acquisition costs.
Risks Related to Our Common Stock and Financial Condition
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. Downturns in the stock market may cause the price of our common stock to decline. The market price of our stock may also be affected by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. For example, in February 2018, following a significant decline in the price of our common stock, a putative class action was commenced against us (see Item 3 “Legal Proceedings” of this Annual Report on Form 10-K). Such litigation could result in substantial costs and a diversion of our attention and resources, which could have an adverse effect on our business.
14
The amount and frequency of our share repurchases and dividend payments may fluctuate.
The amount, timing and execution of our share repurchase program may fluctuate based on our priorities for the use of cash for other purposes such as operational spending, capital spending, acquisitions or repayment of debt. Changes in cash flows, tax laws and our share price could also impact our share repurchase program and other capital activities. Additionally, decisions to return capital to shareholders, including through our repurchase program or the issuance of dividends on our common stock, remain subject to determination of our Board of Directors that any such activity is in the best interests of our shareholders and is in compliance with all applicable laws and contractual obligations.
Our level of indebtedness, a downgrade in our credit ratings or a deterioration in global credit markets could limit the cash flow available for operations and could adversely affect our ability to service our debt or obtain additional financing.
Our level of indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. For example, our level of indebtedness could, among other things:
•affect our liquidity by limiting our ability to obtain additional financing for working capital;
•limit our ability to obtain financing for capital expenditures and acquisitions or make any available financing more costly;
•require us to dedicate all or a substantial portion of our cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures, dividends or acquisitions;
•limit our flexibility in planning for or reacting to changes in the markets in which we compete;
•place us at a competitive disadvantage relative to our competitors who may have less indebtedness;
•render us more vulnerable to general adverse economic and industry conditions; and
•make it more difficult for us to satisfy our financial obligations.
The indenture governing our notes and credit agreement governing our credit facilities contain financial and other restrictive covenants. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, including such notes.
In addition, our overall credit rating may be negatively impacted by deteriorating and uncertain credit markets or other factors that may or may not be within our control. The interest rates on our publicly issued debt and revolving credit facility are linked directly to our credit ratings. Accordingly, any negative impact on our credit ratings would likely result in higher interest rates and interest expense on any borrowings under our revolving credit facility or future issuances of public debt and less favorable terms on other operating and financing arrangements. In addition, it could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements.
Conditions and events in the global credit market could have a material adverse effect on our access to short and long-term borrowings to finance our operations and the terms and cost of that debt. It is possible that one or more of the banks that provide us with financing under our revolving credit facility may fail to honor the terms of our existing credit facility or be financially unable to provide the unused credit as a result of significant deterioration in such bank’s financial condition. An inability to obtain sufficient financing at cost-effective rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, principal corporate offices and retail stores and branches at the end of 2020:
Square Footage (in thousands) | ||||||||||||||||||||
| Location | Leased | Owned | ||||||||||||||||||
| Distribution centers | 51 locations in 32 U.S. states and 4 Canadian provinces | 7,304 | 4,401 | |||||||||||||||||
| Principal corporate offices: | ||||||||||||||||||||
| Raleigh, NC | Raleigh, NC | 387 | — | |||||||||||||||||
| Roanoke, VA | Roanoke, VA | 265 | — | |||||||||||||||||
| Stores and branches | 4,809 stores and branches in 49 U.S. states and 2 U.S. territories and 167 stores and branches in 9 Canadian provinces | 34,755 | 6,307 | |||||||||||||||||
Item 3. Legal Proceedings.
On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleges that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020 the court granted in part and denied in part our motion to dismiss. The surviving claims are subject to discovery. On November 6, 2020 the court granted plaintiff’s motion for class certification. In addition, derivative complaints purportedly on behalf of the Company were filed against us as nominal defendant and certain of our current and former officers and directors related to similar allegations for the Class Period on April 29, 2020 in the U.S. District Court for the District of Delaware and August 13, 2020 in the Delaware Court of Chancery. The defendants have moved to dismiss the federal derivative complaint and the state court derivative claim is stayed pending the determination of the federal motion to dismiss. We strongly dispute the allegations of the complaints and intend to defend the cases vigorously.
Refer to discussion in Note 13, Contingencies, of the Notes to the Consolidated Financial Statements included herein for information relating to additional legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “AAP.”
At February 17, 2021, there were 293 holders of record of our common stock, which does not include the number of beneficial owners whose shares were represented by security position listings.
Our share repurchase program authorizing the repurchase of up to $400.0 million in common stock was authorized by our Board of Directors on August 7, 2019. On November 8, 2019 our Board of Directors authorized $700 million as an addition to the existing share repurchase program. The following table sets forth information with respect to repurchases of our common stock for the fourth quarter ended January 2, 2021:
| Period | Total Number of Shares Purchased (1) | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value that May Yet Be Purchased Under the Programs (In thousands) | ||||||||||||||||||||||
| October 4, 2020 to October 30, 2020 | 492,429 | $ | 154.31 | 492,429 | $ | 676,170 | ||||||||||||||||||||
| November 1, 2020 to November 28, 2020 | 592,062 | 147.07 | 582,298 | 590,534 | ||||||||||||||||||||||
| November 29, 2020 to January 2, 2021 | 1,026,947 | 154.15 | 1,026,939 | 432,234 | ||||||||||||||||||||||
| Total | 2,111,438 | $ | 152.20 | 2,101,666 | $ | 432,234 | ||||||||||||||||||||
(1)The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $1.4 million, or an average price of $147.24 per share, during the twelve weeks ended January 2, 2021.
17
Stock Price Performance
The following graph shows a comparison of the cumulative total return on our common stock, the Standard & Poor’s (“S&P”) 500 Index and the Standard & Poor’s Retail Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on January 2, 2016, and that any dividends have been reinvested. The comparison in the graph below is based solely on historical data and is not intended to forecast the possible future performance of our common stock.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ADVANCE AUTO PARTS, INC., S&P 500 INDEX
AND S&P RETAIL INDEX
| Company/Index | January 2, 2016 | December 31, 2016 | December 30, 2017 | December 29, 2018 | December 28, 2019 | January 2, 2021 | ||||||||||||||||||||||||||||||||
| Advance Auto Parts | $ | 100.00 | $ | 112.36 | $ | 66.23 | $ | 103.29 | $ | 105.21 | $ | 104.65 | ||||||||||||||||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 100.00 | $ | 136.40 | $ | 129.31 | $ | 171.94 | $ | 203.04 | ||||||||||||||||||||||||||
| S&P Retail Index | $ | 100.00 | $ | 104.64 | $ | 135.08 | $ | 150.14 | $ | 192.14 | $ | 277.63 | ||||||||||||||||||||||||||
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Item 6. Selected Consolidated Financial Data.
The following table sets forth our selected historical consolidated statements of operations, balance sheets and other operating data. Included in this table are key metrics and operating results used to measure our financial progress. The selected historical consolidated financial and other data (excluding the Selected Store Data and Performance Measures) as of January 2, 2021 and December 28, 2019 and for the years ended January 2, 2021, December 28, 2019 and December 29, 2018 have been derived from our audited consolidated financial statements and the related notes included elsewhere in this report. The historical consolidated financial and other data as of December 29, 2018, December 30, 2017, December 31, 2016 and for the years ended December 30, 2017 (“2017”) and December 31, 2016 (“2016”) have been derived from our audited consolidated financial statements and the related notes that have not been included in this report. You should read this data along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this report.
| (in thousands, except per share data, store data and ratios) | Year | ||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
Statement of Operations Data: (1) | |||||||||||||||||||||||||||||
| Net sales | $ | 10,106,321 | $ | 9,709,003 | $ | 9,580,554 | $ | 9,373,784 | $ | 9,567,679 | |||||||||||||||||||
| Gross profit | $ | 4,481,614 | $ | 4,254,746 | $ | 4,219,413 | $ | 4,085,049 | $ | 4,255,915 | |||||||||||||||||||
| Operating income | $ | 749,907 | $ | 677,180 | $ | 604,275 | $ | 570,212 | $ | 787,598 | |||||||||||||||||||
Net income (2) | $ | 493,021 | $ | 486,896 | $ | 423,847 | $ | 475,505 | $ | 459,622 | |||||||||||||||||||
| Basic earnings per common share | $ | 7.17 | $ | 6.87 | $ | 5.75 | $ | 6.44 | $ | 6.22 | |||||||||||||||||||
| Diluted earnings per common share | $ | 7.14 | $ | 6.84 | $ | 5.73 | $ | 6.42 | $ | 6.20 | |||||||||||||||||||
Cash dividends declared per basic share | $ | 1.00 | $ | 0.24 | $ | 0.24 | $ | 0.24 | $ | 0.24 | |||||||||||||||||||
Balance Sheet and Other Financial Data: | |||||||||||||||||||||||||||||
Total assets (3) | $ | 11,839,636 | $ | 11,248,525 | $ | 9,040,648 | $ | 8,482,301 | $ | 8,315,033 | |||||||||||||||||||
| Total debt | $ | 1,032,984 | $ | 747,320 | $ | 1,045,930 | $ | 1,044,677 | $ | 10,433,255 | |||||||||||||||||||
| Total stockholders’ equity | $ | 3,559,512 | $ | 3,549,081 | $ | 3,550,813 | $ | 3,415,196 | $ | 2,916,192 | |||||||||||||||||||
Selected Store Data and Performance Measures: | |||||||||||||||||||||||||||||
Comparable store sales growth (4) | 2.4 | % | 1.1 | % | 2.3 | % | (2.0 | %) | (1.4 | %) | |||||||||||||||||||
Number of stores, beginning of year | 5,037 | 5,109 | 5,183 | 5,189 | 5,293 | ||||||||||||||||||||||||
New stores | 13 | 26 | 27 | 60 | 78 | ||||||||||||||||||||||||
Closed stores | (74) | (98) | (101) | (66) | (182) | ||||||||||||||||||||||||
Number of stores, end of year | 4,976 | 5,037 | 5,109 | 5,183 | 5,189 | ||||||||||||||||||||||||
Note: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 - 2016 include 52 weeks.
(1)In 2020 we reported Net sales of $10.1 billion, Gross profit of $4.5 billion, Operating income of $749.9 million, Net income of $493.0 million and $7.14 Diluted earnings per share. The 53rd week in 2020 added approximately $158.5 million of Net sales, $20.1 million of Operating income, $15.7 million of Net income and increased Diluted earnings per share by $0.23.
(2)Net income for 2018 and 2017 includes an income tax benefit of $5.7 million and $143.8 million related to the U.S. Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017. Refer to discussion in Note 12, Income Taxes, of the Notes to the Consolidated Financial Statements included herein for further information. Net income for 2020 includes loss on early redemption of our senior unsecured notes of $48.0 million. Refer to discussion in Note 6, Long-term Debt and Fair Value of Financial Instruments, of the Notes to the Consolidated Financial Statements included herein for further information.
(3)Effective December 30, 2018, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which resulted in the recording of lease assets and lease liabilities on our Consolidated Balance Sheet. As of January 2, 2021, total assets includes Operating lease right-of-use assets of 2.4 billion. Refer to discussion in Note 2, Significant Accounting Policies, and Note 8, Leases and Other Commitments, of the Notes to the Consolidated Financial Statements included herein for further information.
(4)Comparable store sales include net sales from our stores, branches and e-commerce websites. Sales to independently owned Carquest branded stores are excluded from our comparable store sales. The change in store sales is calculated based on the change in net sales starting once a store or branch has been open for 13 complete accounting periods (each period represents four weeks). Relocations are included in comparable store sales from the original date of opening. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date (approximately one year). Comparable store sales growth does not include the results from the 53rd week in 2020.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the section titled “Part 1. Item 1A. Risk Factors” elsewhere in this report.
Impact of COVID-19 on Our Business
During the COVID-19 pandemic, we continued to prioritize the health, safety and wellbeing of our Team Members and customers; worked to drive financial performance by preserving our cash position, scrutinized planned spending and the prioritization of various initiatives; and worked to help ensure that when the current period of crisis passes, our team will emerge even stronger.
In response to the COVID-19 pandemic, we have continued to take additional measures to help ensure the health, safety and wellbeing of our Team Members and customers. Such measures include retro-fitting our stores with plexiglass care shields, the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery.
Government imposed restrictions and stay at home orders related to the pandemic occurred during our first quarter of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. However, as the second and third quarters of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY omnichannel business. While government restrictions began to tighten again in the fourth quarter of 2020, we still experienced increased demand, resulting in increased comparable store sales.
In addition to external factors, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day options, contributed to driving demand and the improvement in our results. We have also continued to make progress on the execution of our key supply chain initiatives, including cross-banner replenishment and our single warehouse management system.
Despite the increase in Net sales during the fifty-three weeks ended January 2, 2021, the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.
Management Overview
Net sales increased 4.1% in 2020 as compared to 2019, which was primarily driven by an increase in comparable store sales of 2.4% resulting from growth in our DIY omnichannel business, with the remaining increase attributable to 2020 including a 53rd week of operations versus only 52 weeks of operations in 2019. We experienced positive comparable store sales across every region, with Southeast, Florida and Central having the strongest growth. Our West, Mid Atlantic and Northeast regions had the lowest comparable sales growth.
We generated Diluted earnings per share (“Diluted EPS”) of $7.14 during 2020 compared to $6.84 in 2019. When adjusted for the following non-operational items, our Adjusted diluted earnings per share (“Adjusted EPS”) in 2020 was $8.51 compared to $8.19 during 2019:
| Year Ended | ||||||||||||||
| January 2, 2021 | December 28, 2019 | |||||||||||||
| Transformation expenses | $ | 0.55 | $ | 0.81 | ||||||||||
| General Parts International, Inc. (“GPI”) amortization of acquired intangible assets | $ | 0.30 | $ | 0.29 | ||||||||||
| Other adjustments | $ | 0.52 | $ | 0.25 | ||||||||||
Refer to “Reconciliation of Non-GAAP Financial Measures” for further details of our comparable adjustments and the usefulness of such measures to investors.
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A high-level summary of our financial results and other highlights from 2020 includes:
•Net sales during 2020 were $10.1 billion, an increase of 4.1% as compared to 2019, primarily driven by an increase in comparable store sales of 2.4%, led by growth in our DIY omnichannel business, as well as $158.5 million of Net sales attributable to the additional week in 2020.
•Gross profit margin for 2020 was 44.3% of Net sales, an increase of 52 basis points as compared to 2019. This increase was primarily due to favorable channel mix, growth in our DIY omnichannel business, supply chain leverage, inventory management, including decrease in inventory shrink and favorable pricing actions.
•Operating income for 2020 was $749.9 million, an increase of $72.7 million from 2019. As a percentage of total sales, operating income was 7.4%, an increase of 45 basis points as compared to 2019. The favorable impact in Gross profit was offset by deleveraging SG&A costs compared to prior year due to increased marketing spend on advertising, lease termination costs as we optimize our real estate footprint and higher supplies and cleaning costs related to COVID-19.
•We generated cash flow from operations of $969.7 million during 2020, an increase of 11.9% compared to 2019, primarily due to an increase in Net income, as well as improvements related to working capital.
Refer to “Results of Operations” and “Liquidity and Capital Resources” for further details on our results.
Business Update
We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience and driving consistent execution for both Professional and “do-it-yourself” (“DIY”) customers. To achieve these improvements, we have undertaken planned strategic initiatives to help build a foundation for long-term success across the organization, which include:
•Continued development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
•Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network.
•Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand.
•Progress in the implementation of a more efficient end-to-end supply chain to deliver our broad assortment.
•Enhancement of ‘Advance Same Day’ Curbside Pick Up, ‘Advance Same Day’ Home Delivery and our mobile application and eCommerce performance.
•Actively pursuing new store openings in 2021, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independent Carquest network.
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. In addition to the “Impact of COVID-19 on Our Business” section included within Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:
•Fuel costs
•Unemployment rates
•Consumer confidence
•Competition
•Changes in new car sales
•Miles driven
•Vehicle manufacturer warranties
•Average age of vehicles in operation
•Economic and political uncertainty
•Deferral of elective automotive maintenance and improvements in new car quality
While these factors tend to fluctuate, we remain confident in the long-term growth prospects for the automotive parts industry.
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Results of Operations
The following table sets forth certain of our operating data expressed as a percentage of net sales for the periods indicated.
| Year Ended | 2020 vs. 2019 $ Change | Basis Points | 2019 vs. 2018 $ Change | Basis Points | ||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 10,106.3 | 100.0 | % | $ | 9,709.0 | 100.0 | % | $ | 9,580.6 | 100.0 | % | $ | 397.3 | — | $ | 128.4 | — | ||||||||||||||||||||||||||||||||
Cost of sales | 5,624.7 | 55.7 | 5,454.3 | 56.2 | 5,361.1 | 56.0 | 170.4 | (52) | 93.1 | 22 | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | 4,481.6 | 44.3 | 4,254.7 | 43.8 | 4,219.4 | 44.0 | 226.9 | 52 | 35.3 | (22) | ||||||||||||||||||||||||||||||||||||||||
| SG&A | 3,731.7 | 36.9 | 3,577.6 | 36.8 | 3,615.1 | 37.7 | 154.1 | 8 | (37.6) | (89) | ||||||||||||||||||||||||||||||||||||||||
| Operating income | 749.9 | 7.4 | 677.2 | 7.0 | 604.3 | 6.3 | 72.8 | 45 | 72.9 | 67 | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | (46.9) | (0.5) | (39.9) | (0.4) | (56.6) | (0.6) | (7.0) | (5) | 16.7 | 18 | ||||||||||||||||||||||||||||||||||||||||
| Loss on debt extinguishment | (48.0) | (0.5) | (10,756) | (0.1) | — | — | (37.2) | (36) | (10.8) | (11) | ||||||||||||||||||||||||||||||||||||||||
| Other income, net | (4.0) | 0.0 | 11.2 | 0.1 | 7.6 | 0.1 | (15.2) | (15) | 3.6 | 4 | ||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 158.0 | 1.6 | 150.9 | 1.6 | 131.4 | 1.4 | 7.1 | 1 | 19.4 | 18 | ||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 493.0 | 4.9 | % | $ | 486.8 | 5.0 | % | $ | 423.8 | 4.4 | % | $ | 6.3 | (14) | $ | 63.0 | 59 | ||||||||||||||||||||||||||||||||
Note 1: Table amounts may not foot due to rounding.
Note 2: Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks.
2020 Compared to 2019
Net Sales
The year ended January 2, 2021 consisted of 53 weeks compared to 52 weeks in 2019. Net sales for 2020 were $10.1 billion, an increase of $397.3 million, or 4.1%, from Net sales in 2019. This increase primarily reflected the impact of our positive comparable store sales 2.4% resulting from growth in our DIY omnichannel business, as well as $158.5 million of Net sales attributable to the additional week in 2020. We experienced positive comparable store sales across every region, with Southeast, Florida and Central having the strongest growth. Our West, Mid Atlantic and Northeast regions had the lowest comparable sales growth.
We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store sales 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. Net sales for the 53rd week in a year are not included in the comparable sales calculation for that year. For example, our comparable sales results for 2020 compare weeks 1 through 52 in 2020 to the 52-week period reported for 2019. Comparable sales is intended only as supplemental information and is not a substitute for Net sales presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Gross Profit
Gross profit for 2020 was $4.5 billion, or 44.3% of net sales, as compared to $4.3 billion, or 43.8% of net sales, in 2019, an increase of 52 basis points. The increase in gross profit as a percentage of net sales was primarily due to favorable channel mix, growth in our DIY omnichannel business, operational productivity relating to our ability to leverage our supply chain, inventory management including a decrease in inventory shrink and favorable pricing actions.
As a result of changes in our last in, first out (“LIFO”) reserve, a benefit of $13.8 million, an expense of $101.3 million and a benefit of $39.8 million were included in Cost of Sales in 2020, 2019 and 2018.
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Selling, general and administrative expenses (“SG&A”)
SG&A for 2020 was $3.7 billion, or 36.9% of net sales, as compared to $3.6 billion, or 36.8% of net sales, for 2019, an increase of 8 basis points. This increase as a percentage of net sales was primarily due to increased marketing spend on advertising, lease termination costs as we optimize our real estate footprint and higher supplies and cleaning costs related to COVID-19. The additional week in 2020 contributed $53.5 million to SG&A.
Interest expense
Interest expense for 2020 was $46.9 million, an increase of $7.0 million when compared to 2019. This increase was primarily due to the issuance of our $500.0 million 2030 senior unsecured notes on April 16, 2020 and our $350.0 million 2027 senior unsecured notes on September 29, 2020. Refer to Note 6, Long-term Debt and Fair Value of Financial Instruments of the Notes to the Consolidated Financial Statements included herein for further details.
Loss on early redemptions of senior unsecured notes
During the fifty-three weeks ended January 2, 2021, we incurred charges of $48.0 million related to the early redemption of our 2022 and 2023 senior unsecured notes. During the fifty-two weeks ended December 28, 2019, we incurred charges of $10.8 million related to the early redemption of our 2020 senior unsecured notes. Refer to Note 6, Long-term Debt and Fair Value of Financial Instruments of the Notes to the Consolidated Financial Statements included herein for further details.
Provision for income taxes
Our Provision for income taxes for 2020 was $158.0 million, as compared to $150.9 million for 2019, an increase of $7.1 million primarily due to an increase in taxable income. Our effective tax rate was 24.3% for 2020 and 23.7% for 2019. During 2019, the driver of the lower tax expense resulted from a benefit relating to a release of a valuation allowance that was previously established against the deferred tax asset related to our federal foreign tax credit carryforward.
2019 Compared to 2018
A discussion of changes in our results of operations in 2019 compared to 2018 has been omitted from this Form10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC on February 18, 2020, which is available free of charge on the SECs website at www.sec.gov and at www.AdvanceAutoParts.com, by clicking “Investor Relations” located at the bottom of the home page.
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. 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 transformation expenses under our strategic business plan and non-cash amortization related to the acquired GPI intangible assets and other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to 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.
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Transformation Expenses — Costs incurred in connection with our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses will include, but not be limited to the following:
•Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and Team Member severance in connection with our 2018 Store Rationalization plan and 2017 Store and Supply Chain Rationalization plan.
•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
•Other significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise.
GPI Amortization of Acquired Intangible Assets — As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable leases agreements, which we expect to be subject to amortization through 2025.
We have included a reconciliation of this information to the most comparable GAAP measures in the following table.
| Year Ended | |||||||||||
| (in thousands, except per share data) | January 2, 2021 | December 28, 2019 | |||||||||
| Net income (GAAP) | $ | 493,021 | $ | 486,896 | |||||||
| Cost of sales adjustments: | |||||||||||
| Transformation expenses: | |||||||||||
| Restructuring costs | — | 3,345 | |||||||||
| Other significant costs | 3,161 | — | |||||||||
Other adjustment (1) | — | 13,010 | |||||||||
| SG&A adjustments: | |||||||||||
| GPI amortization of acquired intangible assets | 27,337 | 27,500 | |||||||||
| Transformation expenses: | |||||||||||
| Restructuring costs | 16,765 | 19,028 | |||||||||
| Third-party professional services | 14,117 | 35,579 | |||||||||
| Other significant costs | 15,965 | 19,351 | |||||||||
Other income adjustment (2) | 48,022 | 10,756 | |||||||||
Provision for income taxes on adjustments (3) | (31,342) | (32,142) | |||||||||
| Adjusted net income (Non-GAAP) | $ | 587,046 | $ | 583,323 | |||||||
| Diluted earnings per share (GAAP) | $ | 7.14 | $ | 6.84 | |||||||
| Adjustments, net of tax | 1.37 | 1.35 | |||||||||
| Adjusted diluted earnings per share (Non-GAAP) | $ | 8.51 | $ | 8.19 | |||||||
(1)During the sixteen weeks ended April 20, 2019, we made an out-of-period correction, which increased Cost of sales by $13.0 million, related to received not invoiced inventory.
(2)During the twelve weeks ended October 3, 2020, we incurred charges relating to a make-whole provision and tender premiums of $46.3 million and debt issuance costs of $1.7 million resulting from the early
redemption of our 2022 and 2023 Notes. During the sixteen weeks ended April 20, 2019, we incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting
from the early redemption of our 2020 senior unsecured notes.
(3)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.
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Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, given uncertainties related to the COVID-19 pandemic, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity change. Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year.
Share Repurchases
On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program as an addition to the previous $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019.
During 2020, we repurchased 3.0 million shares of our common stock at an aggregate cost of $458.5 million, or an average price of $150.65 per share, in connection with our share repurchase program. We had $432.2 million remaining under our share repurchase program as of January 2, 2021. During 2019, we repurchased 3.4 million shares of our common stock at an aggregate cost of $487.4 million, or an average price of $144.23 per share, under our share repurchase program.
Capital Expenditures
Our primary capital requirements have been the funding of our investments in supply chain and information technology, e-commerce and maintenance of existing stores and branches. We lease approximately 84% of our stores and branches.
Our capital expenditures were $267.6 million in 2020, a decrease of $2.6 million from 2019. Our capital expenditures were primarily related to several information technology projects, including our Finance enterprise resource planning system, as well as investments in supply chain and store improvements.
Our future capital requirements will depend in large part on the timing or number of the investments we make in information technology and supply chain network initiatives and existing stores and new store development (leased and owned locations) within a given year. In 2021, we anticipate that our capital expenditures related to such investments will range from $275 million to $325 million, but may vary with business conditions.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| Year Ended | |||||||||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||
| Cash flows provided by operating activities | $ | 969.7 | $ | 866.9 | $ | 811.0 | |||||||||||
| Cash flows used in investing activities | (266.9) | (462.9) | (191.8) | ||||||||||||||
| Cash flows used in financing activities | (286.0) | (882.2) | (263.9) | ||||||||||||||
| Effect of exchange rate changes on cash | (0.5) | 0.3 | (5.7) | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | 416.3 | $ | (477.9) | $ | 349.6 | |||||||||||
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Operating Activities
For 2020, net cash provided by operating activities increased $102.8 million to $969.7 million. The net increase in cash flows provided by operating activities compared to the prior year was primarily driven by an increase in Net income, improvements in working capital and the deferral of payroll taxes under the CARES Act. In the current year, working capital included an increase in cash provided by Accrued expenses, partially offset by a decrease in cash provided by Accounts payable and an increase in cash used by Inventories. Refer to “Results of Operations” for further details on our results.
For 2019, net cash provided by operating activities increased $55.9 million to $866.9 million. The net increase in operating cash flows compared to the prior year was primarily driven by an increase in Net income, which was partially offset by a decrease in working capital.
Investing Activities
For 2020, net cash used in investing activities decreased by $196.0 million to $266.9 million compared to 2019. Cash used in investing activities for 2020 consisted primarily of purchases of property and equipment, which was comparable to capital expenditures in 2019. The decrease in cash used in investing activities in 2020 is attributable to the DieHard® brand acquisition on December 23, 2019, which we purchased for a cash purchase price of $200.0 million.
For 2019, net cash used in investing activities increased by $271.1 million to $462.9 million compared to 2018. The increase in cash used in investing activities was primarily driven by the acquisition of the DieHard® brand on December 23, 2019 for a cash purchase price of $200.0 million. This purchase gave us the right to sell DieHard® batteries and enables us to extend the DieHard® brand into other automotive and vehicular categories. Additionally, the remaining increase was in capital expenditures related to several IT projects, including our Finance enterprise resource planning system, as well as investments in supply chain, e-commerce and store improvements.
Financing Activities
For 2020, net cash used in financing activities decreased by $596.2 million to $286.0 million compared to 2019. This decrease was primarily a result of the net proceeds of $244.5 million received in 2020 that resulted from the issuance of our $500.0 million 2030 senior unsecured notes on April 16, 2020 and our $350.0 million 2027 senior unsecured notes on September 29, 2020, offset by the redemption of all of our $300.0 million 2022 senior unsecured notes on September 16, 2020 and the cash tender offer on September 29, 2020 for a portion of the 2023 senior secured notes. In 2019, we used $310.0 million to redeem all $300.0 million aggregate principal amount of our outstanding 2020 senior unsecured notes.
For 2019, net cash used in financing activities increased by $618.2 million to $882.2 million compared to 2018. This increase was primarily a result of returning cash to shareholders in the form of share repurchases and dividends, as well as on February 28, 2019, we redeemed all $300.0 million aggregate principal amount of our outstanding 2020 Notes. We incurred charges relating to a make-whole provision and debt issuance costs of $10.1 million and $0.7 million resulting from the early redemption of our 2020 Notes.
Our Board of Directors has declared a quarterly cash dividend since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. On February 10, 2021, our Board of Directors declared a quarterly cash dividend of $0.25 per share to be paid on April 2, 2021 to all common shareholders of record as of March 19, 2021.
Long-Term Debt
As of January 2, 2021, we had a credit rating from Standard & Poor’s of BBB- and from Moody’s Investor Service of Baa2. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may be limited. In addition, it could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
For additional information on transactions entered into relating to Long-term debt during the fifty-three weeks ended January 2, 2021, refer to Note 6, Long-term Debt and Fair Value of Financial Instruments of the Notes to the Consolidated Financial Statements included herein.
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Off-Balance-Sheet Arrangements
As of January 2, 2021, other than as disclosed in Note 6, Long-term Debt and Fair Value of Financial Instruments and Note 8, Leases and Other Commitments, of the Notes to the Consolidated Financial Statements included herein, we had no other off-balance-sheet arrangements. We include other off-balance-sheet arrangements in our Contractual Obligations table including interest payments on our senior unsecured notes, revolving credit facility and letters of credit outstanding.
Contractual Obligations
In addition to our senior unsecured notes and revolving credit facility, we utilize operating leases as another source of financing. The amounts payable under these operating leases are included in our Contractual Obligations table. Our future contractual obligations related to long-term debt, operating leases and other contractual obligations as of January 2, 2021 were as follows:
| (in thousands) | Payments Due by Period | |||||||||||||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | |||||||||||||||||||||||||||
Long-term debt (1) | $ | 1,043,673 | $ | — | $ | 193,673 | $ | — | $ | 850,000 | ||||||||||||||||||||||
| Interest payments | 254,304 | 34,374 | 68,680 | 51,250 | 100,000 | |||||||||||||||||||||||||||
Operating leases (2) | 2,831,305 | 539,068 | 872,151 | 629,030 | 791,056 | |||||||||||||||||||||||||||
Other long-term liabilities (3) | 488,726 | — | — | — | — | |||||||||||||||||||||||||||
Purchase commitments (4) | 122,843 | 49,005 | 66,694 | 7,144 | — | |||||||||||||||||||||||||||
| $ | 4,740,851 | $ | 622,447 | $ | 1,201,198 | $ | 687,424 | $ | 1,741,056 | |||||||||||||||||||||||
Note: For additional information refer to Note 6, Long-term Debt and Fair Value of Financial Instruments; Note 8, Lease and other Commitments; Note 12, Income Taxes; Note 13, Contingencies; and Note 14, Benefit Plans, of the Notes to the Consolidated Financial Statements included herein.
(1)Long-term debt represents the principal amount of our senior unsecured notes, which become due in 2023, 2027 and 2030.
(2)We lease certain store locations, distribution centers, office space, equipment and vehicles. Our property leases generally contain renewal and escalation clauses and other concessions. These provisions are considered in our calculation of our minimum lease payments that are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations.
(3)Includes the long-term portion of deferred income taxes and other liabilities, including self-insurance reserves for which no contractual payment schedule exists. As we expect the payments to occur beyond 12 months from January 2, 2021, the related balances have not been reflected in the “Payments Due by Period” section of the table.
(4)Purchase commitments include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Included in the table above is the lesser of the remaining obligation or the cancellation penalty under the agreement.
Critical Accounting Policies
Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.
The preparation of our financial statements included the following significant estimates and exercise of judgment.
27
Vendor Incentives
We receive incentives in the form of reductions to amounts owed and/or payments from vendors related to volume rebates and other promotional considerations. Many of these incentives are under agreements with terms in excess of one year, while others are negotiated on an annual basis or less. Volume rebates and vendor promotional allowances are earned based on inventory purchases and initially recorded as a reduction to inventory, except for amounts that are offset in SG&A when circumstances exist as described below. These deferred amounts are recorded as a reduction to cost of sales as the inventory is sold.
Vendor promotional allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to SG&A when the cost is incurred if the fair value of that benefit can be reasonably estimated. Certain of our vendor agreements contain purchase volume incentives that provide for increased funding when graduated purchase volumes are met. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes.
Similarly, we recognize other promotional incentives earned under long-term agreements as a reduction to Cost of sales. However, these incentives are recognized based on the cumulative net purchases as a percentage of total estimated net purchases over the life of the agreement. Short-term incentives with terms less than one year are generally recognized as a reduction to cost of sales over the duration of the agreements.
Amounts received or receivable from vendors that are not yet earned are reflected as deferred revenue. Our estimate of the portion of deferred revenue that will be realized within one year of the balance sheet date is included in Other current liabilities. Earned amounts that are receivable from vendors are included in Receivables, net except for that portion expected to be received after one year, which is included in Other assets, net. We regularly review the receivables from vendors to ensure they are able to meet their obligations. Historically, the change in our reserve for receivables related to vendor funding has not been significant.
Self-Insurance Reserves
Our self-insurance reserves consist of the estimated exposure for claims filed, claims incurred but not yet reported and projected future claims, and are established using actuarial methods followed in the insurance industry and our historical claims experience. Specific factors include, but are not limited to, assumptions about health care costs, the severity of accidents and the incidence of illness and the average size of claims. Generally, claims for automobile and general liability and workers’ compensation take several years to settle. We classify the portion of our self-insurance reserves that is not expected to be settled within one year in long-term liabilities.
While we do not expect the amounts ultimately paid to differ significantly from our estimates, our self-insurance reserves and corresponding SG&A could be affected if future claim experience differs significantly from historical trends and actuarial assumptions. A 10% change in our self-insurance liabilities at January 2, 2021 would result in a change in expense of approximately $14.4 million for 2020.
New Accounting Pronouncements
For a description of recently adopted and issued accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Recently Issued Accounting Pronouncements” in Note 2, Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included herein.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee.
Certain 100% wholly owned domestic subsidiaries of the Issuer, including our Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors (“Guarantor Subsidiaries”) of our senior unsecured notes. The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiaries. Certain of our wholly owned subsidiaries, including all of our foreign subsidiaries and captive insurance subsidiary, do not serve as guarantors of our senior unsecured notes (“Non-Guarantor Subsidiaries”).
28
The following tables present summarized financial information for the Issuer and Guarantor Subsidiaries on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor Subsidiaries and (ii) equity in earnings from and investments in any subsidiaries that are a Non-Guarantor Subsidiary.
Summarized Financial Information
| Balance Sheets | |||||||||||
| Issuer and Guarantor Subsidiaries | |||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||
| Assets | |||||||||||
Current assets (1) | $ | 5,796.3 | $ | 5,329.9 | |||||||
Non-current assets (2) | $ | 5,395.4 | $ | 5,403.6 | |||||||
| Liabilities | |||||||||||
| Current liabilities | $ | 4,539.1 | $ | 4,264.3 | |||||||
| Intercompany payables, net due to Non-Guarantor Subsidiaries | $ | 290.7 | $ | 342.8 | |||||||
| Other non-current liabilities | $ | 3,401.7 | $ | 3,128.2 | |||||||
(1)Current assets includes $4,318.6 million and $4,234.2 million of Inventories as of January 2, 2021 and December 28, 2019.
(2)Non-current assets includes $1,585.9 million and $1,613.8 million of Goodwill and Intangible assets, net as of January 2, 2021 and December 28, 2019.
| Statements of Operations | |||||||||||
| Issuer and Guarantor Subsidiaries | |||||||||||
| Fifty-Three Weeks Ended | Fifty-Two Weeks Ended | ||||||||||
| (in millions) | January 2, 2021 | December 28, 2019 | |||||||||
| Net sales | $ | 9,735.8 | $ | 9,342.2 | |||||||
| Gross profit | $ | 4,335.1 | $ | 4,089.8 | |||||||
| Operating income | $ | 687.8 | $ | 605.5 | |||||||
| Income before provision for income taxes | $ | 598.0 | $ | 569.0 | |||||||
| Net income | $ | 453.4 | $ | 486.9 | |||||||
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
We are subject to interest rate risk to the extent we borrow against our revolving credit facility as it is based, at our option, on adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. As of January 2, 2021 and December 28, 2019, we had no borrowings outstanding under our revolving credit facility.
Our financial assets that are exposed to credit risk consist primarily of trade accounts receivable and vendor receivables. We are exposed to normal credit risk from customers. Our concentration of credit risk is limited because our customer base consists of a large number of customers with relatively small balances, which allows the credit risk to be spread across a broad base. We have not historically had significant credit losses.
We are exposed to foreign currency exchange rate fluctuations for the portion of our inventory purchases denominated in foreign currencies. We believe that the price volatility relating to foreign currency exchange rates is partially mitigated by our ability to adjust selling prices. During 2020, 2019 and 2018, foreign currency transactions did not significantly impact net income.
29
Item 8. Financial Statements and Supplementary Data.
See financial statements included in Item 15 “Exhibits, Financial Statement Schedules” of this annual report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness may vary over time.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of January 2, 2021. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a) - 15(f) under the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide “reasonable assurance” regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide “reasonable assurance” regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
As of January 2, 2021, management, including our principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that our internal control over financial reporting as of January 2, 2021 is effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended January 2, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
Attestation Report of Registered Public Accounting Firm
Our internal control over financial reporting as of January 2, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which also audited our consolidated financial statements for the year ended January 2, 2021, as stated in their report included herein, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of January 2, 2021.
Item 9B. Other Information.
None.
31
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
For a discussion of our directors, executive officers and corporate governance, see the information set forth in the sections entitled “Proposal No. 1 - Election of Directors,” “Corporate Governance,” “Meetings and Committees of the Board,” “Information About Our Executive Officers,” “Audit Committee Report,” and “Delinquent Section 16(a) Reports,” “Code of Ethics and Business Conduct” and “Code of Ethics for Finance Professionals” in our proxy statement for the 2021 annual meeting of stockholders to be filed with the SEC within 120 days after the end of the year ended January 2, 2021 (the “2021 Proxy Statement”), which is incorporated herein by reference.
Item 11. Executive Compensation.
See the information set forth in the sections entitled “Meetings and Committees of the Board,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Additional Information Regarding Executive Compensation” and “Director Compensation” in the 2021 Proxy Statement, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
See the information set forth in the sections entitled “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 2021 Proxy Statement, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
See the information set forth in the sections entitled “Corporate Governance-Related Party Transactions,” “Corporate Governance-Director Independence” and “Meetings and Committees of the Board” in the 2021 Proxy Statement, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
See the information set forth in the section entitled “2020 and 2019 Audit Fees” in the 2021 Proxy Statement, which is incorporated herein by reference.
32
PART IV
Item 15. Exhibits, Financial Statement Schedules.
| (a)(1) Financial Statements | ||||||||
| Audited Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries for the years ended January 2, 2021, December 28, 2019 and December 29, 2018: | ||||||||
| (2) Financial Statement Schedule | ||||||||
| (3) Exhibits | ||||||||
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Advance Auto Parts, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advance Auto Parts, Inc. and subsidiaries (the "Company") as of January 2, 2021 and December 28, 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended January 2, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, effective December 30, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-12, Leases (Topic 842), using the alternative transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
34
Vendor Incentives - Refer to Note 2 to the Consolidated Financial Statements
Critical Audit Matter Description
The Company receives incentives in the form of reductions in amounts owed to and/or payments due from vendors related to volume rebates and other promotions. Volume rebates and vendor promotional allowances are earned based on inventory purchases and initially recorded as a reduction to inventory, except for allowances provided as reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products that are offset in selling, general and
administrative expenses. The deferred amounts are recorded as a reduction in cost of sales as the inventory is sold. Total deferred vendor incentives included as a reduction of inventories were $141.9 million as of January 2, 2021.
The Company purchases inventory from a significant number of vendors, with no single vendor accounting for more than 10% of purchases. While many of these incentives are under long-term agreements in excess of one year, others are negotiated on an annual basis or shorter. Accordingly, auditing vendor incentives was challenging due to the extent of audit effort required to evaluate whether the vendor incentives were recorded in accordance with the terms of the vendor agreements.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to whether the vendor incentives were recorded in accordance with the terms of the vendor agreements included the following, among others:
•We tested the effectiveness of controls over the process that ensures that all vendor agreements are communicated to accounting.
•We tested the effectiveness of controls over the recording of vendor incentives as a reduction in inventories, and subsequently as a reduction in cost of sales as the related inventory was sold.
•We selected a sample of vendor incentives earned during the year and deferred at year-end and recalculated, using the terms of the vendor agreement, both the amount recorded as deferred vendor incentives as a reduction in inventories and the amount recognized in earnings as a reduction in cost of sales.
•We selected a sample of vendors from the Company’s inventory purchases made during the year and from vendor incentives recorded as a reduction in cost of sales and confirmed directly with the vendor that the agreement obtained from the Company and used in the determination of deferred vendor incentives as a reduction in cost of sales was the most recent between the parties.
•We tested the amount of the deferred vendor incentives recorded as a reduction in cost of sales by developing an expectation of the amount based on the historical amounts recorded as a percentage of total cost of sales and compared our expectation to the amount recorded.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 22, 2021
We have served as the Company’s auditor since 2002.
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Advance Auto Parts, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Advance Auto Parts, Inc. and subsidiaries (the “Company”) as of January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended January 2, 2021, of the Company and our report dated February 22, 2021, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 22, 2021
36
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
| January 2, 2021 | December 28, 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, net | |||||||||||
| Inventories | |||||||||||
Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net of accumulated depreciation of $2,189,165 and $2,037,849 | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| $ | $ | ||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses | |||||||||||
Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Noncurrent operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, nonvoting, $0.0001 par value, | |||||||||||
10,000 shares authorized; no shares issued or outstanding | |||||||||||
Common stock, voting, $0.0001 par value, 200,000 shares authorized; | |||||||||||
| 76,305 shares issued and 66,361 outstanding at January 2, 2021 | |||||||||||
| 76,051 shares issued and 69,232 outstanding at December 28, 2019 | |||||||||||
Additional paid-in capital | |||||||||||
| Treasury stock, at cost, 9,944 and 6,819 shares | ( | ( | |||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| $ | $ | ||||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
37
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
| Year Ended | |||||||||||||||||
| January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Net sales | $ | $ | $ | ||||||||||||||
Cost of sales, including purchasing and warehousing costs | |||||||||||||||||
| Gross profit | |||||||||||||||||
Selling, general and administrative expenses | |||||||||||||||||
| Operating income | |||||||||||||||||
| Other, net: | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Loss on early redemptions of senior unsecured notes | ( | ( | |||||||||||||||
| Other income, net | ( | ||||||||||||||||
| Total other, net | ( | ( | ( | ||||||||||||||
| Income before provision for income taxes | |||||||||||||||||
| Provision for income taxes | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Basic earnings per common share | $ | $ | $ | ||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | ||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||
Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks.
Consolidated Statements of Comprehensive Income
(in thousands)
| Year Ended | |||||||||||||||||
| January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Changes in net unrecognized other postretirement benefit costs, net of tax of $54, $67 and $103 | ( | ( | ( | ||||||||||||||
Currency translation adjustments | ( | ||||||||||||||||
| Total other comprehensive income (loss) | ( | ||||||||||||||||
| Comprehensive income | $ | $ | $ | ||||||||||||||
Fiscal year 2020 includes 53 weeks. Fiscal years 2019 and 2018 include 52 weeks.
The accompanying notes to the consolidated financial statements are an integral part of these statements.
38
Advance Auto Parts, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock, at cost | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 30, 2017 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Restricted stock, restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Repurchase of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.24 per common share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, December 29, 2018 | ( | ( | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Repurchase of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($0.24 per common share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, December 28, 2019 | ( | ( | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Cash dividends declared ($1.00 per common share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, January 2, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
39
Advance Auto Parts, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) | |||||||||||||||||
| Year Ended | |||||||||||||||||
| January 2, 2021 | December 28, 2019 | December 29, 2018 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Share-based compensation | |||||||||||||||||
| Loss and impairment of long-lived assets | |||||||||||||||||
| Loss on early redemption of senior unsecured notes | |||||||||||||||||
| Other, net | |||||||||||||||||
| Provision for deferred income taxes | |||||||||||||||||
| Net change in: | |||||||||||||||||
| Receivables, net | ( | ( | ( | ||||||||||||||
| Inventories | ( | ( | ( | ||||||||||||||
| Accounts payable | |||||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Other assets and liabilities, net | ( | ( | |||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Purchases of property and equipment | ( | ( | ( | ||||||||||||||
| Purchase of an indefinite-lived intangible asset | ( | ( | |||||||||||||||
| Proceeds from sales of property and equipment | |||||||||||||||||
| Other, net | |||||||||||||||||
| Net cash used in investing activities | ( | ( | ( | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| (Decrease) increase in bank overdrafts | ( | ||||||||||||||||
| Redemption of senior unsecured note | ( | ( | |||||||||||||||
| Borrowings under credit facilities | |||||||||||||||||
| Payments on credit facilities | ( | ||||||||||||||||
| Proceeds from issuance of senior unsecured notes, net | |||||||||||||||||
| Dividends paid | ( | ( | ( | ||||||||||||||
| Proceeds from the issuance of common stock | |||||||||||||||||
| Repurchases of common stock | ( | ( | ( | ||||||||||||||
| Other, net | ( | ( | |||||||||||||||
| Net cash used in financing activities | ( | ( | ( | ||||||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||||||||
Cash and cash equivalents, beginning of period | |||||||||||||||||
Cash and cash equivalents, end of period | $ | $ | $ | ||||||||||||||
| Supplemental cash flow information: | |||||||||||||||||
| Interest paid | $ | $ | $ | ||||||||||||||
| Income tax payments | $ | $ | $ | ||||||||||||||
| Non-cash transactions: | |||||||||||||||||
| Accrued purchases of property and equipment | $ | $ | $ | ||||||||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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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 consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., including, 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 January 2, 2021, our operations are comprised of 4,806 stores and 170 branches 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,” “Carquest” and “Autopart International,” and our branches operate under the “Worldpac” trade name. In addition, we served 1,277 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico, Grand Cayman, the Bahamas, Turks and Caicos and British Virgin Islands.
In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic. As a majority of our stores and facilities have remained open, we have taken additional measures to help protect the health and safety of our Team Members and customers. Such measures, among others, include the implementation of other labor-related benefits for Team Members and increased sanitation practices across Advance. Since the assumptions underpinning our long-term revenue and cash flow growth rates, operating models and business strategies have not been significantly impacted, there was no material impairment of our various assets during the fifty-three weeks ended January 2, 2021.
The COVID-19 pandemic remains an evolving situation. If a period of decreased demand were to reoccur, it may lead to increased asset recovery and valuation risks in the future, such as impairment of goodwill, intangible assets and store and other assets. We will continue to assess the impact of the pandemic on our financial position. The extent to which the COVID-19 pandemic will impact our operations, liquidity, compliance with debt covenants or financial results in subsequent periods is uncertain, but such impact could be material.
Accounting Period
Our fiscal year ends on the Saturday nearest the end of December. All references herein for the years “2020,” “2019” and “2018” represent the fiscal year ended January 2, 2021, which consist of 53 weeks, and fiscal years ended December 28, 2019 and December 29, 2018, which both had 52 weeks.
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.
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2. Significant Accounting Policies:
Inventory
Our inventory consists primarily of parts, batteries, accessories and other products used on vehicles that have reasonably long shelf lives and is stated at the lower of cost or market. The cost of our merchandise inventory is primarily determined using the last-in, first-out (“LIFO”) method. 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 relating to prices paid in 2020 and prior years. We regularly review inventory quantities on-hand, consider whether we may have excess inventory based on our current approach for managing slower moving inventory and adjust the carrying value as necessary.
Vendor Incentives
We receive incentives in the form of reductions to amounts owed to and/or payments from vendors related to volume rebates and other promotional considerations. Many of these incentives are under long-term agreements in excess of one year, while others are negotiated on an annual basis or shorter. Advertising allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to selling, general and administrative expenses (“SG&A”) when the cost is incurred. Volume rebates and allowances that do not meet the requirements for offsetting in SG&A are recorded as a reduction to inventory as they are earned based on inventory purchases. Total deferred vendor incentives recorded as a reduction of Inventories were $141.9 million and $173.8 million as of January 2, 2021 and December 28, 2019.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged directly to expense when incurred; major improvements are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the account balances, with any gain or loss reflected in the consolidated statements of operations.
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Goodwill and Indefinite-Lived Intangible Assets
We perform our evaluation for the impairment of goodwill and indefinite-lived intangible assets for our reporting units annually as of the first day of the fourth quarter, or when indications of potential impairment exist. These indicators would include a significant change in operating performance, the business climate, legal factors, competition, or a planned sale or disposition of a significant portion of the business, among other factors. We assess qualitative factors such as current company performance and overall economic factors to determine if it is more-likely-than-not that the goodwill might be impaired and whether it is necessary to perform a quantitative goodwill impairment test. In the quantitative goodwill test, we compare the carrying value of a reporting unit to its fair value. If the fair value of the reporting unit is lower than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds the reporting unit's fair value. Our indefinite-lived intangible assets are tested for impairment at the asset group level. Indefinite-lived intangibles are evaluated by comparing the carrying amount of the asset to the future discounted cash flows that the asset is expected to generate. If the fair value based on the future discounted cash flows exceeds the carrying value, we conclude that no intangible asset impairment has occurred. If the carrying value of the indefinite-lived intangible asset exceeds the fair value, we recognize an impairment loss.
Warranty Liabilities
The warranty obligation on the majority of merchandise sold by us with a manufacturer’s warranty is the responsibility of our vendors. However, we have an obligation to provide customers replacement of certain merchandise at no cost or merchandise at a prorated cost if under a warranty and not covered by the manufacturer. As of January 2, 2021 and December 28, 2019, our warranty liability primarily consisted of batteries with warranty coverage sold by us. We estimate our warranty obligation at the time of sale based on the historical return experience, sales level and cost of the respective product sold. To the extent vendors provide upfront allowances in lieu of accepting the obligation for warranty claims and the allowance is in excess of the related warranty expense, the excess is recorded as a reduction to cost of sales.
Leases
We lease certain store locations, distribution centers, office spaces, equipment and vehicles. We recognize lease expense on a straight-line basis over the initial term of the lease unless external economic factors exist such that renewals are reasonably certain. In those instances, the renewal period would be included in the lease term to determine the period in which to recognize the lease expense. Most leases require us to pay taxes, maintenance, insurance and other certain costs applicable to the leased premises.
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Effective December 30, 2018, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), using the alternative transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements. Using the alternative transition method, we applied the transition requirements at the effective date of ASU 2016-02 with the impact of initially applying ASU 2016-02 recognized as a cumulative-effect adjustment to retained earnings in the first quarter of 2019.
We elected the package of practical expedients permitted under the transition guidance within the new standard. In addition, as a practical expedient relating to our store locations, distribution centers, office spaces and vehicle leases, we elected not to separate lease components from nonlease components.
Revenues
Effective December 31, 2017, we adopted ASC 606, Revenue From Contracts With Customers (Topic 606) (“ASC 606”). The results of applying Topic 606 using the modified retrospective approach were insignificant and did not have a material impact on our consolidated financial condition, results of operations, cash flows, business process, controls or systems.
ASC 606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer and is considered the unit of account. The majority of our contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and is, therefore, not distinct. Discounts and incentives are treated as separate performance obligations. We allocate the contract’s transaction price to each of these performance obligations separately using explicitly stated amounts or our best estimate using historical data. Additionally, we estimate and record gift card breakage as redemptions occur.
In accordance with ASC 606 revenue is recognized at the time the sale is made, at which time our walk-in customers take immediate possession of the merchandise or same-day delivery is made to our Professional delivery customers, which include certain independently-owned store locations. Payment terms are established for our Professional delivery customers based on pre-established credit requirements. Payment terms vary depending on the customer and generally range from 1 to 30 days. Based on the nature of receivables, no significant financing components exist. For e-commerce sales, revenue is recognized either at the time of pick-up at one of our store locations or at the time of shipment depending on the customer's order designation. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to Net sales and Cost of sales for returns based on current sales levels and our historical return experience.
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The following table summarizes financial information for each of our product groups.
| Year Ended | ||||||||||||||||||||
| January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||||||
| Percentage of Sales, by Product Group | ||||||||||||||||||||
| Parts and Batteries | % | % | % | |||||||||||||||||
| Accessories and Chemicals | ||||||||||||||||||||
| Engine Maintenance | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | % | % | % | |||||||||||||||||
Cost of Sales
Cost of sales includes actual product cost, warranty costs, vendor incentives, cash discounts on payments to vendors, costs associated with operating our distribution network, including payroll and benefits costs, occupancy costs and depreciation, in-bound freight-related costs from our vendors, impairment of inventory resulting from store closures and costs associated with moving merchandise inventories from our distribution centers to stores, branch locations and customers.
Selling, General and Administrative Expenses
Advertising Costs
We expense advertising costs as incurred. Advertising expense, net of qualifying vendor promotional funds, was $132.3 million, $117.3 million and $120.9 million in 2020, 2019 and 2018. Vendor promotional funds, which reduced advertising expense, amounted to $48.5 million and $45.7 million and $26.9 million in 2020, 2019 and 2018.
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Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under the asset and liability method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income taxes reflect the net income tax effect of temporary differences between the basis of assets and liabilities for financial reporting purposes and for income tax reporting purposes. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of the enactment date.
We recognize tax benefits and/or tax liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts as we must determine the probability of various possible outcomes.
Segment Information
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. Our CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about our five operating segments, for purposes of allocating resources and evaluating financial performance.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This ASU will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. We expect the adoption of this new standard to have an insignificant impact on our consolidated financial condition, results of operations or cash flows.
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During the first quarter of 2020, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.
During the second quarter of 2020, we early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3.Inventories:
We used the LIFO method of accounting for approximately 88.3 13.8 million in 2020, an increase to Cost of sales of $101.3 million in 2019 and a reduction to cost of sales of $39.8 million in 2018.
Purchasing and warehousing costs included in Inventories as of January 2, 2021 and December 28, 2019, were $464.7 million and $476.3 million.
Inventory balances were as follows:
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Inventories at first in, first out (“FIFO”) | $ | $ | |||||||||
| Adjustments to state inventories at LIFO | |||||||||||
| Inventories at LIFO | $ | $ | |||||||||
4.Goodwill and Intangible Assets:
Goodwill
At January 2, 2021 and December 28, 2019, the carrying amount of Goodwill in the accompanying consolidated balance sheets was $993.6 million and $992.2 million. The change in goodwill during 2020 and 2019 was $1.4 million and $2.0 million related to foreign currency translation.
Intangible Assets Other Than Goodwill
On December 23, 2019, we purchased the DieHard® brand for a cash purchase price of $200.0 million, exclusive of $1.5 million of capitalizable transaction costs. This purchase gives us the right to sell DieHard® batteries and enables us to extend the DieHard® brand into other automotive and vehicular categories. We granted the seller an exclusive royalty-free, perpetual license to develop, market, and sell DieHard® branded products in non-automotive categories. We accounted for this transaction as a purchase of an indefinite-lived intangible asset, which is included within the Brands, trademarks and tradenames category below, and is not subject to amortization.
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Amortization expense was $31.6 million, $31.7 million and $40.7 million for 2020, 2019 and 2018. A summary of the composition of the gross carrying amounts and accumulated amortization of acquired intangible assets are presented in the following table:
| January 2, 2021 | December 28, 2019 | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
| Amortized intangible assets: | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Non-compete and other | ( | ( | ||||||||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||||||||||||||||||||||||||||
| Brands, trademark and tradenames | ||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
Future Amortization Expense
The table below shows expected amortization expense for the next five years and thereafter for acquired intangible assets recorded as of January 2, 2021:
| Year | Amount | |||||||
| (in thousands) | ||||||||
| 2021 | $ | |||||||
| 2022 | $ | |||||||
| 2023 | $ | |||||||
| 2024 | $ | |||||||
| 2025 | $ | |||||||
| Thereafter | $ | |||||||
| $ | ||||||||
5. Receivables, net:
Receivables, net consist of the following:
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Trade | $ | $ | |||||||||
| Vendor | |||||||||||
| Other | |||||||||||
| Total receivables | |||||||||||
| Less: allowance for doubtful accounts | ( | ( | |||||||||
| Receivables, net | $ | $ | |||||||||
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6.Long-term Debt and Fair Value of Financial Instruments:
Long-term debt consists of the following:
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| 4.50% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $559 at December 28, 2019) due January 15, 2022 | |||||||||||
| 4.50% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $683 and $2,121 at January 2, 2021 and December 28, 2019) due December 1, 2023 | |||||||||||
| 1.75% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $4,145 at January 02, 2021) due October 1, 2027 | |||||||||||
| 3.90% Senior Unsecured Notes (net of unamortized discount and debt issuance costs of $5,600 at January 2, 2021) due April 15, 2030 | |||||||||||
| Long-term debt, excluding current portion | $ | $ | |||||||||
| Fair value of long-term debt | $ | $ | |||||||||
Fair Value of Financial Assets and Liabilities
The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. We believe the carrying value of its other long-term debt approximates fair value. The carrying amounts of our cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Bank Debt
On January 31, 2017, we entered into a new 5 year credit agreement that provides a $1.0 billion unsecured revolving credit facility (the “2017 Credit Agreement”) with Advance Stores, as Borrower, the lenders party thereto, and Bank of America, N.A., as the administrative agent and replaces a prior credit agreement entered into in 2013. The 2017 Credit Agreement provides for the issuance of letters of credit with a sublimit of $200.0 million. We may request that the total revolving commitment be increased by an amount not exceeding $250.0 million during the term of the 2017 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving loan balance, if any, are permitted in whole or in part, at our option, in minimum principal amounts as specified in the 2017 Credit Agreement.
On January 31, 2018, we entered into Amendment No. 1 to the 2017 Credit Agreement (the “Amendment”), among Advance Stores, as Borrower, the lenders party thereto, and Bank of America, N.A., Administrative Agent. The Amendment: (i) provided for LIBOR replacement rates in the event that LIBOR is unavailable in the future; (ii) modified the definitions of the financial covenants (and the testing level relating thereto) with respect to a maximum leverage ratio and a minimum coverage ratio that we are required to comply with; and (iii) extended the termination date of the 2017 Credit Agreement from January 31, 2022 until January 31, 2023. We have the option to make one additional written request of the lenders to extend the termination date then in effect for one additional year.
On January 10, 2019, we entered into Amendment No. 2 to the 2017 Credit Agreement (the “ Second Amendment”), among Advance Stores Company, Incorporated, as Borrower, Advance Auto Parts, Inc., as Parent, the banks, financial institutions and other institutional lenders parties thereto and Bank of America, N.A., as Administrative Agent. The Second Amendment: (i) added a new definition of "Insurance Subsidiary" to the 2017 Credit Agreement meaning each wholly owned subsidiary of Parent that is maintained as a special purpose self-insurance subsidiary and any of its subsidiaries; (ii) provided that an Insurance Subsidiary does not serve as a Guarantor of the 2017 Credit Agreement; and (iii) provided that Insurance Subsidiaries are permitted to incur intercompany indebtedness. Insurance Subsidiaries will not be required to serve as Guarantors of the Parent's senior unsecured notes so long as they are not guarantors of the 2017 Credit Agreement.
As of January 2, 2021, we had no outstanding borrowings under 2017 Credit Agreement and borrowing availability was $1.0 billion. Under the 2017 Credit Agreement, we had no letters of credit outstanding as of January 2, 2021.
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Interest on any borrowings on the revolver will be based at our option, on an adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. After an initial interest period, we may elect to convert a particular borrowing to a different type. The initial margins per annum for the revolving loan are 1.10 % for the adjusted LIBOR and 0.10 % for alternate base rate borrowings. A facility fee of 0.15 % per annum is charged on the total revolving facility commitment, payable quarterly in arrears. Under the terms of the 2017 Credit Agreement, the interest rate spread and facility fee are based on our credit rating. The interest rate spread ranges from 0.91 % to 1.50 % for adjusted LIBOR borrowings and 0.00 % to 0.50 % for alternate base rate borrowings.
The 2017 Credit Agreement contains customary covenants restricting the ability of: (a) Advance Stores and its subsidiaries to, among other things, (i) create, incur or assume additional debt (only with respect to subsidiaries of Advance Stores), (ii) incur liens, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (b) Advance, Advance Stores and their subsidiaries to, among other things (i) enter into certain hedging arrangements, (ii) enter into restrictive agreements limiting their ability to incur liens on any of their property or assets, pay distributions, repay loans, or guarantee indebtedness of their subsidiaries; and (c) Advance, among other things, to change the holding company status of Advance. Advance Stores is required to comply with financial covenants with respect to a maximum leverage ratio and a minimum coverage ratio. The 2017 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults of Advance Stores’ other material indebtedness. We were in compliance with our financial covenants with respect to the 2017 Credit Agreement as of January 2, 2021.
As of January 2, 2021 and December 28, 2019, we had $100.0 million and $111.6 million of bilateral letters of credit issued separately from the 2017 Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.
Senior Unsecured Notes
Our 4.50 % senior unsecured notes due January 15, 2022 (the “2022 Notes”) were issued in January 2012 at 99.97 % of the principal amount of $300.0 million. The 2022 Notes bear interest at a rate of 4.50 % per year payable semi-annually in arrears on January 15 and July 15 of each year. Our 4.50 % senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69 % of the principal amount of $450.0 million. The 2023 Notes bear interest at a rate of 4.50 % per year payable semi-annually in arrears on June 1 and December 1 of each year.
On April 16, 2020, we issued $500.0 million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued at 99.65 % of the principal amount of $500.0 million, are due April 15, 2030 and bear interest at 3.90 % per year payable semi-annually in arrears on April 15 and October 15 of each year (collectively with the 2023 Notes and 2027 Notes, referred to as our “senior unsecured notes”). During the second quarter of 2020, we commenced an exchange offer to exchange the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 3.90 % senior unsecured notes due 2030 (the “Exchange Notes” or “2030 Notes”), which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes. On July 28, 2020, the Original Notes were successfully exchanged for the Exchange Notes.
On September 16, 2020, we redeemed all $300.0 million aggregate principal amount of our outstanding 2022 Notes. In connection with this early redemption, we incurred charges relating to a make-whole provision and debt issuance costs of $15.8 million and $0.3 million.
On September 29, 2020, we issued $350.0 million aggregate principal amount of senior unsecured notes (the “2027 Notes”). The 2027 Notes were issued at 99.67 % of the principal amount of $350.0 million, are due October 1, 2027 and bear interest at 1.75 % per year payable semi-annually in arrears on April 1 and October 1 of each year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.
Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of our 2023 Notes with the net proceeds from the 2027 Notes. In connection with this tender offer, we incurred charges relating to tender premiums and debt issuance costs of $30.5 million and $1.4 million.
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The terms of the senior unsecured notes are governed by an indenture (as amended, supplemented, waived or otherwise modified, the “Indenture”) among Advance, the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.
Future Payments
As of January 2, 2021, the aggregate future annual maturities of long-term debt instruments are as follows:
Year | Amount | |||||||
| (in thousands) | ||||||||
| 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| $ | ||||||||
Debt Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are customers of ours totaling $23.6 million as of January 2, 2021. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements is $57.5 million as of January 2, 2021. We believe that the likelihood of performance under these guarantees is remote.
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7. Property and Equipment:
Property and equipment consists of the following:
| (in thousands) | Useful Lives | January 2, 2021 | December 28, 2019 | ||||||||||||||
| Land and land improvements | 0 - 10 years | $ | $ | ||||||||||||||
| Buildings | 30 - 40 years | ||||||||||||||||
| Building and leasehold improvements | 1 - 15 years | ||||||||||||||||
| Furniture, fixtures and equipment | 2 - 20 years | ||||||||||||||||
| Vehicles | 8 years | ||||||||||||||||
| Construction in progress | |||||||||||||||||
| Less - Accumulated depreciation | ( | ( | |||||||||||||||
| Property and equipment, net | $ | $ | |||||||||||||||
Depreciation expense relating to Property and equipment was $218.5 million, $206.7 million and $201.6 million for 2020, 2019 and 2018. We capitalized $58.4 million, $29.1 million and $13.0 million incurred for the development of internal use computer software during 2020, 2019 and 2018. These costs are currently classified in the Construction in progress category above, but once placed into service within the Furniture, fixtures equipment category, these costs will be depreciated on the straight-line method over 3 to 10 years.
In 2020, 2019 and 2018 we recognized impairment losses of $0.2 million, $2.3 million and $13.4 million, primarily on store and corporate assets.
8. Leases and Other Commitments:
Leases
Substantially all of our leases are for facilities and vehicles. The initial term for facilities are typically 5 years to 10 years, with renewal options at 5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically 3 years to 6 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease liabilities consist of the following:
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| ( | ( | ||||||||||
| Noncurrent operating lease liabilities | $ | $ | |||||||||
The current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheet.
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Total lease cost is included in Cost of sales and SG&A in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:
| Year Ended | |||||||||||
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Operating lease cost | $ | $ | |||||||||
| Variable lease cost | |||||||||||
| Total lease cost | $ | $ | |||||||||
The future maturity of lease liabilities are as follows:
| Year | Amount | |||||||
| (in thousands) | ||||||||
| 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Imputed interest | ( | |||||||
| Total operating lease liabilities | $ | |||||||
Operating lease payments include $97.1 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $50.6 million of legally binding lease payments for leases signed, but not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate for our operating leases are 7.0 years and 3.6 % as of January 2, 2021. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.
Other information relating to our lease liabilities is as follows:
| Year Ended | |||||||||||
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | $ | |||||||||
Other Commitments
We have entered into certain arrangements which require the future purchase of goods or services. Our obligations primarily consist of payments for the purchase of hardware, software and maintenance. As of January 2, 2021, future payments amount to $122.8 million and are not accrued in our consolidated balance sheet.
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9. Accrued Expenses:
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Payroll and related benefits | $ | $ | |||||||||
| Taxes payable | |||||||||||
| Self-insurance reserves | |||||||||||
| Warranty reserves | |||||||||||
| Capital expenditures | |||||||||||
| Accrued rebates | |||||||||||
| Accrued interest | |||||||||||
| Other | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
The following table presents changes in our warranty reserves:
| Year Ended | |||||||||||||||||
| (in thousands) | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||
| Warranty reserve, beginning of period | $ | $ | $ | ||||||||||||||
| Additions to reserve | |||||||||||||||||
| Reduction and utilization of reserve | ( | ( | ( | ||||||||||||||
| Warranty reserve, end of period | $ | $ | $ | ||||||||||||||
10. Share Repurchase Program:
On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time. Our share repurchase program allows us to repurchase our common stock on the open market or in privately negotiated transactions from time to time.
During 2020, we repurchased 3.0 million shares of our common stock at an aggregate cost of $458.5 million, or an average price of $150.65 per share, in connection with our share repurchase program. We had $432.2 million remaining under our share repurchase program as of January 2, 2021. During 2019, we repurchased 3.4 million shares of our common stock at an aggregate cost of $487.4 million, or an average price of $144.23 per share, under our share repurchase program.
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11. Earnings per Share:
| Year Ended | |||||||||||||||||
| (in thousands, except per share data) | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||
| Numerator | |||||||||||||||||
| Net income applicable to common shares | $ | $ | $ | ||||||||||||||
| Denominator | |||||||||||||||||
| Basic weighted average common shares | |||||||||||||||||
| Dilutive impact of share-based awards | |||||||||||||||||
Diluted weighted average common shares (1) | |||||||||||||||||
| Basic earnings per common share | $ | $ | $ | ||||||||||||||
| Diluted earnings per common share | $ | $ | $ | ||||||||||||||
(1)For the fifty-three weeks ended January 2, 2021 119 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the fifty-two weeks ended December 28, 2019 115 thousand restricted
stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the fifty-two weeks ended December 29, 2018, these anti-dilutive RSUs were insignificant.
12. Income Taxes:
U.S. Tax Reform
During 2018, in conjunction with the completion of our 2017 U.S. income tax return, we identified a change in estimate to amounts previously estimated in 2017 in relation with the U.S. Tax Cuts and Jobs Act (the “Act”) for the remeasurement of the net deferred tax liability and nonrecurring repatriation tax on accumulated earnings of foreign subsidiaries that resulted in a net tax benefit of $5.7 million. Our analysis under Staff Accounting Bulletin No. 118 was completed in 2018.
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Provision for Income Taxes
Provision for income taxes consists of the following:
| (in thousands) | Current | Deferred | Total | ||||||||||||||
| 2020 | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | ( | ||||||||||||||||
| $ | $ | $ | |||||||||||||||
| 2019 | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
| 2018 | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | ( | ||||||||||||||||
| $ | $ | $ | |||||||||||||||
The provision for income taxes differed from the amount computed by applying the federal statutory income tax rate due to:
| Year Ended | |||||||||||||||||
| (in thousands) | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||
| Income before provision for income taxes at statutory U.S. federal income tax rate (21% for 2020, 2019 and 2018) | $ | $ | $ | ||||||||||||||
State income taxes, net of federal income tax benefit | |||||||||||||||||
| Impact of the Act | ( | ||||||||||||||||
| Other, net | ( | ||||||||||||||||
| $ | $ | $ | |||||||||||||||
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Deferred Income Tax Assets (Liabilities)
Temporary differences that give rise to significant deferred income tax assets (liabilities) are as follows:
| (in thousands) | January 2, 2021 | December 28, 2019 | |||||||||
| Deferred income tax assets: | |||||||||||
| Accrued expenses not currently deductible for tax | $ | $ | |||||||||
| Share-based compensation | |||||||||||
| Accrued medical and workers compensation | |||||||||||
| Net operating loss carryforwards | |||||||||||
| Operating lease liabilities | |||||||||||
| Other, net | |||||||||||
| Total deferred income tax assets before valuation allowances | |||||||||||
| Less: Valuation allowance | ( | ( | |||||||||
| Total deferred income tax assets | |||||||||||
| Deferred income tax liabilities: | |||||||||||
| Property and equipment | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Intangible assets | ( | ( | |||||||||
| Operating lease right-of-use assets | ( | ( | |||||||||
| Total deferred income tax liabilities | ( | ( | |||||||||
| Net deferred income tax liabilities | $ | ( | $ | ( | |||||||
As of January 2, 2021 and December 28, 2019, our net operating loss (“NOL”) carryforwards comprised of state NOLs of $137.9 million and $159.4 million. These NOLs may be used to reduce future taxable income and expire periodically through 2037. Due to uncertainties related to the realization of these NOLs in certain jurisdictions, as well as other credits available to us, we have recorded a valuation allowance of $3.2 million and $3.6 million as of January 2, 2021 and December 28, 2019. The amount of deferred income tax assets realizable, however, could change in the future if projections of future taxable income change.
We have not recorded deferred taxes when earnings from foreign operations are considered to be indefinitely invested outside of the U.S. As of January 2, 2021, these accumulated net earnings generated by our foreign operations were approximately $41.2 million, which did not include earnings deemed to be repatriated as part of the Act. It is not practicable to determine the income tax liability that would be payable if such earnings were repatriated.
Unrecognized Tax Benefits
The following table summarizes the activity of our gross unrecognized tax benefits:
| (in thousands) | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||
| Unrecognized tax benefits, beginning of period | $ | $ | $ | ||||||||||||||
| Increases related to prior period tax positions | |||||||||||||||||
| Decreases related to prior period tax positions | ( | ( | |||||||||||||||
| Increases related to current period tax positions | |||||||||||||||||
| Settlements | ( | ( | |||||||||||||||
| Expiration of statute of limitations | ( | ( | ( | ||||||||||||||
| Unrecognized tax benefits, end of period | $ | $ | $ | ||||||||||||||
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13. Contingencies:
14. Benefit Plans:
401(k) Plan
We maintain a defined contribution benefit plan, which covers substantially all Team Members after one year of service and who have attained the age of 21. The plan allows for Team Member salary deferrals, which are matched at our discretion. Company contributions to these plans were $21.3 million, $17.9 million and $15.0 million in 2020, 2019 and 2018.
Deferred Compensation
We maintain a non-qualified deferred compensation plan for certain Team Members. This plan provides for a minimum and maximum deferral percentage of the Team Member’s base salary and bonus, as determined by the Retirement Plan Committee. We established and maintained a deferred compensation liability for this plan. As of January 2, 2021 and December 28, 2019, these liabilities were $16.1 million and $15.0 million.
15. Share-Based Compensation:
Overview
We grant share-based compensation awards to our Team Members and members of our Board of Directors as provided for under our 2014 Long-Term Incentive Plan (“2014 LTIP”), which was approved by our shareholders on May 14, 2014. In 2020, 2019 and 2018, we granted share-based compensation in the form of restricted stock units (“RSUs”) or deferred stock units (“DSUs”). No
As of January 2, 2021, the aggregate intrinsic value of outstanding and exercisable time-based and performance-based SARs was insignificant. In 2020, 2019 and 2018, all related activity related to SARs, including grants, exercises and forfeitures, was insignificant.
58
At January 2, 2021, there were 4.6 million shares of common stock available for future issuance under the 2014 LTIP based on management’s current estimate of the probable vesting outcome for performance-based awards. We issue new shares of common stock upon exercise of SARs. Shares forfeited and shares withheld for payment of taxes due become available for reissuance and are included in availability. Availability also includes shares that became available for reissuance in connection with the exercise of SARs.
Restricted Stock Units
For time-based RSUs, the fair value of each award was determined based on the market price of our common stock on the date of grant. Time-based RSUs generally vest over a three-year period in equal annual installments beginning on the first anniversary of the grant date. During the vesting period, holders of RSUs are entitled to receive dividend equivalents, but are not entitled to voting rights.
For performance-based RSUs, the fair value of each award was determined based on the market price of our common stock on the date of grant. Performance-based awards generally may vest following a three-year period subject to our achievement of certain financial goals as specified in the grant agreements. Depending on our results during the three-year performance period, the actual number of awards vesting at the end of the period generally ranges from 0 % to 200 % of the performance award. Performance-based RSUs generally do not have dividend equivalent rights and do not have voting rights until the shares are earned and issued following the applicable performance period. The number of performance-based awards outstanding is based on the number of awards that we believed were probable of vesting at January 2, 2021. Performance-based RSU’s granted during 2020 are presented as grants in the table at their respective target levels. The change in units based on performance represents the change in the number of granted awards expected to vest based on the updated probability assessment as of January 2, 2021. Compensation expense for performance-based awards of $9.4 million, $7.8 million, and $5.4 million in 2020, 2019 and 2018, was determined based on management’s estimate of the probable vesting outcome.
For market-based RSUs, the fair value of each award was determined using a Monte Carlo simulation model. The model uses multiple input variables that determined the probability of satisfying the market condition requirements as follows:
| Monte Carlo Simulation Model Assumptions | 2021 | 2019 | 2018 | |||||||||||||||||
Risk-free interest rate (1) | % | % | % | |||||||||||||||||
| Expected dividend yield | % | % | % | |||||||||||||||||
Expected stock price volatility (2) | % | % | % | |||||||||||||||||
(1)The risk-free interest rate is based on the U.S. Treasury constant maturity interest rate having term consistent with the vesting period of the award.
(2)Expected volatility is determined based on historical volatility over a matching look-back period and is consistent with the correlation coefficients between our stock prices and our peer group.
Additionally, we estimated a liquidity discount of 10.1 % using the Chaffe Protective Put Method to adjust the fair value for the post-vest restrictions. Market-based RSU’s vesting depends on our relative total shareholder return among a designated group of peer companies during a three-year period and will be subject to a one-year holding period after vesting.
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The following table summarizes activity for time-based, performance-based and market-based RSUs in 2020:
| Time-Based | Performance-Based | Market-Based | |||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | Number of Awards | Weighted-Average Grant Date Fair Value | Number of Awards | Weighted-Average Grant Date Fair Value | Number of Awards | Weighted-Average Grant Date Fair Value | |||||||||||||||||||||||||||||
| Nonvested at December 28, 2019 | $ | $ | $ | ||||||||||||||||||||||||||||||||
Granted | $ | $ | $ | ||||||||||||||||||||||||||||||||
Change in units based on performance | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
Vested (1) | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||
Forfeited | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||
| Nonvested at January 2, 2021 | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1)The vested shares of Market-Based RSUs were not exercised due to low multiplier effect for 2017 awards.
The following table summarizes certain information concerning activity for time-based, performance-based and market-based RSUs:
| Year Ended | |||||||||||||||||
| (in thousands, except per share data) | January 2, 2021 | December 28, 2019 | December 29, 2018 | ||||||||||||||
| Time-based: | |||||||||||||||||
| Weighted average fair value of RSUs granted | $ | $ | $ | ||||||||||||||
| Total grant date fair value of RSUs vested | $ | $ | $ | ||||||||||||||
| Performance-based: | |||||||||||||||||
| Weighted average fair value of RSUs granted | $ | $ | $ | ||||||||||||||
| Total grant date fair value of RSUs vested | $ | $ | $ | ||||||||||||||
| Market-based: | |||||||||||||||||
| Weighted average fair value of RSUs granted | $ | $ | $ | ||||||||||||||
| Total grant date fair value of RSUs vested | $ | $ | $ | ||||||||||||||
As of January 2, 2021, the maximum potential payout under our currently outstanding performance-based and market-based RSUs were 350 thousand and 178 thousand units.
Other Considerations
Total income tax benefit related to share-based compensation expense for 2020, 2019 and 2018 was $11.5 million, $9.4 million and $6.8 million.
As of January 2, 2021, there was $67.1 million of unrecognized compensation expense related to all share-based awards that was expected to be recognized over a weighted average period of 1.5 years.
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Deferred Stock Units (“DSUs”)
We grant share-based awards annually to our Board of Directors in connection with its annual meeting of stockholders. These awards are granted in the form of DSUs as provided for in the Advance Auto Parts, Inc. Deferred Stock Unit Plan for Non-Employee Directors and Selected Executives (“DSU Plan”). Each DSU is equivalent to one share of our common stock and will be distributed in common shares after the director’s service on the Board ends. DSUs granted vest over a one year service period. Additionally, the DSU Plan provides for the deferral of compensation earned in the form of (i) an annual retainer for directors, and (ii) wages for certain highly compensated Team Members. These DSUs are settled in common stock with the participants at a future date, or over a specified time period, as elected by the participants in accordance with the DSU Plan.
We granted 12 thousand DSUs in 2020. The weighted average fair value of DSUs granted during 2020, 2019 and 2018 was $130.14 , $156.47 , and $127.14 . The DSUs are awarded at a price equal to the market price of our underlying common stock on the date of the grant. For 2020, 2019 and 2018, we recognized $1.6 million, $1.9 million and $1.9 million of share-based compensation expense for these DSU grants.
Employee Stock Purchase Plan
We also offer an employee stock purchase plan (“ESPP”). Under the ESPP, eligible Team Members may elect salary deferrals to purchase our common stock at a discount of 10 % from its fair market value on the date of purchase. There are annual limitations on the amounts a Team Member may elect of either $25 thousand per Team Member or 10 % of compensation, whichever is less. As of January 2, 2021, there were 0.9 million shares available to be issued under the ESPP.
16. Accumulated Other Comprehensive Loss:
Accumulated other comprehensive loss, net of tax, consisted of the following:
| (in thousands) | Unrealized Gain (Loss) on Postretirement Plan | Foreign Currency Translation | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||
| Balance, December 30, 2017 | $ | $ | ( | $ | ( | ||||||||||||
| 2018 activity | ( | ( | ( | ||||||||||||||
| Balance, December 29, 2018 | ( | ( | |||||||||||||||
| 2019 activity | ( | ||||||||||||||||
| Balance, December 28, 2019 | ( | ( | |||||||||||||||
| 2020 activity | ( | ||||||||||||||||
| Balance, January 2, 2021 | $ | $ | ( | $ | ( | ||||||||||||
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17. Quarterly Financial Data (unaudited):
The following table summarizes quarterly financial data for 2020 and 2019:
| 2020 | First | Second | Third | Fourth | |||||||||||||||||||
| (in thousands, except per share data) | (16 weeks) | (12 weeks) | (12 weeks) | (13 weeks) | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| 2019 | First | Second | Third | Fourth | |||||||||||||||||||
| (in thousands, except per share data) | (16 weeks) | (12 weeks) | (12 weeks) | (12 weeks) | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | |||||||||||||||||||
Note: Due to 2020 having 53 weeks, Q4 2020 included 13 weeks of operations, while the comparable prior year period included 12 weeks.
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Advance Auto Parts, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
| Allowance for doubtful accounts receivable | Balance at Beginning of Period | Charges to Expenses | Deductions(1) | Balance at End of Period | ||||||||||||||||||||||
| December 29, 2018 | $ | $ | $ | ( | $ | |||||||||||||||||||||
| December 28, 2019 | $ | $ | $ | ( | $ | |||||||||||||||||||||
| January 2, 2021 | $ | $ | $ | ( | $ | |||||||||||||||||||||
(1)Accounts written off during the period. These amounts did not impact our statement of operations for any year presented.
Other valuation and qualifying accounts have not been reported in this schedule because they are either not applicable or because the information has been included elsewhere in this report.
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EXHIBIT INDEX
| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| 3.1 | 10-Q | 3.1 | 8/14/2018 | ||||||||||||||
| 3.2 | 10-Q | 3.2 | 8/18/2020 | ||||||||||||||
| 4.0 | 10-Q | 4.7 | 11/10/2020 | ||||||||||||||
| 4.1 | 8-K | 4.1 | 4/29/2010 | ||||||||||||||
| 4.2 | 8-K | 10.45 | 6/3/2011 | ||||||||||||||
| 4.3 | 8-K | 4.4 | 1/17/2012 | ||||||||||||||
| 4.4 | 8-K | 4.5 | 12/21/2012 | ||||||||||||||
| 4.5 | 8-K | 4.6 | 4/19/2013 | ||||||||||||||
| 4.6 | 8-K | 4.7 | 12/9/2013 | ||||||||||||||
| 4.7 | 8-K | 4.5 | 1/17/2012 | ||||||||||||||
| 4.8 | 8-K | 4.7 | 12/9/2013 | ||||||||||||||
| 4.9 | 10-Q | 4.11 | 5/28/2014 | ||||||||||||||
| 4.10 | 8-K | 4.1 | 4/17/2020 | ||||||||||||||
| 4.11 | 8-K | 4.6 | 9/30/2020 | ||||||||||||||
| 10.1 | 8-K | 10.19 | 5/20/2004 | ||||||||||||||
| 10.2 | 10-Q | 10.19 | 5/29/2008 | ||||||||||||||
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| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| 10.3 | 10-K | 10.17 | 3/1/2011 | ||||||||||||||
| 10.5 | 10-K | 10.33 | 2/28/2012 | ||||||||||||||
| 10.6 | 8-K | 10.1 | 12/21/2012 | ||||||||||||||
| 10.8 | 10-K | 10.34 | 2/25/2013 | ||||||||||||||
| 10.9 | 10-K | 10.36 | 2/25/2013 | ||||||||||||||
| 10.10 | 8-K | 10.1 | 12/9/2013 | ||||||||||||||
| 10.11 | 8-K | 10.2 | 12/9/2013 | ||||||||||||||
| 10.12 | 10-K | 10.45 | 2/25/2014 | ||||||||||||||
| 10.13 | 10-K | 10.48 | 2/25/2014 | ||||||||||||||
| 10.15 | 10-K | 10.52 | 3/3/2015 | ||||||||||||||
| 10.17 | 10-K | 10.54 | 3/3/2015 | ||||||||||||||
| 10.18 | 8-K | 10.1 | 11/13/2015 | ||||||||||||||
| 10.19 | 10-Q | 10.1 | 5/31/2016 | ||||||||||||||
| 10.20 | 10-Q | 10.2 | 5/31/2016 | ||||||||||||||
| 10.22 | 10-Q | 10.5 | 5/31/2016 | ||||||||||||||
| 10.23 | 10-Q | 10.7 | 5/31/2016 | ||||||||||||||
| 10.24 | 8-K | 10.1 | 2/6/2017 | ||||||||||||||
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| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| 10.25 | 8-K | 10.2 | 2/6/2017 | ||||||||||||||
| 10.26 | 10-K | 10.50 | 2/28/2017 | ||||||||||||||
| 10.28 | 10-K | 10.55 | 2/28/2017 | ||||||||||||||
| 10.29 | 10-K | 10.56 | 2/28/2017 | ||||||||||||||
| 10.30 | 10-K | 10.58 | 2/28/2017 | ||||||||||||||
| 10.31 | DEF14A | Appendix A | 4/6/2017 | ||||||||||||||
| 10.32 | 8-K | 10.1 | 2/6/2018 | ||||||||||||||
| 10.34 | 10-K | 10.58 | 2/21/2018 | ||||||||||||||
| 10.35 | 10-Q | 10.1 | 11/13/2018 | ||||||||||||||
| 10.36 | 8-K | 10.1 | 10/15/2018 | ||||||||||||||
| 10.37 | 10-K | 10.52 | 2/9/2019 | ||||||||||||||
| 10.38 | 10-K | 10.53 | 2/9/2019 | ||||||||||||||
| 10.39 | 10-K | 10.54 | 2/9/2019 | ||||||||||||||
| 10.40 | 10-K | 10.55 | 2/9/2019 | ||||||||||||||
| 10.41 | 10-K | 10.56 | 2/9/2019 | ||||||||||||||
| 10.42 | 10-K | 10.57 | 2/9/2019 | ||||||||||||||
| 10.43 | 10-K | 10.58 | 2/9/2019 | ||||||||||||||
| 10.44 | X | ||||||||||||||||
| 10.45 | X | ||||||||||||||||
| 21.1 | 10-K | 21.1 | 2/18/2020 | ||||||||||||||
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| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| 22.1 | 10-Q | 22.1 | 11/10/2020 | ||||||||||||||
| 23.1 | X | ||||||||||||||||
| 31.1 | X | ||||||||||||||||
| 31.2 | X | ||||||||||||||||
| 32.1 | X | ||||||||||||||||
| 101.INS | XBRL Instance Document. | X | |||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | X | |||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | X | |||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | X | |||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. | X | |||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | X | |||||||||||||||
| 104.1 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit. | X | |||||||||||||||
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Item 16. Form 10-K Summary.
None.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ADVANCE AUTO PARTS, INC. | ||||||||||||||
| Dated: | February 22, 2021 | By: | /s/ Jeffrey W. Shepherd | |||||||||||
| Jeffrey W. Shepherd | ||||||||||||||
| Executive Vice President, Chief Financial Officer | ||||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Thomas R. Greco | President and Chief Executive Officer and Director | February 22, 2021 | ||||||||||||
| Thomas R. Greco | (Principal Executive Officer) | |||||||||||||
| /s/ Jeffrey W. Shepherd | Executive Vice President, Chief Financial Officer | February 22, 2021 | ||||||||||||
| Jeffrey W. Shepherd | (Principal Financial Officer) | |||||||||||||
| /s/ Andrew E. Page | Senior Vice President, Controller and Chief Accounting Officer | February 22, 2021 | ||||||||||||
| Andrew E. Page | (Principal Accounting Officer) | |||||||||||||
| /s/ Eugene I. Lee, Jr. | Chairman and Director | February 22, 2021 | ||||||||||||
| Eugene I. Lee, Jr. | ||||||||||||||
| /s/ Carla J. Bailo | Director | February 22, 2021 | ||||||||||||
| Carla J. Bailo | ||||||||||||||
| /s/ John F. Bergstrom | Director | February 22, 2021 | ||||||||||||
| John F. Bergstrom | ||||||||||||||
| /s/ Brad W. Buss | Director | February 22, 2021 | ||||||||||||
| Brad W. Buss | ||||||||||||||
| /s/ John F. Ferraro | Director | February 22, 2021 | ||||||||||||
| John F. Ferraro | ||||||||||||||
| /s/ Jeffrey J. Jones II | Director | February 22, 2021 | ||||||||||||
| Jeffrey J. Jones II | ||||||||||||||
| /s/ Sharon L. McCollam | Director | February 22, 2021 | ||||||||||||
| Sharon L. McCollam | ||||||||||||||
| /s/ Douglas A. Pertz | Director | February 22, 2021 | ||||||||||||
| Douglas A. Pertz | ||||||||||||||
| /s/ Nigel Travis | Director | February 22, 2021 | ||||||||||||
| Nigel Travis | ||||||||||||||
| /s/ Arthur L. Valdez Jr. | Director | February 22, 2021 | ||||||||||||
| Arthur L. Valdez Jr. | ||||||||||||||
69
Exhibit 10.44
SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION
Under our director compensation program, each non-management director receives annual compensation that is comprised of a combination of cash and equity-based compensation. Management directors do not receive any additional compensation for services as a director. Each non-management director receives an annual retainer of $85,000 and additional applicable retainers or fees as set forth in the following paragraph.
Directors who chair Board committees receive additional retainer amounts annually for their committee chair responsibilities. The Audit Committee Chair receives $20,000 and the Compensation Committee Chair receives $15,000. The chair of each of the other Board committees receives $10,000. The independent Board Chair (or the independent Lead Director in the event the Board Chair is not independent) receives an additional $150,000 annual retainer.
Each non-management director may elect to receive all or a portion of his or her retainer amounts on a deferred basis in the form of deferred stock units, or DSUs. Each DSU is equivalent to one share of our common stock. Dividends paid by us are credited toward the purchase of additional DSUs and are distributed together with the underlying DSUs. DSUs are payable in the form of common stock to participating directors over a specified period of time as elected by the participating director, or whenever their Board service ends, whichever is sooner.
In addition, each non-management director receives equity compensation valued at $155,000 per year. The equity compensation is awarded annually in the form of DSUs, granted to directors shortly after the date of the annual stockholder meeting, and will be distributed in common shares after the director’s service on the Board ends. Board members who are appointed at any time other than at the annual meeting receive a prorated DSU award with a grant value based upon the number of months from their election date until the next annual stockholder meeting. The annual grant of DSUs may vest pro-rata based upon the number of months the director has served during the current term in the event that a director’s service as a member of the Board ends before May 1 of the calendar year following the Company’s most recent annual meeting.
Exhibit 10.45
ADVANCE AUTO PARTS, INC.
DEFERRED COMPENSATION PLAN
(As Amended and Restated Effective as of January 1, 2021)
Table of Contents
Page
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Article 1
GENERAL
Section 1.1 Purpose. It is the intention of Advance Auto Parts, Inc. (the “Company”) to continue to maintain and provide for the administration of the Advance Auto Parts, Inc. Deferred Compensation Plan (the “Plan”) in accordance with the provisions of Section 409A of the Code, and in accordance with other provisions of law relating to non-qualified deferred compensation plans. The purpose of the Plan is to allow eligible Team Members elect to defer the receipt of a portion of the compensation that would otherwise be currently payable to the Team Member.
Section 1.2 Status of Plan. The Plan is maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). It is the intention of the Company that the Plan be unfunded for tax purposes and for purposes of Title I of ERISA. The Plan constitutes a mere promise by the Company to make deferred compensation payments in the future. As to such deferred compensation benefits, Participants under the Plan have the status of a general, unsecured creditors of the Company.
Section 1.3 Effective Date. The Plan as hereby amended and restated is a continuation of the Plan that was originally adopted effective as of June 1, 2003. The Plan was amended and restated effective as of January 1, 2008 for the purpose of becoming compliant with final Code Section 409A regulations issued by the Internal Revenue Service, and thereafter further amended from time to time. The provisions of the Plan as herein restated will be effective as of January 1, 2021, except as may be specifically provided otherwise. Except as may be required by ERISA or the Code, the rights of any person whose status as a Participant has terminated will be determined pursuant to the Plan as in effect on the date such status terminated, unless a subsequently adopted provision of the Plan is made specifically applicable to such person.
Section 1.4 Pre-2005 Deferrals. Deferrals made under the Plan on or before December 31, 2004, which were earned and not subject to a substantial risk of forfeiture as of such date, shall be segregated and administered solely in accordance with the Addendum to this Plan.
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Article 2
DEFINITIONS
For the purposes of this Plan, the following words and phrases shall have the meanings indicated, unless the context clearly indicates otherwise:
Section 2.1 Administrative Committee. “Administrative Committee” means the committee that is responsible for the operation and administration of the Plan, as identified in Section 8.1(c).
Section 2.2 Affiliated Company. “Affiliated Company” means the Company and each other corporation or enterprise, which as of a given date, is then a member of the same controlled group of corporations or the same group of trades or businesses under common control, determined in accordance with Sections 414(b) and (c) of the Code, as is the Company.
Section 2.3 Aggregated Plans. “Aggregated Plans” means the Advance Auto Parts, Inc. Deferred Stock Unit Plan for Non-Employee Directors and Selected Executives, and any other account balance form of deferred compensation plan allowing elective deferrals that is sponsored by an Affiliated Company, and which is required to be aggregated with this Plan pursuant to IRS Regulation §1.409A-1(c)(2).
Section 2.4 Annual Bonus. “Annual Bonus” means the bonus awarded to a Team Member for a calendar year performance period under an incentive plan maintained by an Employer.
Section 2.5 Base Salary.
(a) The “Base Salary” of a Team Member for a Plan Year means the base rate of cash compensation otherwise payable by an Employer to or for the benefit of the Team Member for services rendered or labor performed while that Team Member is a Participant in this Plan for such Plan Year
(b) “Base Salary” does not include Bonus Compensation or Commissions.
(c) Any Base Salary paid to a Team Member after the last day of a Plan Year solely for services performed during the final payroll period (as described in Code Section 3401(b)) containing the last day of the Plan Year shall be treated as compensation for services performed in the subsequent Plan Year. For example, if a payroll period begins on December 23 of Year 1 and ends on January 5 of Year 2, then the Base Salary for that payroll period shall be treated as Year 2 compensation.
Section 2.6 Beneficiary. “Beneficiary” means the person, persons or entity designated by the Participant or by the terms of the Plan to receive any benefits payable under the Plan pursuant to Article 7.
Section 2.7 Board. Except as provided in Section 6.1, “Board” means the Board of Directors of the Company as constituted from time to time.
Section 2.8 Bonus Compensation. "Bonus Compensation" for any Team Member for any period means any Quarterly Bonus or Annual Bonus awarded to such Team Member for services rendered or performance achieved for such period.
Section 2.9 Code. “Code” shall mean the Internal Revenue Code of 1986, as amended. References to any provision of the Code or regulation (including a proposed regulation) thereunder shall include any successor provisions or regulations.
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Section 2.10 Commissions.
(a) The “Commissions” of a Team Member for a Plan Year means the compensation or portions of compensation earned by a Team Member for services provided by the Team Member in connection with a sale of a product or service to an unrelated customer while that Team Member is a Participant in this Plan for such Plan Year.
(b) Commissions relating to a sale will be considered Eligible Compensation for the Plan Year in which the customer remits payment for the sale to the Company or other Affiliated Company, or if applied consistently to all similarly situated Team Members, for the Plan Year in which the sale occurs.
Section 2.11 Company. “Company” means Advance Auto Parts, Inc., its successors, and any organization into which or with which Advance Auto Parts, Inc. may merge or consolidate or to which all or substantially all of its assets may be transferred.
Section 2.12 Compensation Committee. “Compensation Committee” means the Compensation Committee of the Board, or any successor to such committee.
Section 2.13 Deferral Account. “Deferral Account” means each account established and maintained on behalf of each Participant pursuant to Section 4.1. Where the context so implies, reference to a Participant’s Deferral Account shall include the Participant’s Discretionary Employer Deferral Contribution Account (if any).
Section 2.14 Deferral Election Agreement. “Deferral Election Agreement” (sometimes referred to simply as a “Deferral Election”) means an Eligible Individual’s agreement to defer the receipt of Eligible Compensation as submitted by the Eligible Individual under the Plan in accordance with Section 3.3.
Section 2.15 Deferral Period. “Deferral Period” means the period defined in Section 3.5.
Section 2.16 Deferred Amount. “Deferred Amount” means the amount defined in Section 3.4.
Section 2.17 Disabled. A Participant shall be considered to be or have become “Disabled” for purposes of the Plan if, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve months, the Participant:
(a) Is unable to engage in any substantial gainful activity; or
(b) Is receiving, and has received for a period of not less than three months, income replacement benefits under another accident and health plan covering employees of the Participant’s Employer.
A Participant will be deemed to be Disabled if the Participant has been determined to be disabled (i) by the Social Security Administration, or (ii) under a disability insurance program having a definition of disability that satisfies the standard prescribed in subsection (a) above.
Section 2.18 Discretionary Employer Deferral Contribution
. “Discretionary Employer Deferral Contribution” means the employer contribution that an Employer may make to the Plan on behalf of eligible Participants for any Plan Year as prescribed in Section 3.10.
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Section 2.19 Discretionary Employer Deferral Contribution Account. “Discretionary Employer Deferral Contribution Account” means a notational account established to reflect the crediting of any Discretionary Employer Deferral Contributions made on account of a Participant, including the deemed earnings thereon.
Section 2.20 Eligible Compensation. The “Eligible Compensation” for any Team Member for any period means the Base Salary, Bonus Compensation and Commissions, if any, otherwise payable to the Team Member for services performed, including any such compensation that the Team Member could have received in cash in lieu of:
(a) Compensation deferrals elected to be made under this Plan, or under any other non-qualified deferred compensation plan maintained by the Company or other Affiliated Company; and
(b) Contributions made by or on the Team Member’s behalf to any qualified retirement plan, or to any Code Section 125 cafeteria plan or other employee benefit plan maintained by the Company or other Affiliated Company.
Section 2.21 Eligible Individual. “Eligible Individual” for a Plan Year means a Team Member who is eligible to participate in the Plan for that Plan Year.
Section 2.22 Employer. “Employer” means each Affiliated Company having any Team Members who are Participants under the Plan. If an Affiliated Company acquires a corporation or other trade or business, and if the acquired entity is thereupon maintained as a separate Employer or operating unit with respect to an Affiliated Company in general, then such entity will not be deemed to be an Employer with respect to the Plan, and the Team Members employed by that entity will not be eligible to participate in the Plan, unless and until the Company directly, or acting through the Administrative Committee, affirmatively designates the acquired entity as an Employer.
Section 2.23 ERISA. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
Section 2.24 Hypothetical Investment Benchmark. “Hypothetical Investment Benchmark” means the investment benchmarks that are used to measure the earnings credited to a Participant’s Deferral Account, as prescribed in Section 4.4.
Section 2.25 Participant. “Participant” means any eligible Team Member who has elected to participant in the Plan by filing a Deferral Election Agreement as provided in Article 3.
Section 2.26 Plan. “Plan” means this Advance Auto Parts, Inc. Deferred Compensation Plan, as may be amended from time to time.
Section 2.27 Plan Year. “Plan Year” means a 12 month period beginning January 1 and ending the following December 31.
Section 2.28 Qualified Change in Control Event. “Qualified Change in Control Event” is a change in control of an Employer, as more fully prescribed in Article 6.
Section 2.29 Quarterly Bonus. “Quarterly Bonus” means the amount awarded to a Team Member for each quarterly performance period within a Plan Year pursuant to any approved incentive plan maintained by an Employer.
Section 2.30 Retirement. “Retirement” or “Retires” means, with respect to a Participant, the Participant’s Separation from Service after both attaining age 55 and completing at least 10 continuous years of service with the Affiliated Companies.
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Section 2.31 Separation from Service.
(a) Subject to the further provisions of this Section 2.31, a Participant will incur a Separation from Service for purposes of the Plan if the Team Member dies, Retires, or otherwise has a termination of employment as to all the Affiliated Companies.
(b) A Team Member’s employment relationship with an Affiliated Company will be treated as continuing intact, and thus the Team Member will not be deemed to have incurred a Separation from Service, while the Team Member is on military leave, sick leave or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the Team Member retains a right to reemployment with the Affiliated Company under an applicable statute or by contract. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Team Member will return to perform services for the Affiliated Company. If the period of leave exceeds six months and the Team Member does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first day immediately following such six month period.
(c) Whether a termination of employment has occurred is determined based on whether the facts and circumstances indicate that the Affiliated Company and the Team Member reasonably anticipated that no further services would be performed after a certain date, or that the level of bona fide services the Team Member would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as an Team Member or an independent contractor) over the immediately preceding 36-month period (or the full period of services to the Affiliated Companies if the Team Member has been providing services to the Affiliated Companies less than 36 months). A Team Member is presumed to have incurred a Separation from Service where the level of bona fide services performed decreases to a level equal to 20 percent or less of the average level of services performed by the Team Member during the immediately preceding 36-month period. A Team Member will be presumed not to have incurred a Separation from Service where the level of bona fide services performed continues at a level that is 50 percent or more of the average level of service performed by the Team Member during the immediately preceding 36-month period. No presumption applies to a decrease in the level of bona fide services performed to a level that is more than 20 percent, and less than 50 percent, of the average level of bona fide services performed during the immediately preceding 36-month period).
Section 2.32 Specified Employee.
(a) For purposes of this Plan, a “Specified Employee” means a Team Member who is:
(i) A five-percent owner of an Affiliated Company; or
(ii) A one-percent owner of an Affiliated Company having annual compensation of more than $150,000; or
(iii) An officer of an Affiliated Company, regardless of the level of the officer’s annual compensation for the Plan Year at issue. In this regard, an “officer” means a Team Member whose position is that of a Vice-President or higher.
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(b) A Team Member’s status as a Specified Employee will be determined as of December 31 of each Plan Year (the “Identification Date”). If applicable, such a determination will be based on the compensation earned by the Participant from the Affiliated Companies for the 12 month period ending on the Identification Date.
(c) A Team Member who is determined to be a Specified Employee as of an Identification Date will be treated as a Specified Employee for purposes of the distribution restrictions prescribed under Section 5.6 of the Plan for the 12-month period beginning on the first day of the month following the Identification Date (i.e., for the calendar year immediately following the Identification Date).
(d) If a publicly-traded corporation is acquired by, or merges into, the Company or other Affiliated Company, then any Team Member of the acquired or merged corporation who as of December 31 (the Identification Date) immediately following the corporation transaction, has become an officer of an Affiliated Company (as defined in paragraph (a)(iii) above), or who is an owner described in paragraph (a)(i) or (ii) above, will be treated as a Specified Employee for purposes of this Plan through the last day of calendar year that is coincident with or next follows the date of the corporation transaction. Thereafter, the Team Member’s status as a Specified Employee will be determined as prescribed above. Notwithstanding the foregoing, the Company may elect to use any reasonable method to determine the Specified Employees for purposes of the Plan for periods immediately after the corporate transaction, provided that such method is adopted no later than 90 days after the corporate transaction and applied prospectively from the date the method is adopted.
(e) If a company that is not publicly-traded is acquired by or merges into the Company or other Affiliated Company, then the Team Members of the acquired or merged company will not be treated as Specified Employees for purposes of this Plan until the first day of the calendar year next following the acquisition. Thereafter, the Team Member’s status as a Specified Employee will be determined as prescribed above.
Section 2.33 Specified Time. “Specified Time” means a designated Deferral Period with respect to a Deferral Account that based on a stated number of years, as prescribed in Section 3.5(b).
Section 2.34 Team Member. “Team Member” means an employee of the Company or other Affiliated Company.
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Article 3
ELIGIBILITY AND DEFERRAL ELECTIONS
Section 3.1 Eligibility.
(a) A Team Member will be eligible to participate in the Plan for a Plan Year if the Team Member (i) will have a pay grade of 11 or higher as of the first day of such Plan Year, and (ii) is employed by an Employer on November 30 of the preceding Plan Year.
(b) Notwithstanding subsection (a) above, but subject to the terms of the Plan, a Team Member with a pay grade that is less than 11 who was an active Participant in the Plan for the Plan Year beginning on January 1, 2020 (i.e., who had elected to make deferrals for the 2020 Plan Year) will be grandfathered, and will continue to be eligible to participate in and make deferrals under the Plan, provided that the Team Member remains a management or highly compensated employee within the meaning of ERISA.
(c) An individual who initially becomes employed by an Employer during a Plan Year (including by reason of a transfer of employment from an Affiliated Company that is not an Employer with respect to the Plan), or a former Participant who is rehired by an Employer during a Plan Year (whether or not within the same Plan Year as of a Separation of Service) will not be eligible to participate in the Plan until the following Plan Year, subject in all cases to the eligibility provisions of subsection (a) above.
(d) A Participant who is transferred from an Employer to employment with an Affiliated Company that is not an Employer with respect to the Plan, or who while continuing in the employ of an Employer ceases to be an eligible Team Member (a “Transferred Participant”), will not be considered to have incurred a Separation from Service. The Transferred Participant will continue to be eligible to make deferrals under the Plan through the end of the Plan Year in which such transfer occurs.
(e) Notwithstanding the foregoing, an individual is not eligible to participate in the Plan unless the individual is a citizen or permanent legal resident of the United States.
Section 3.2 Duration of Participation. Each Participant will remain a Participant under the Plan until the balance of all of the Participant’s Deferral Accounts has been distributed to the Participant or the Participant’s Beneficiary.
Section 3.3 Deferral Election Agreements.
(a) For each Plan Year, each eligible Team Member will be permitted to submit a Deferral Election Agreement that will pertain to both the Base Salary and Commissions (if any) otherwise payable to the Team Member for services performed or sales incurred during the Plan Year, as applicable. A Team Member may not submit separate elections for Base Salary and Commissions, respectively.
(b) For each Plan Year, each eligible Team Member will be permitted to additionally, or alternatively, submit a separate Deferral Election Agreement with respect to any Bonus Compensation otherwise payable to the Team Member for services performed or performance achieved during the Plan Year. The Administrative Committee in its discretion may permit separate elections to be made with respect to a Team Member’s Quarterly Bonuses and Annual Bonus, respectively.
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(c) The submission of the Deferral Election Agreement must be made in writing or otherwise in accordance with such policies and procedures established by the Administrative Committee and communicated to Eligible Individuals, which procedures may permit or require elections to be made by electronic media. The Eligible Individual will be provided written or electronic confirmation of the terms of each Deferral Election Agreement.
(d) The Deferral Election Agreement with respect to each form of Eligible Compensation will include the elections and descriptions prescribed below.
(i) The amount of the Eligible Individual Eligible Compensation to be deferred for the Plan Year, as applicable (the “Deferred Amount”), as described more fully in Section 3.4;
(ii) The designated payment event for such Deferred Amount, as described more fully in Section 3.5;
(iii) The form in which the Deferred Amount is elected to be paid, as described more fully in Section 3.6; and
(iv) The manner in which the Deferred Amount will be deemed to be invested, as described in Section 4.4.
Section 3.4 Deferred Amount.
(a) The Deferral Election Agreement of an Eligible Individual for a Plan Year will designate the amount of each form of the Eligible Compensation for such Plan Year that the Eligible Individual elects to have deferred under the Plan (the “Deferred Amount”).
(b) The maximum or minimum amount of deferral that may be elected by an Eligible Individual for a Plan Year with respect to each form of Eligible Compensation will be established by the Administrative Committee. The maximum or minimum amount may differ as to an Eligible Individual or classes of Eligible Individuals.
(c) The aspect of a Deferral Election Agreement regarding the elected Deferred Amount will not apply to any period for which the amount of the Eligible Compensation remaining to be paid to the Eligible Individual (but for the deferral election), after making any other deductions or withholdings of income, would be less than the Deferred Amount prescribed in the Deferral Election Agreement.
Section 3.5 Designated Payment Event.
(a) An Eligible Individual’s Deferral Election Agreement must designate the event that will give rise to the payment of the Deferred Amount. The period of the deferral through the date of the event giving rise to the payment of the Deferred Amount is sometimes referred to herein as the “Deferral Period.” Subject to the terms of the Plan, including Section 5.6 (regarding the restriction on distributions to Specified Employees), an Eligible Individual may elect to have the Deferred Amount pertaining to services performed in any Plan Year become payable upon (i.e., to be deferred until) either of the following alternative events:
(i) The Eligible Individual’s Retirement or other Separation from Service; or
(ii) The last day of a future calendar year; provided, however, that such designated calendar year cannot be earlier than the second calendar year following the calendar year in which
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falls the first day of the Plan Year to which the deferred compensation pertains (i.e., as of a “Specified Time”). For example, a Team Member may elect to have a Deferral Account pertaining to Year 1 compensation be deferred for the period ending on December 31 of Year 3, or until the last day of any subsequent calendar year.
(b) Notwithstanding the terms of a Deferral Election Agreement, a Participant’s Retirement will be a designated payment event with respect to each of the Participant’s Deferral Accounts. Accordingly, if such Retirement occurs prior to the occurrence of the Specified Time designated in any Deferral Election Agreement for any Deferral Account, then the Retirement will supplant the Specified Time election with respect to that Deferral Account.
Section 3.6 Form of Payment.
(a) A Participant’s Deferral Election Agreement will designate the form in which the Deferred Amount will be paid if such payments arise by reason of a designated payment event prescribed in Section 3.5 above. The permissive forms of payment are:
(i) A lump sum; or
(ii) Substantially equal annual installments over a period (as the Participant will designate) of not less than two years and not more than 10 years.
(b) If the distribution of a Participant’s Deferral Account is to be made in annual installments, then the annual cash payments to be made from the Participant’s Deferral Account will be determined by reference to a fraction, the numerator of which is one and the denominator of which is the number of remaining installments (including the installment being paid). Each installment will be deemed to be made on a pro rata basis from each of the different deemed investments of the Deferral Account (if there is more than one such deemed investment).
Section 3.7 Deferral Election Deadline.
(a) A Deferral Election pertaining to Base Salary and Commissions, or to Bonus Compensation, that may otherwise become payable to a Team Member for services performed, sales made or performance achieved during a Plan Year, including in regard to the Commissions, Annual Bonus or the fourth quarter Quarterly Bonus pertaining to a Plan Year that will be paid after the end of that Plan Year, must be submitted on or before December 31 of the Plan Year immediately preceding the Plan Year for which it is effective (the “Statutory Deadline”), or as of such earlier submission date established by the Administrative Committee (such as by the end of the open enrollment period applicable to such Plan Year).
(b) Notwithstanding subsection (b) above, the Administrative Committee in its discretion may permit a Team Member to submit the Deferral Election for the Annual Bonus pertaining to any Plan Year on or before June 30 falling within the applicable Plan Year, or as of such earlier submission date established by the Administrative Committee, subject to the following conditions:
(i) The Annual Bonus for the Plan Year must be payable by reason of the Team Member’s satisfaction of organizational or individual performance criteria that is measured on the basis of a calendar year performance period or such other performance period of not less than 12 months;
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(ii) The Team Member must have performed services for the Employer continuously during the period beginning on the later of the beginning of the performance period or the date the applicable performance criteria are established, and ending on the date the election is made; and
(iii) The election must be made before the amount of the Annual Bonus becomes readily ascertainable.
Section 3.8 Irrevocability of Election.
(a) Once the applicable Statutory Deadline to make a Deferral Election for any form of Eligible Compensation with respect to any Plan Year has passed, as prescribed in Section 3.7, the Deferral Election will generally become irrevocable. The consequences of such include the following:
(i) The amount of the Eligible Compensation that the Participant elected to defer for the Plan Year, or the election not to defer any amount, cannot be canceled or modified;
(ii) The form of payment for the Deferral Account to which the Deferred Election applies cannot be modified; and
(iii) The designated date of payment for the Deferral Account to which the Deferred Election applies cannot be modified, except as provided in Section 5.8.
(b) Notwithstanding subsection (a) above, the Deferral Election of a Participant who receives an Unforeseeable Emergency withdrawal from the Plan pursuant to Section 5.11 will be cancelled on a prospective basis. Such cancellation will continue in effect for the remainder of the Plan Year in which the withdrawal is made. The Participant, if otherwise so eligible, will be permitted to elect to make elective deferrals under the Plan for the subsequent Plan Year.
Section 3.9 Default Rules. If an Eligible Individual has timely made an effective, affirmative Deferral Election for a Plan Year, but the Deferral Election Agreement did not specify a form of distribution, or did not specify a Deferral Period, then the default rules prescribed below will apply
(a) If the Deferral Election Agreement did not specify a form of payment, then the default form of payment pertaining to the Deferral Election is a lump sum.
(b) If the Deferral Election Agreement did not specify a Deferral Period, then the Deferral Period pertaining to the Deferral Election will be the expiration of two full calendar years following the Plan Year to which the deferred compensation pertains. For example, the default Deferral Period pertaining to Year 1 compensation is the period ending on December 31 of Year 3.
(c) Notwithstanding the foregoing, as generally prescribed in Section 3.5, a Participant’s Retirement is the designated payment event with respect to each of the Participant’s Deferral Accounts. Accordingly, if such Retirement occurs prior to the occurrence of the deemed Specified Time Deferral Election for any Deferral Account, then the Retirement will supplant the deemed Specified Time Deferral Election with respect to that Deferral Account.
Section 3.10 Discretionary Employer Deferral Contributions.
(a) An Employer may, at any time and in its complete discretion, make non-elective Discretionary Employer Deferral Contributions on behalf of any Eligible Individual for any Plan Year.
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(b) Any Discretionary Employer Deferral Contributions made by an Employer with respect to an Eligible Individual will be maintained in a separate Discretionary Employer Contribution Deferral Account established on the Eligible Individual’s behalf.
(c) Except as otherwise prescribed under the Plan, an Eligible Individual’s Discretionary Employer Contribution Deferral Account pertaining to deferral contributions made for any Plan Year will become payable at such time, and in such form, as prescribed in the Deferral Election Agreement made (or deemed to have been made) by the Eligible Individual with respect to the Eligible Individual’s Base Salary for the period at issue; provided, however, that the specified payment date for such Deferral Account will not precede the last day of the Plan Year as of which such Deferral Account has become vested pursuant to Section 4.3(b) below.
(d) Discretionary Employer Deferral Contributions pertaining to any Plan Year will be invested pursuant to the same Hypothetical Investment Benchmarks and in the same proportion as prescribed in the deferrals of the Eligible Individual’s Base Salary for such period.
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Article 4
MAINTENANCE AND INVESTMENT OF ACCOUNTS
Section 4.1 Maintenance of Deferral Accounts. Separate Deferral Accounts will be maintained for each Participant. More than one Deferral Account may be maintained for a Participant as necessary to reflect various Hypothetical Investment Benchmarks, or separate Deferral Election Agreements specifying different Deferral Periods and/or forms of payment. A Participant’s Deferral Accounts will be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan, and will not constitute or be treated as a trust fund of any kind. The Administrative Committee will determine the balance of each Deferral Account, as of each Valuation Date, by adjusting the balance of such Deferral Account as of the immediately preceding Valuation Date to reflect changes in the value of the deemed investments thereof, credits and debits pursuant to Section 4.2 and Section 4.4 and distributions pursuant to Article 5 with respect to such Deferral Account since the preceding Valuation Date.
Section 4.2 Crediting of Deferred Compensation. The Deferred Amount of a Participant with respect to each period of participation in the Plan will be credited to the Participant’s Deferral Account as and when such Deferred Amount would otherwise have been paid to the Participant. To the extent that any taxes or other amounts are required to be withheld from the Deferred Amount pursuant to any state, Federal or local law, such amounts will be taken out of other compensation eligible to be paid to the Participant that is not deferred under this Plan.
Section 4.3 Vesting.
(a) Except as provided in subsection (b) below, a Participant will be 100% vested in the balance of each of his or her Deferral Accounts at all times.
(b) A Participant will become vested in a Discretionary Employer Contribution Deferral Account pertaining to Discretionary Employer Contribution Deferrals made for any Plan Year as of the earliest to occur of the following:
(i) The passage of two Plan Years following the Plan Year to which such Discretionary Employer Contribution Deferrals pertain during each of which the Participant completes at least 1,000 hours of service;
(ii) The date as of which the Participant, while employed by an Employer or other Affiliated Company, dies or becomes Disabled; and
(iii) The date as of which the Participant Retires.
(c) Notwithstanding subsection (b) above, the Company, in its sole discretion, may waive or reduce the foregoing vesting standard for the Discretionary Employer Contribution Deferral Account of any Participant.
(d) Amounts held in a Discretionary Employer Contribution Deferral Account of a Participant who terminates employment prior to becoming vested such account as prescribed in subsection (b) above will be forfeited.
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Section 4.4 Hypothetical Investment Benchmarks. Each Participant will be entitled to direct the manner in which his/her Deferral Accounts will be deemed to be invested, selecting among the Hypothetical Investment Benchmarks established by the Administrative Committee, and in accordance with such rules, regulations and procedures as the Administrative Committee may establish from time to time. Notwithstanding anything to the contrary herein, earnings and losses based on a Participant’s investment elections will begin to accrue as of the date the Participant’s Deferred Amounts are credited to his or her Deferral Accounts.
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Article 5
DISTRIBUTIONS
Section 5.1 Eligibility for Distributions. Except as otherwise provided herein, a distribution from a Participant’s Deferral Account may be made only on account of one of the following events incurred by or with respect to the Participant:
(a) The Participant’s Separation from Service. In this regard, a distribution by reason of a Participant’s Retirement will be permitted only if the Retirement constitutes a Separation from Service;
(b) The Participant becoming Disabled;
(c) The Participant’s death;
(d) A Specified Time, as prescribed under the Participant’s Deferral Election Agreement;
(e) The occurrence of an Unforeseeable Emergency, as prescribed in Section 5.10; or
(f) The termination of the Plan, or portion of the Plan, prescribed in Section 9.2.
Section 5.2 Retirement Distributions. Subject to Section 5.6 below, in either of the circumstances described below, upon a Participant’s Retirement, the value of the Participant’s Deferral Accounts will be then distributed to the Participant in installments or in a lump sum as designated in the applicable Deferral Election Agreement.
(a) The Participant had elected to receive payment of a Deferral Account upon Retirement; or
(b) The Deferral Period elected by the Participant for that Deferral Account was a Specified Time, but the Participant Retires before the end of that Specified Time.
Section 5.3 Specified Time Distributions. Subject to Sections 5.6 and 5.8 below, if the Deferral Period elected by a Participant with respect to a Deferral Account is a Specified Time, and the Participant did not Retire before the end of that Specified Time, then upon the end of that Specified Time, the value of the Deferral Account at issue will be distributed to the Participant in installments or in a lump sum as designated in the applicable Deferral Election Agreement.
Section 5.4 Other Payment Events. Notwithstanding the provisions of any Deferral Election Agreement, if prior to Retirement a Participant dies, becomes Disabled but remains employed, or incurs a Separation from Service, the entire balance of all of the Participant’s Deferral Accounts will be distributed to the Participant or the Participant’s Beneficiary or Beneficiaries (as the case may be) in a lump sum payment.
Section 5.5 Designated Payment Date.
(a) The designated date as of which the value of a Participant’s Deferral Account is to be distributed, or will commence being distributed, will be as prescribed below.
(i) The designated payment date with respect to a Deferral Account to be distributed in a lump sum payment will be the second business day of the month following the month in which occurs the event giving rise to the lump sum payment (or, if later, following the month in
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which occurs the final deferral with respect to the Deferral Election Agreement pertaining to the Deferral Account is withheld from the Participant’s paycheck).
(ii) In the case of distributions to be made to a Participant in the form of installment payments, the designated payment dates will be the second business day of the month following the month in which occurs the event that gives rise to the payment, and each annual anniversary of that initial designated payment date.
(iii) If a Participant dies prior to a payment event with respect to a Deferral Account, the entire balance of such Deferral Account will be paid to the Participant’s Beneficiary or Beneficiaries in a lump sum payment. If a Participant who is receiving installment payments dies before all payments have been made, all remaining amounts will be paid to the Participant's Beneficiary or Beneficiaries in a lump sum payment. Such payment will be made within the period prescribed in Section 5.5(c)(ii) below.
(iv) The designated payment date with respect to a withdrawal due to an Unforeseeable Emergency pursuant to Section 5.9 below will be the first day of the month following the month in which occurs the date as of which the withdrawal request is approved by the Administrative Committee.
(b) For purposes of the administrative provisions of this Plan, a payment will be treated as having been made upon the date specified under subsection (a) above if the payment is made:
(i) On such date or a later date within the same calendar year; or
(ii) If later, by the 15th day of the third calendar month following the date so specified.
(c) Notwithstanding the foregoing, the rules below will apply.
(i) If the calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant (or the Participant’s estate), the payment will be treated as made upon the specified date if the payment is made during the first calendar year in which the payment is administratively practicable.
(ii) A payment to be made to a Beneficiary upon the date of the death of a Participant, or upon the death of a Beneficiary who has become entitled to payment due to the Participant’s death, will be made during the period ending on December 31 of the first calendar year following the calendar year during which the death occurs. The Beneficiary may designate the year of payment.
(iii) For purposes of administrative convenience, payment may be made to a Participant no earlier than 30 days before the designated payment date prescribed in subsection (a) above.
(d) In no event will a Participant be permitted, directly or indirectly, to designate the taxable year of the distribution.
(e) The amount to be distributed to a Participant or a Beneficiary will be determined on the basis of the value of the applicable Deferral Account as of the first business day of the month immediately preceding the designated payment date with respect to the distribution at issue.
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Section 5.6 Restriction on Distributions to Specified Employees.
(a) Notwithstanding the provisions of Section 5.5 above, if a Participant becomes entitled to a distribution from the Plan by reason of Retirement or other Separation from Service, and if the Participant is a Specified Employee as of the date of such Retirement or other Separation from Service, then the amounts held in the Participant’s Deferral Accounts will become payable as of the first day of the seventh month following the date of the Participant’s Retirement or other Separation from Service (or, if earlier, as of the date of the Participant’s death).
(b) If the distributions to the Specified Employee are to be made in annual installments, the delay in payment prescribed in subsection (a)(ii) above will apply solely to the first installment payment. Each subsequent installment payment will be made as of the date such payment otherwise would have been made pursuant to Section 5.5.
(c) The distribution restrictions prescribed in subsection (a)(ii) above will not apply to a payment to be made pursuant to Section 5.7(b)(i) or (ii) (regarding the payment of employment taxes and compensation deferred under the Plan or a certificate of divesture compliance distributions), or Section 10.2(b) (regarding domestic relations orders).
Section 5.7 No Acceleration of Scheduled Distributions.
(a) Except as otherwise provided in the Plan, the time or schedule of any distribution of any portion of a Participant’s Deferral Accounts will not be permitted to be accelerated, either at the election of the Participant or at the discretion of the Compensation Committee.
(b) Notwithstanding the foregoing, distributions may be made to or on behalf of a Participant prior to the otherwise applicable designated payment date in the following situations:
(i) As may be necessary to comply with a certificate of divestiture (as defined in Code Section 1043(b)(2));
(ii) To pay FICA taxes on amounts deferred under the Plan, or income taxes on additional charges arising from the Employer’s payment of FICA taxes or for amounts attributable to the pyramiding of wages and taxes; or
(iii) If the Plan at any time fails to meet the requirements of Code Section 409A and the underlying regulations. In that event, however, the accelerated payment may not exceed the amount required to be included in the Participant’s income as a result of the Plan’s failure to comply with the Code Section 409A requirements.
Section 5.8 Extension of Specified Time Deferral Period. Section 3.5(b) of the Plan permits a Participant to select a Deferral Period of a stated period of calendar years (i.e., a “Specified Time Deferral Period”). In this connection, a Participant will be permitted to extend a Specified Time Deferral Period with respect to a Deferral Account, subject to the conditions set forth below.
(a) An election to extend the Specified Time Deferral Period with respect to any Deferral Account must be submitted to the Administrative Committee in accordance with its established procedures.
(b) Any such election will not take effect under the Plan until 12 months after the date on which the election is submitted to the Administrative Committee.
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(c) An election to extend a Specified Time Deferral Period must provide for the lengthening of the Specified Time Deferral Period for a period of not less than an additional five years.
(d) Any election to extend a Specified Time Deferral Period must be made at least 12 months prior to the designated payment date (as prescribed in Section 5.5(a)) for the first scheduled payment from the applicable Deferral Account. A deferral extension election may be modified or revoked prior to such deadline date. If not modified or revoked, the election will generally become irrevocable as of such deadline date.
(e) For purposes of this Section 5.8:
(i) The entitlement to installment payments will be treated as the entitlement to a single payment; and
(ii) The applicable designated payment date otherwise applicable to a Specified Time Deferral Period will be determined without regard to the restrictions on distributions to Specified Employees prescribed in Section 5.6.
Section 5.9 Delay of Payments Under Certain Circumstances. Notwithstanding any provision of the Plan to the contrary, payment to a Participant will be delayed to a date after the designated payment date otherwise prescribed under Section 5.5 under any of the circumstances prescribed below.
(a) A payment to a Participant will be delayed where the Compensation Committee reasonably anticipates that the Company’s or other Affiliated Company’s income tax deduction with respect to such payment otherwise would be limited or eliminated by application of Code Section 162(m); provided, however, that in such event, the payment will be made either at the earliest date at which the Compensation Committee reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m), or the calendar year in which the Participant Separates from Service.
(b) A payment to a Participant will be delayed where the Compensation Committee reasonably anticipates that the making of the payment will violate a term of a loan agreement , or other similar contract, to which the Company or any other Affiliated Company is a party, and such violation will cause material harm to the Company or other Affiliated Company; provided, however, that in such event, the payment will be made at the earliest date at which the Compensation Committee reasonably anticipates that the making of the payment will not cause such violation, or such violation will not cause material harm to the Company or other Affiliated Company.
(c) A payment to a Participant will be delayed where the Compensation Committee reasonably anticipates that the making of the payment will violate federal securities laws or other applicable law; provided, however, that in such event, the payment to be made at the earliest date at which the Company or other Affiliated Company reasonably anticipates that the making of the payment will not cause such violation. For purposes of this subsection (c), the making of a payment that would cause inclusion in gross income or other application of any penalty provision or other provision of the Code is not treated as a violation of applicable law.
(d) A payment to a Participant will be delayed upon such other events and conditions as may be prescribed in generally applicable guidance issued by the Internal Revenue Service.
Section 5.10 Cash Payments. All distributions under the Plan will be paid in cash.
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Section 5.11 Unforeseeable Emergency Withdrawals. A Participant who incurs an Unforeseeable Emergency (as defined below) may submit a request to the Administrative Committee for a withdrawal equal to that portion (or all) of the Participant’s Deferral Accounts as is then needed to alleviate the financial hardship resulting therefrom. Such withdrawals will be subject to the following provisions of this Section 5.11.
(a) For purposes of this Section 5.11:
(i) An “Unforeseeable Emergency” means a severe financial hardship to a Participant resulting from an illness or accident of the Participant, or of the spouse, a dependent (as defined in Code Section 152(a)) or a primary beneficiary (as defined below) of the Participant; the loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant; and
(ii) A ”primary beneficiary” of a Participant is an individual who is named as a Beneficiary of the Participant under the Plan, and who has an unconditional right to all, or a portion of, the balance of the Participant’s Deferral Account upon the death of the Participant.
(b) The circumstances that will constitute an Unforeseeable Emergency will depend upon the facts of each case. Examples of circumstances that may qualify as an Unforeseeable Emergency (provided that the other conditions of this Section 5.11 are satisfied) are:
(i) The imminent foreclosure of, or eviction from, the Participant’s primary residence;
(ii) The need to pay for medical expenses, including non-refundable deductibles or the cost of prescription drugs; and
(iii) The need to pay for the funeral expenses of the spouse, or dependent or primary beneficiary of the Participant.
(c) The purchase of a home and the payment of college tuition are not Unforeseeable Emergencies for purposes of this Plan.
(d) A withdrawal will not be permitted under this Section 5.11 to the extent that the hardship resulting from the Unforeseeable Emergency is, or may be, relieved:
(i) Through the reimbursement or compensation by insurance or otherwise;
(ii) By the liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or
(iii) By the cessation of deferrals under the Plan.
(e) The amount of any Unforeseeable Emergency withdrawal will be limited to that which Administrative Committee determines is reasonably necessary to alleviate the hardship resulting from the occurrence of the Unforeseeable Emergency (which may include any amount necessary to pay any federal or state income taxes or penalties reasonably anticipated to result from the distribution). The determination of the amount reasonably necessary to satisfy the emergency need must take into account any additional compensation that is available to the Participant upon cancellation of the Participant’s deferral election due to the Unforeseeable Emergency withdrawal that is effected pursuant to Section 3.9(c). However, such determination is not required to take into account any
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additional Unforeseeable Emergency withdrawal that is available under another nonqualified deferred compensation plan, but which has not actually been paid from that other plan.
(f) After reviewing each Unforeseeable Emergency withdrawal request, the Administrative Committee will make a determination as to whether the circumstances satisfy the Unforeseeable Emergency standards prescribed above, and will thereupon notify the requesting Participant of the determination. If the request is approved, the Administrative Committee will process payment of the withdrawal
(g) The Administrative Committee may establish a policy and procedures regarding the order in which Unforeseeable Emergency withdrawals are to be charged against the particular Deferral Accounts of a Participant.
Section 5.12 Withholding of Taxes. Notwithstanding any other provision of this Plan, there will be withheld from payments made hereunder any amounts required to be so withheld by any applicable law or regulation.
Section 5.13 USERRA Rights. Notwithstanding any provision of this Article 5 to the contrary, the Plan will permit a Participant to elect a change in the time or the form of payment as may be required to comply with the Uniformed Services Employment and Reemployment Rights Act (“USERRA”).
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Article 6
PAYMENTS UPON QUALIFIED CHANGE IN CONTROL EVENT
Section 6.1 Termination of Plan upon Change in Control. Notwithstanding any provision of the Plan to the contrary, upon the occurrence of a Qualified Change in Control Event involving the Company or other Relevant Employer (as defined in Section 6.6(a) below), the Board as constituted immediately prior to the event may in its discretion terminate the Plan, or the portion of the Plan pertaining to the Relevant Employer, and cause to be distributed to each affected Participant the entire balance of all of the Participant’s Deferral Accounts (including the balance of any non-vested Discretionary Employer Deferral Contribution Accounts). The termination by such Board must occur within the 30 days preceding, or within the 12 month period following, the Qualified Change in Control Event. Such Plan termination distributions will be permitted only if:
(a) All substantially similar non-qualified deferred compensation programs maintained by the Company and all other Affiliated Companies are terminated upon such Qualified Change in Control Event; and
(b) All compensation deferred and held under each such deferred compensation program is distributed to Participants within 12 months of the date of termination of the applicable program.
Section 6.2 Qualified Change in Control Event. For purposes of this Article 6, a “Qualified Change in Control Event” with respect to any Participant means any of the following events:
(a) A Qualified change in the ownership of a corporation that is a Relevant Employer (as prescribed in Section 6.3);
(b) A Qualified change in effective control of a corporation that is a Relevant Employer (as prescribed in Section 6.4); and
(c) A Qualified Change in the ownership of a substantial portion of the assets of a corporation that is a Relevant Employer (as prescribed in Section 6.5).
Section 6.3 Change in the Ownership of a Corporation.
(a) For purposes of this Article 6, a change in the ownership of a corporation occurs on the date that any one person, or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of such corporation. If any one person, or more than one person acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation within the meaning of Section 6.4 below).
(b) For purposes of this Section 6.3, an increase in the percentage of stock owned by any one person, or by persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock.
(c) In all regards, for purposes of this Section 6.3, a change in the ownership of a corporation will be deemed to have occurred only when there is a transfer of stock of a corporation (or issuance of stock of a corporation), and stock in such corporation remains outstanding after the transaction.
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Section 6.4 Change in the Effective Control of a Corporation.
(a) For purposes of this Article 6, a change in the effective control of a corporation occurs on the date that either:
(i) A majority of members of the Company’s Board is replaced during any 12 month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board prior to the date of the appointment or election; or
(ii) Any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the applicable corporation possessing 30 percent or more of the total voting power of the stock of such corporation.
(b) A change in effective control of a corporation may also occur in any transaction in which either of the two corporations involved in the transaction incurs a change in control event described under Section 6.3 or 6.5.
Section 6.5 Change in the Ownership of Substantial Portion of Assets.
(a) For purposes of this Article 6, a change in the ownership of a substantial portion of a corporation's assets occurs on the date that any one person, or more than one person acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.
(b) A transfer of assets by a corporation will not be treated as a change in the ownership of such assets, and such transfer will thus not constitute a Qualified Change in Control Event, if the assets are transferred to:
(i) A shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock;
(ii) An entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by the corporation;
(iii) A person, or more than one person acting as a group, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of the corporation; or
(iv) An entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in paragraph (iii).
(c) For purposes of subsection (b) above, a person's status is determined immediately after the transfer of the assets. Thus, for example, a transfer to a corporation in which the transferor corporation has no ownership interest before the transaction, but which is a majority owned subsidiary of the transferor corporation after the transaction is not treated as a change in the ownership of the assets of the transferor corporation.
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Section 6.6 Definitions and Operating Rules. The following definitions and operating rules will apply for purposes of this Article 6.
(a) Relevant Employer. To constitute a Qualified Change in Control Event as to the particular Participant, the event must relate to one of the following corporate employers:
(i) The Company;
(ii) A subsidiary corporate Employer for whom the Participant is performing services at the time of the Qualified Change in Control Event; or
(iii) A subsidiary corporate Employer that is a majority shareholder of an Employer identified in paragraph (ii) above, or any corporate Employer in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in paragraph (ii) above. For purposes of this paragraph (iii), a majority shareholder of a corporate Employer is a shareholder owning more than 50% of the total fair market value and total voting power of such Employer.
(b) Persons Acting as a Group. Persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
(c) Ownership Attribution. The ownership attribution rules of Code Section 318(a) will apply to determine stock ownership. Stock underlying a vested option is considered owned by the individual who holds the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). For purposes of the preceding sentence, however, if a vested option is exercisable for stock that is not substantially vested (as defined in IRS Regulation § 1.83 3(b) and (j)), the stock underlying the option is not treated as owned by the individual who holds the option.
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Article 7
BENEFICIARY DESIGNATION
Section 7.1 Beneficiary Designation. Each Participant will have the right, at any time, to designate any person, persons or entity as his Beneficiary or Beneficiaries. A Beneficiary designation will be made, and may be amended, by the Participant by filing a written designation with the Administrative Committee, on such form and in accordance with such procedures as the Administrative Committee will establish from time to time.
Section 7.2 No Beneficiary Designation. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, then the Participant’s Beneficiary will be deemed to be the Participant’s estate.
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Article 8
ADMINISTRATION OF PLAN
Section 8.1 Named Fiduciaries. The persons identified in this Section 8.1 are named as fiduciaries under this Plan and will be the only named fiduciaries with respect to the Plan.
(a) Advance Stores Company, Incorporated (“Advance Stores”) will serve as the Plan Sponsor, and will be responsible for all fiduciary functions under the Plan except insofar as any such authority or responsibility is assigned by or pursuant to the Plan to another name fiduciary, or is delegated to another fiduciary pursuant to subsection (b) below. In that regard, Advance Stores will be the “Administrator” of the Plan within the meaning of ERISA. The authority and responsibility reserved or assigned to Advance Stores will be exercised by an authorized officer or by the Compensation Committee.
(b) The Compensation Committee will have the authority and responsibility in regard to the design of the Plan and as otherwise delegated herein. The Compensation Committee may delegate to a committee or to any officer of Advance Stores or any Affiliated Company any authority or responsibility reserved or assigned to it or to Advance Stores pursuant to the Plan. In the event of any such delegation, any references to the authority, right or power of Advance Stores or the Compensation Committee to act which are contained in any notice, disclosure or communication made with a view toward effectuating the purposes of the Plan will be construed to include authority for such actions by the committee or officer to whom the Compensation Committee has delegated its authority. Notwithstanding any other provision of the Plan, in the event that an action or direction of any person to whom authority reposed with Advance Stores or the Compensation Committee under the Plan has been delegated by the Compensation Committee conflicts with an action or direction of the Board of Directors, Advance Stores, or the Compensation Committee, then the authority of the Board of Directors, Advance Stores, or the Compensation Committee, as applicable, will supersede that of the delegate with respect to such action or direction.
(c) An Administrative Committee will have the responsibility and authority to control the operation and administration of the Plan in accordance with the terms of the Plan.
(i) The members of the Administrative Committee will be the individuals serving in the roles of, respectively, the Executive Vice President of Human Resources and the Senior Vice President, Total Rewards for the Employers, and such other individuals who are appointed to the Administrative Committee by such Executive Vice President of Human Resources (or, in the event of a vacancy in such position, by the Senior Vice President, Total Rewards).
(ii) The Administrative Committee may designate one of its members as a chairperson, and may retain and supervise outside providers, third party administrators, record keepers and professionals (including in-house professionals) to perform any or all of the duties delegated to it hereunder.
(d) The Administrative Committee will be responsible for the administration of this Plan and will have all powers necessary to administer this Plan, including discretionary authority to determine eligibility for benefits and to decide claims under the terms of this Plan, except to the extent that any such powers are vested in any other person administering this Plan by the Compensation Committee. The Administrative Committee may from time to time establish rules for the administration of this Plan, and it will have the exclusive right to interpret this Plan and to decide any matters arising in
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connection with the administration and operation of this Plan. All rules, interpretations and decisions of the Administrative Committee will be conclusive and binding on the Company, the Employers, Participants and Beneficiaries.
(e) The Administrative Committee is expressly reposed with the discretionary authority and powers in regard to all facets of any claims for benefits made under the Plan. In turn, the Compensation Committee is expressly reposed with the discretionary authority and powers in regard to all facets of the review of a denied claim for benefits. Such authority and powers include, but are not limited to, the following:
(i) Construing and interpreting the terms of the Plan and of any documents pertaining to the Plan;
(ii) Construing and interpreting all laws and regulations as applicable to any claims for benefits made under the Plan;
(iii) Making any factual determinations, and applying such determinations to the terms of the Plan and issues arising under the Plan; and
(iv) Otherwise deciding all questions regarding an individual’s benefit entitlements under the Plan, and the manner and timing of any payments to be made to or with respect to any individual under the Plan.
(f) No member of the Board, Compensation Committee or Administrative Committee will be liable for any act or action hereunder, whether of omission or commission, by any other member or Team Member, or by any agent to whom duties in connection with the administration of this Plan have been delegated or for anything done or omitted to be done in connection with this Plan.
(g) The Company will, to the fullest extent permitted by law, indemnify each director, officer or Team Members of the Company or any Affiliated Company (including the heirs, executors, administrators and other personal representatives of such person), each member of the Compensation Committee and Administrative Committee against expenses (including attorneys’ fees), judgments, fines, amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or actual suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was serving this Plan in any capacity at the request of the Company or any other Affiliated Company, the Compensation Committee or the Administrative Committee.
(h) Any expense incurred by the Company, an Employer, the Compensation Committee or the Plan Administration Committee relative to the administration of this Plan will be paid by the Company or other Affiliated Company and/or may be deducted from the Deferral Accounts of the Participants as determined by the Compensation Committee.
(i) Any member of the Compensation Committee or the Administrative Committee may also be a Participant, but no committee member will have power to take part in any discretionary decision or action affecting his own interest as a Participant under this Plan unless such decision or action is upon a matter which affects all other Participants similarly situated and confers no special right, benefit or privilege not simultaneously conferred upon all other such Participants.
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Section 8.2 Claim Procedure
.
(a) If a Participant or Beneficiary makes a written request alleging a right to receive payments under this Plan or alleging a right to receive an adjustment in benefits being paid under this Plan, such actions will be treated as a claim for benefits. All claims for benefits under this Plan will be sent to the Administrative Committee.
(b) If the Administrative Committee determines that any individual who has claimed a right to receive benefits, or different benefits, under this Plan is not entitled to receive all or any part of the benefits claimed, the Administrative Committee will inform the claimant in writing of such determination and the reasons thereof in terms calculated to be understood by the claimant. The notice will be sent within 90 days of the claim unless the Administrative Committee determines that additional time, not exceeding 90 days, is needed and so notifies the Participant. The notice will make specific reference to the pertinent Plan provisions on which the denial is based, and will describe any additional material or information that is necessary. Such notice will, in addition, inform the claimant of the procedure that the claimant should follow to take advantage of the review procedures set forth below in the event the claimant desires to contest the denial of the claim, and the right of the claimant to bring a civil action under ERISA if the claim is denied upon further review. Upon request, and free of charge, the claimant will be provided with reasonable access to, and copies of, all documents, records and other information relevant to the claim for benefits.
(c) The claimant may within 90 days thereafter submit in writing to the Administrative Committee a notice that the claimant contests the denial of his or her claim and desires a further review of the denied claim. The request for review will be directed to the Compensation Committee, which will review the claim and authorize the claimant to review pertinent documents and submit issues and comments relating to the claim. The Compensation Committee will render a final decision with specific reasons thereof in writing and will transmit it to the claimant within 60 days of the written request for review, unless the Compensation Committee determines that additional time, not exceeding 60 days, is needed, and so notifies the Participant. If the claim is to be denied in whole or in part upon review, the written notice to the claimant will include the following:
(i) The specific reason or reasons for the denial;
(ii) Reference to the specific Plan provisions upon which the denial is based;
(iii) A statement that the claimant is entitled to receive, upon request, and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim appeal; and
(iv) A statement of the claimant’s right to file a civil lawsuit under ERISA.
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(d) Notwithstanding subsection (c) above, if the Compensation Committee holds regularly scheduled meetings at least quarterly, the Compensation Committee will make a claim review determination no later than the date of the meeting of the committee that immediately follows the Plan’s receipt of a request for review, unless the request for review is filed within 30 days preceding the date of such meeting. In such case, a claim review determination may be made by no later than the date of the second meeting following the Plan’s receipt of the request for review. If special circumstances (such as the need to hold hearing) require a further extension of time for processing, a determination will be rendered not later than the third meeting of the committee following the Plan’s receipt of the request for review. If such an extension of time for review is required because of special circumstances, the claimant will be provided with written notice of the extension, describing the special circumstances and the date as of which the claim review determination will be made, prior to the commencement of the extension. The claimant will be notified of the claim review determination as soon as possible, but not later than five days after the determination is made.
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Article 9
AMENDMENT AND TERMINATION OF PLAN
Section 9.1 Amendment
. The Board or the Compensation Committee may at any time amend this Plan in whole or in part, provided, however, that no amendment will be effective to decrease the balance in, or otherwise alter the election made with respect to, any Deferral Account as accrued at the time of such amendment, nor will any amendment otherwise have a retroactive effect. In addition, any amendment that has the effect of changing the time or form of payment under the Plan with respect to any Participant will be subject to the provisions of Sections 5.7 and 5.8 (regarding the prohibition against the acceleration of payments and the restrictions on changes in the time or form of payments).
Section 9.2 Company’s Right to Terminate. The Board or the Compensation Committee may at any time terminate the Plan with respect to future Deferral Election Agreements. However, the Plan cannot otherwise be terminated, and Deferral Accounts thereupon distributed, except as provided below.
(a) The Plan may be terminated and distributions thereupon made upon a Qualified Change in Control Event, as prescribed in Section 6.1.
(b) The Plan may be terminated and distributions thereupon made within 12 months of the Company’s corporate dissolution taxed under Code Section 331, or with the approval of a bankruptcy court pursuant to 11 USC § 503(b)(1)(A), provided that the amounts deferred under the Plan are distributed for inclusion in the gross income of the Participant in the latest of:
(i) The calendar year in which the Plan termination occurs;
(ii) The calendar year in which the deferred amount is no longer subject to a substantial risk of forfeiture; or
(iii) The first calendar year in which the termination distribution is administratively practicable.
(c) The Plan may be terminated and distributions thereupon made if the conditions prescribed below are satisfied.
(i) Each other “account balance” deferred compensation plan maintained by the Company and any other Affiliated Company that also covers any Participant in this Plan is concurrently terminated;
(ii) No payments (other than payments that would be payable under the terms of the terminated programs if the terminations had not occurred) are made within 12 months of the termination of the programs;
(iii) All payments are made within 24 months of the termination of the applicable programs; and
(iv) During the three year period following the termination of the Plan, neither the Company, nor any other Affiliated Company, adopts an account balance deferred compensation program covering any individual who was a Participant in the Plan upon its termination.
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Article 10
MISCELLANEOUS
Section 10.1 Unfunded Plan. This Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of highly compensated employees, within the meaning of Sections 201, 301 and 401 of ERISA. All payments pursuant to the Plan will be made from the general funds of the Employers and no special or separate fund will be established or other segregation of assets made to assure payment. No Participant or other person will have under any circumstances any interest in any particular property or assets of the Employers as a result of participating in the Plan. Notwithstanding the foregoing, the Employers may (but will not be obligated to) create one or more grantor trusts, the assets of which are subject to the claims of the Employers’ creditors, to assist it in accumulating funds to pay its obligations under the Plan.
Section 10.2 Nonassignability.
(a) Except as specifically set forth in the Plan with respect to the designation of Beneficiaries, neither a Participant nor any other person will have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable will, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.
(b) Notwithstanding the foregoing, the balance of a Participant’s Deferral Accounts, or any portion thereof, will be distributed in accordance with the terms of any domestic relations order which the Administrative Committee determines to be a qualified domestic relations order (“QDRO”) described in Section 414(p) of the Code.
Section 10.3 Validity and Severability. The invalidity or unenforceability of any provision of this Plan will not affect the validity or enforceability of any other provision of this Plan, which will remain in full force and effect, and any prohibition or unenforceability in any jurisdiction will not invalidate or render unenforceable such provision in any other jurisdiction.
Section 10.4 Governing Law. The validity, interpretation, construction and performance of this Plan will in all respects be governed by the laws of the Commonwealth of Virginia, without reference to principles of conflict of law, except to the extent preempted by federal law.
Section 10.5 Employment Status. This Plan does not constitute a contract of employment or impose on the Participant or any Employer any obligation for the Participant to remain employed by the Employer or change the status of the Participant’s employment or the policies of the Employer and its affiliates regarding termination of employment.
Section 10.6 Underlying Incentive Plans and Programs. Nothing in this Plan will prevent the Company or other Employer from modifying, amending or terminating the compensation or the incentive plans and programs pursuant to which cash awards are earned and which are deferred under this Plan.
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Section 10.7 Funding and Financial Health Restrictions. In no event will any amounts attributable to any Deferral Account be held in an offshore trust within the meaning of Code Section 409A(b)(1). In addition, the assets of any Affiliated Company will not be restricted to the payment of benefits under the Plan upon a change in the Affiliated Company’s financial health within the meaning of Code Section 409A(b)(2).
Signature Page Follows
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Pursuant to the authority granted by the Compensation Committee of the Board of Directors of Advance Auto Parts, Inc., the undersigned hereby executes this Amendment and Restatement of the Advance Auto Parts, Inc. Deferred Compensation Plan on behalf of Advance Auto Parts, Inc.
COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS OF
ADVANCE AUTO PARTS, INC.
By:
Tammy M. Finley
Executive Vice President, Human Resources and General Counsel
Dated:
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ADDENDUM TO
ADVANCE AUTO PARTS, INC. DEFERRED COMPENSATION PLAN
PREAMBLE
The purpose and effect of this Addendum (the “Addendum”) to the Advance Auto Parts, Inc. Deferred Compensation Plan (the “Plan”) is to preserve the terms of the Plan that were in effect as of December 31, 2004 (the “2004 Plan Terms”), and to continue to apply such 2004 Plan Terms to compensation deferred under the Plan on or before December 31, 2004, without regard to the standards of Code Section 409A as enacted under the American Jobs Creation Act of 2004 (“AJCA”).
SCOPE OF ADDENDUM
This Addendum will apply solely to a Participant’s Deferral Accounts under the Plan attributable to the deferral of any compensation for services performed by the Participant for the Company or an Affiliated Company (or for Discount Auto Parts, Inc., which was acquired by the Company in 2003) on or before December 31, 2004, provided that the compensation was earned and not subject to a substantial risk of forfeiture as of that date. Such accounts are hereinafter referred to as “Pre-2005 Deferrals.” The accounts maintained for such deferrals are referred to as “Pre-2005 Deferral Accounts.”
For purposes of greater preciseness, the Pre-2005 Deferral Accounts are those pertaining to:
1. A Participant’s “Base Salary” Deferrals for 2003 and 2004;
2. A Participant’s “Quarterly Bonus” Deferrals for 2003 and for the first three quarters of 2004;
3. A Participant’s Roll up Performance Bonus for 2003; and
4. A Participant’s DAP SEP Account, as described in Section 4.02 of this Addendum.
Entitlement to both the Quarterly Bonus for the fourth quarter of 2004, and for the 2004 Roll up Performance Bonus, generally required that a Participant have been employed by the Company as of a post December 31, 2004 payment date. These bonuses, and the underlying deferrals of such bonuses, were therefore generally subject to a substantial risk of forfeiture as of such date. Consequently, such bonus deferrals are subject to the Code Section 409A standards that become effective as of January 1, 2005, and thus will be governed by the Basic Plan Document, unless the bonuses were in fact paid to the applicable Participant on or before December 31, 2004.
EFFECT OF AMENDMENTS AND DISCRETIONARY ACTIONS
It is intended that the 2004 Plan terms be strictly preserved for purposes of this Addendum. In that regard, no amendment to the Basic Plan Document, and no exercise of any discretion by the Administrative Committee under the terms of the Basic Plan Document, will apply to the Pre-2005 Deferral Accounts to which this Addendum pertains unless such amendment or exercise of discretion expressly provides that it is to be applied to such Pre-2005 Deferral Accounts.
Notwithstanding the foregoing, the Administrative Committee may change or add a Hypothetical Investment Benchmarks made available with respect to Pre-2005 Deferral Accounts.
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2004 PLAN TERMS
ARTICLE I
APPLICATION
Notwithstanding any provision of the Plan to the contrary, the following provisions of this Addendum will apply to a Participant’s Pre-2005 Deferral Accounts as previously defined.
ARTICLE II
DEFINITIONS
For the purposes of this Addendum, the words and phrases set forth below will have the meanings indicated, unless the context clearly indicates otherwise. Other words and phrases within this Addendum will have the same meaning as defined under the Basic Plan Document.
Basic Plan Document. “Basic Plan Document” means the document governing the terms of the Plan as in effect on and after January 1, 2005, as may be amended from time to time.
Pre-2005 Deferrals. “Pre-2005 Deferrals” means the elective deferrals described in the “Scope of Addendum” Section of this Addendum.
Pre-2005 Deferral Account. “Pre-2005 Deferral Account” means the account maintained under the Plan for each Participant who has made Pre-2005 Deferrals to the Plan.
Deferral Period. “Deferral Period” as applied under this Addendum is defined in Section 3.03 below.
Deferred Amount. “Deferred Amount” as applied under this Addendum is defined in Section 3.03 below.
Disability. “Disability” means eligibility for disability benefits under the terms of the Long-Term Disability Plan maintained by the Company.
Form of Payment. “Form of Payment” means payment in one lump sum or in substantially equal annual installments over a period of up to 10 years.
Participation Agreement. “Participation Agreement” means an agreement filed by a Participant as described in Section 3.01 of this Addendum.
Retirement. “Retirement” means retirement of a Participant from the Company and all Affiliated Companies after attaining both age 55 and completing at least ten continuous years of service.
Termination of Employment. “Termination of Employment” means the cessation of a Participant’s services as a full time team member of the Company and all Affiliated Companies for any reason other than Retirement.
Unforeseeable Emergency. “Unforeseeable Emergency” means severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
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ARTICLE III
PLAN TERMS
Section 3.01
Maintenance of Accounts. Separate Pre-2005 Deferral Accounts will be maintained for each Participant. More than one Pre-2005 Deferral Account may be maintained for a Participant as necessary to reflect (a) various Hypothetical Investment Benchmarks; and/or (b) separate Participation Agreements specifying different Deferral Periods and/or forms of payment pertaining to such Pre-2005 Deferral Accounts.
Section 3.02
Vesting of Deferral Account. Except as provided in Section 3.10 below (regarding a forfeiture upon a voluntary early withdrawal), a Participant will be 100% vested in his or her Pre-2005 Deferral Accounts at all times.
Section 3.03
Participation Agreement. Each Participant for whom a Pre-2005 Deferral Account is maintained will have previously entered into a Participation Agreement that set forth the following:
(a) The amount of Eligible Compensation for the Plan Year or performance period to which the Participation Agreement relates that was to be deferred under the Plan (the “Deferred Amount”);
(b) The period after which payment of the Deferred Amount is to be made or begin to be made (the “Deferral Period”), which will be the earlier of (i) a number of full years, not less than two (i.e., for a “Specified Time”), and (ii) the period ending upon the Retirement or prior termination of employment of the Participant; and
(c) The form in which payments are to be made, which may be a lump sum or in substantially equal annual installments over a period of up to 10 years.
Section 3.04
Modification of Deferral Period Election by Participant. A Participant who elected a Deferral Period for any Pre-2005 Deferrals based on a Specified Time may elect to extend that Specified Time period (in increments of full calendar years) by submitting an amended Participation Agreement to the Administrative Committee at least one full calendar year before the end of Deferral Period (as in effect before such amendment); provided, that only one such amendment may be filed with respect to each Participation Agreement. Under no circumstances may a Participant’s elected Deferral Period be shortened or reduced.
Section 3.05
Time and Form of Payment.
(a) At the end of the Deferral Period for each Pre-2005 Deferral Account, the value of such Pre-2005 Deferral Account will be paid to the Participant at the time or times elected by the Participant in the applicable Participation Agreement.
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(b) If the Participant has elected to receive payments from a Pre-2005 Deferral Account in a lump sum, the Company will pay the value of such Pre-2005 Deferral Account (determined as of the most recent Valuation Date preceding the end of the Deferral Period) in a lump sum in cash as soon as practicable after the end of the Deferral Period.
(c) If the Participant has elected to receive payments from a Pre-2005 Deferral Account in installments, the Company will make annual cash payments from such Pre-2005 Deferral Account, each of which will consist of an amount equal to (i) the balance of such Pre-2005 Deferral Account as of the most recent Valuation Date preceding the payment date times (ii) a fraction, the numerator of which is one and the denominator of which is the number of remaining installments (including the installment being paid). The first such installment will be paid as soon as practicable after the end of the Deferral Period and each subsequent installment will be paid on or about the anniversary of such first payment. Each such installment will be deemed to be made on a pro rata basis from each of the different deemed investments of the Pre-2005 Deferral Account (if there is more than one such deemed investment).
Section 3.06
Retirement. If a Participant had elected to have a Pre-2005 Deferral Account distributed upon Retirement, then the value of such Pre-2005 Deferral Account (determined as of the most recent Valuation Date preceding such Retirement) will be distributed to the Participant upon Retirement in installments or a lump sum as elected in the Participation Agreement, and as generally described in Section 3.05 above.
Section 3.07
Specified Time Distributions. If a Participant elected a Deferral Period with respect to a Pre-2005 Deferral Account that is a stated number of years (i.e., for a Specified Time), then upon the expiration of such Specified Time, the value of such Pre-2005 Deferral Account (determined as of the most recent Valuation Date preceding such Deferral Period) will be distributed in installments or a lump sum as elected in the Participation Agreement, and as generally described in Section 3.05 above.
Section 3.08
Other Than Retirement. Notwithstanding the provisions of any Participation Agreement, if a Participant dies, has a Termination of Employment or Disability prior to Retirement and prior to receiving full payment of a Pre-2005 Deferral Account, the Company will pay the remaining balance (determined as of the most recent Valuation Date preceding such event) to the Participant or the Participant’s Beneficiary or Beneficiaries (as the case may be) in a lump sum as soon as practicable following the occurrence of such event, unless the Administrative Committee in its sole discretion determines otherwise.
Section 3.09
Hardship Withdrawals.
(a) Notwithstanding the foregoing provisions of this Article III and any Participation Agreement, a Participant will be entitled to elect to withdraw all or part of the balance of a Pre-2005 Deferral Account in the event of an Unforeseeable Emergency, in accordance with this Section 3.09.
(b) A hardship withdrawal pursuant to this Section 3.09 may only be made to the extent reasonably needed to satisfy the Unforeseeable Emergency need, and may not be made if such need is or may be relieved (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation
35
of the Participant’s assets to the extent such liquidation would not itself cause severe financial hardship; or (iii) by cessation of participation in the Plan.
(c) An application for a hardship withdrawal under this Section 3.09 will be made to the Plan Administration Committee in such form and in accordance with such procedures as the Plan Administration Committee will determine from time to time. The determination of whether, and in what amount and form, a hardship withdrawal will be permitted pursuant to this Section 3.09 will be made by the Administrative Committee.
Section 3.10
Voluntary Early Withdrawal. Notwithstanding the foregoing provisions of this Article III and any Participation Agreement, a Participant will be entitled to elect to withdraw the entire balance of his or her Pre-2005 Deferral Accounts in accordance with this Section 3.10 by filing with the Administrative Committee such forms, in accordance with such procedures, as the Administrative Committee will determine from time to time. As soon as practicable after receipt of such form by the Administrative Committee, the Company will pay an amount equal to ninety percent of the balance in such Pre-2005 Deferral Accounts (determined as of the most recent Valuation Date preceding the date such election is filed) to the electing Participant in a lump sum in cash, and the Participant will forfeit the remainder of such Pre-2005 Deferral Accounts. A Participant who elects to make a voluntary early withdrawal under this Section 3.10 will not be entitled to file any Deferral Agreements under the Plan for post 2004 deferrals pertaining to compensation to be earned in the first Plan Year that begins after such voluntary early withdrawal election is made.
Section 3.11
Change of Control. In the event of a Change of Control that is recommended for approval to the shareholders by the Board, no immediate special payment will be made to any Participant and the terms and conditions of the Plan will remain in full force and effect. Notwithstanding anything contained in this Plan to the contrary, upon a hostile Change of Control, the Company will immediately pay to each Participant in a lump sum in cash the balance in the Participant’s Pre-2005 Deferral Accounts (determined as of the most recent Valuation Date preceding the Change of Control) including any Company Matching Contributions. A “Hostile Change of Control” is a Change of Control of the Company (as defined under the terms of the Plan in effect on December 31, 2004), which is not recommended for approval to the shareholders by the Board.
Section 3.12
Company’s Right to Terminate. The Board or the Compensation Committee may at any time terminate the portion of the Plan pertaining to Pre-2005 Deferral Accounts at any time for any reason, including without limitation if, in its judgment, the continuance of such portion of the Plan, the tax, accounting, or other effects thereof, or potential payments thereunder would not be in the best interests of the Company, and upon any such termination, the Company will immediately pay to each Participant in a lump sum the accrued balance in the Participant’s Pre-2005 Deferral Account (determined as of the most recent Valuation Date preceding the termination date).
ARTICLE IV
MERGED DISCOUNT AUTO PARTS PLAN
Section 4.01
Overview. Discount Auto Parts, Inc. (“Discount Auto Parts”) was acquired by, and is now a subsidiary of, the Company. Discount Auto Parts had maintained the Discount Auto Parts Plan, Inc. Supplemental Executive Profit Sharing Plan (the “DAP SEP”), a deferred compensation plan, for the benefit of its eligible employees. The DAP SEP was merged
36
with and into the Plan, effective on or about November 1, 2003 (which effective date is hereby referred to as the “Merger Date”). For purposes of this Appendix A, a “DAP SEP Participant” means any current or former employee of Discount Auto Parts for whom an account was maintained under the DAP SEP as of the Merger Date. A DAP SEP Participant is a Participant in the Plan, but only with respect to the rights associated with the Participant’s DAP SEP Account established pursuant to Section 4.02 below, unless and to the extent the individual has become a general Participant in the Plan pursuant to its terms.
Section 4.02
Separate DAP SEP Account. The value of each DAP SEP Participant’s accrued benefit under the DAP SEP was transferred to and became a liability of the Plan as of the Merger Date. Such amount is maintained in a separate DAP SEP Account established for the benefit of the DAP SEP Participant. A DAP SEP Participant will at all times be fully vested and have a nonforfeitable interest in the value of his or her DAP SEP Account.
Section 4.03
Investment of Accounts. A DAP SEP Participant will be entitled to direct the manner in which his or her DAP SEP Account will be deemed to be invested by selecting among the Hypothetical Investment Benchmarks specified from time to time in Appendix A of the Basic Plan Document.
Section 4.04
Payment of Benefits.
(a) Upon a DAP SEP Participant’s termination of employment with the Company and all Affiliated Companies, or, if earlier, upon such Participant’s attainment of age 65 (the “Normal Retirement Age” under the DAP SEP), the DAP SEP Participant will become entitled to receive payment of the value of the balance of his or her DAP SEP Account determined as of the date of such event. Payment of such benefit will be made in a lump sum within 120 days after the occurrence of the event giving rise to the DAP SEP Participant’s right to receive payment.
(b) A DAP SEP Participant will not be entitled to elect to receive any portion of his or her DAP SEP Account prior to terminating employment or attaining age 65. Consequently, the Specified Time distribution, hardship withdrawal and voluntary early withdrawal provisions of Article III of this Addendum will not apply to a Participant’s DAP SEP Account.
(c) The timing of the payment of a Participant’s DAP SEP Account will not be affected by the timing of any other benefits that the DAP SEP Participant may be entitled to receive as a general Participant in the Plan.
Section 4.05.
Death Benefits. Any beneficiary designation filed under the DAP SEP by a DAP SEP Participant whose death had occurred prior to the Merger Date became null and void as of the Merger date. Accordingly, a DAP SEP Participant who is not a general Participant in the Plan as of the Merger Date may designate a Beneficiary or Beneficiaries as generally prescribed under the Plan. In the event of the DAP SEP Participant’s death prior to payment of his or her DAP SEP Account, the Participant’s interest in that Account will be paid to the Participant’s Beneficiary as designated or prescribed under the Plan.
PDX\122291\176440\WWM\28629621.1
37
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-248963 on Form S-3, Post-Effective Amendment on Registration Statement Nos. 333-196240 and 333-115772 on Form S-8, and Registration Statement Nos. 333-155449 and 333-89154 on Form S-8 of our reports dated February 22, 2021, relating to the consolidated financial statements and financial statement schedule of Advance Auto Parts, Inc. and subsidiaries (the “Company”), and the effectiveness of the Company's internal control over financial reporting, appearing in the Annual Report on Form 10-K of the Company for the year ended January 2, 2021.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 22, 2021
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas R. Greco, certify that:
1.I have reviewed this annual report on Form 10-K of Advance Auto Parts, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 22, 2021
| /s/ Thomas R. Greco | ||
| Thomas R. Greco | ||
| President and Chief Executive Officer and Director | ||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey W. Shepherd, certify that:
1.I have reviewed this annual report on Form 10-K of Advance Auto Parts, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 22, 2021
| /s/ Jeffrey W. Shepherd | ||
| Jeffrey W. Shepherd | ||
| Executive Vice President, Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas R. Greco, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Annual Report on Form 10-K of Advance Auto Parts, Inc. for the year ended January 2, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Advance Auto Parts, Inc. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying report on Form 10-K. A signed original of this statement has been provided to Advance Auto Parts, Inc. and will be retained by Advance Auto Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: | February 22, 2021 | By: | /s/ Thomas R. Greco | ||||||||
| Name: Thomas R. Greco Title: President and Chief Executive Officer and Director | |||||||||||
I, Jeffrey W. Shepherd, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Annual Report on Form 10-K of Advance Auto Parts, Inc. for the year ended January 2, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Advance Auto Parts, Inc. The foregoing certification is being furnished to the Securities and Exchange Commission as part of the accompanying report on Form 10-K. A signed original of this statement has been provided to Advance Auto Parts, Inc. and will be retained by Advance Auto Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
| Date: | February 22, 2021 | By: | /s/ Jeffrey W. Shepherd | ||||||||
| Name: Jeffrey W. Shepherd Title: Executive Vice President, Chief Financial Officer | |||||||||||