Advance Auto Parts Inc 10-K for FY2023
Advance Auto Parts Inc (AAP)
10-K
2024-03-12
For: 2023-12-30
View Original
Added on
April 10, 2026
About this 10-K
Advance Auto Parts Inc filed this 10-K on March 12, 2024, covering the fiscal year ended December 30, 2023 (FY2023).
Headline figures
Fiscal year ended December 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.29B
- up 1.2% from $11.15B a year earlier
- Net income
- $29.74M
- down 93.6% from net income of $464.4M a year earlier
- Diluted EPS
- $0.50
- down 93.5% from $7.65 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
________________________________________________
For the fiscal year ended December 30 , 2023
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☒
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 15, 2023, the aggregate market value of common stock held by non-affiliates of the registrant was $4,178,937,579 , based on the last sales price on July 15, 2023, as reported by the New York Stock Exchange.
As of March 5, 2024, the number of shares of the registrant’s common stock outstanding was 59,551,042 shares.
Documents Incorporated by Reference:
| TABLE OF CONTENTS | |||||||||||
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FORWARD-LOOKING STATEMENTS
Certain statements herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast, “guidance,” “intend,” “likely,” “may,” “plan,” “position,” “possible,” “potential,” “probable,” “project,” “should,” “strategy,” “will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, including cost reduction initiatives, the potential sales of the Worldpac and Carquest Canada portions of our business, operational plans and objectives, expectations for economic conditions, future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the company’s leadership transitions, our ability to complete the potential divestitures of Worldpac and Carquest Canada, our ability to hire, train and retain qualified employees, the timing and implementation of strategic initiatives, deterioration of general macroeconomic conditions, geopolitical conflicts, the highly competitive nature of our industry, demand for our products and services, access to financing on favorable terms, complexities in our inventory and supply chain and challenges with transforming and growing our business. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Please refer to “Item 1A. Risk Factors” included in this report and other filings made by us with the Securities and Exchange Commission (“SEC”) for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.
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PART I
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 each year. Our previous three fiscal years ended on December 30, 2023 (“2023”), December 31, 2022 (“2022”) and January 1, 2022 (“2021”) and included fifty-two 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 names, original equipment manufacturer (“OEM”) and owned brand 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 December 30, 2023, we operated 4,786 stores and 321 branches primarily under the trade names “Advance Auto Parts,” “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 served professional customers since 2000. We have grown significantly as a result of strategic acquisitions, new store openings and comparable store sales growth. 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
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During 2023, 61 stores and branches were opened and 40 were closed or consolidated, resulting in a total of 5,107 stores and branches as of December 30, 2023 compared with a total of 5,086 stores and branches as of December 31, 2022.
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 4,484 stores, inclusive of 394 hubs, as of December 30, 2023, 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 7,800 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 23,000 stock keeping units (“SKUs”), consisting of a custom mix of products based on each store’s unique market. Supplementing our stores’ inventory on-hand, less common SKUs are also available on a same-day or next-day basis from any of our larger hub stores.
Carquest — Our 302 stores as of December 30, 2023, including 149 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 7,000 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 December 30, 2023, 1,245 independently-owned stores operated under the Carquest name.
Worldpac — Our 321 branches, of which 135 are branded Autopart International (“AI”), as of December 30, 2023 principally serve professional customers utilizing an efficient and sophisticated online ordering and fulfillment system. Worldpac’s branches are generally larger than our other store locations, averaging approximately 26,000 square feet. Worldpac’s complete product offering includes over 293,000 SKUs for domestic and import vehicles and specializes in imported OEM parts.
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As previously disclosed in our quarterly report on Form 10-Q for the period ended October 07, 2023, we announced our intention to explore divestitures of our Worldpac and Carquest Canada businesses in separate sales processes as part of our strategic review. For additional information related to risks related to divestitures, see Item 1A. Risk Factors.
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 December 30, 2023, 4,935 stores and branches were located in 48 U.S. states and two U.S. territories, and 172 stores and branches were located in nine Canadian provinces.
We serve our stores and branches primarily from our executive office in Raleigh NC. We also maintain customer support centers in Newark CA and Norton MA.
Our Products
The following table shows some of the types of products that we sell by major category:
| 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. Customer returns have historically been immaterial.
Our Customers
Our professional customers consist primarily of customers for whom we deliver products from our store or branch locations to their places of business, including garages, service stations and auto dealerships. Our professional sales represented nearly 60% of our sales in 2023, 2022 and 2021. We also serve 1,245 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;
•Oil and battery recycling; and
•Loaner tool programs.
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We also serve our customers online at www.AdvanceAutoParts.com or on our Advance Mobile App. Our professional customers can conveniently place their orders electronically, including through MyAdvance.com, by phone or in-store, and we deliver products from our stores or branch locations to their places of business.
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 December 30, 2023, we operated 50 distribution centers, ranging in size from approximately 60,000 to 943,000 square feet with total square footage of approximately 12.7 million, including one distribution center dedicated to reclamations. In 2023, we closed a distribution center in Asheville, North Carolina.
Merchandise, Marketing and Advertising
In 2023, we purchased merchandise from over 750 vendors. Our purchasing strategy involves negotiating agreements with vendors to purchase merchandise over a specified period of time along with other provisions, including pricing, rebates, 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®, Fram®, Gates®, Meguiar’sTM, Mobil 1TM, Moog®, Monroe®, NGK®, Prestone®, Purolator®, Trico® and Wagner®. In addition to these branded products, we stock a wide selection of high-quality owned brand products with a goal of appealing to value-conscious customers. These categories of merchandise include batteries, brakes, chassis, ride control, engine management, filtration, chemicals and other parts under various owned brand names such as Autopart International®, Carquest®, DieHard®, Driveworks® and Wearever®. For the DieHard® brand, we own the right to sell batteries and 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 the 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.
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
We believe our People are Our Best Part, and we have adopted six Cultural Beliefs to help 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 Cultural Belief, Champion Inclusion, we seek to fully leverage the ideas and talents of all team members in caring for our customers and each other. We encourage our team members to Speak Up and promote their engagement through a variety of programs and networks within our organization.
As of December 30, 2023, we employed approximately 40,000 full-time team members and 29,000 part-time team members. Our workforce consisted of 82.5% of our team members employed in store-level operations, 11.3% in distribution and 6.2% in our corporate offices. As of December 30, 2023, approximately 1.3% of our team members were represented by labor unions.
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Additional information about our human capital resources can be found in our Corporate Sustainability and Social Report, which is available on our website. Our Corporate Sustainability and Social Report is not, and will not be deemed to be, a part of this Annual Report on Form 10-K or incorporated by reference into any of our other filings with the Securities and Exchange Commission (“SEC”).
Intellectual Property
We own a number of trade names, service marks and trademarks, including “Advance Auto Parts®,” “Advance Same Day®,” “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 owned 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 trademarks 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 compared with 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 brand recognition, customer service, product offerings, availability, quality, service with speed, 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.
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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, taxes, workplace safety, consumer protection and trade compliance. 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.
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 2023. We make available free of charge through our Investor Relations website, located at ir.advanceautoparts.com, 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 materials with, or furnish them to the SEC. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at www.sec.gov.
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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 Strategy
If we are unable to successfully implement our business strategy, our business, financial condition, results of operations and cash flows could be adversely affected.
We have undertaken a strategic and operational review to improve the performance of our business and create long-term value. We are currently making and expect to continue to make significant investments to improve our business. If we are unable to implement our 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 and when multiple projects with interdependencies and shared human resources are pursued simultaneously.
We are exposed to risks associated with our potential divestitures, which may impact our ability to fully realize the anticipated benefits of those transactions.
We recently announced our intention to explore divestitures of our Worldpac business and Carquest Canada business in separate sales processes as part of our strategic review. There can be no assurance that we will complete these transactions. Divestitures are complex transactions involving inherent risks, including the potential for distractions of management from the core remaining business of the Company and the occurrence of events that may impact our ability to fully realize the anticipated benefits of the divestitures. We have not yet set a timetable for the sale processes, but transactions of this nature carry risks associated to variation from expectations with respect to timing, expense and post-closing claims for liability. If any of these risks materialize, the benefits of such divestitures may not be fully realized, if at all.
If we are unable to design, implement and properly operate and maintain various information systems, our ability to conduct our 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 the process of designing, implementing and updating various information systems. These initiatives will require significant investment of human and financial resources, and we may experience significant delays, increased costs and other difficulties with these projects. We are currently focusing on projects to improve our merchandising, assortment and inventory systems to enable us to efficiently move product through our supply chain network. Any deficiency in the design or implementation or maintenance of these systems could lead to inaccuracy of data and disruption to our business operations, such as demand and fulfillment data, which would lower the accuracy and efficacy of our demand and inventory forecasting. Such deficiencies may also result in lost sales from failure to buy product demanded by our customers, excess inventory from buying product not demanded by our customers, higher costs from buying products in an inefficient manner, disruption in sending invoices and tracking payments, and otherwise negative impacts to our business operations.
The effectiveness of our supply chain is important to our business operations and ability to grow our business, and if we are unable to maintain adequate supply chain capacity or improve supply chain efficiency, it 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. We are working to optimize our distribution network to support sales growth. If we are unable to maintain adequate capacity in our supply chain network, either as we expand our business or work to optimize our existing network, or if we are unable to improve the efficiency of our supply chain, we may experience higher inventory costs, lower availability, slower delivery speed and ultimately a lower ability to meet consumer product needs and channel preferences. We plan to further invest in distribution center infrastructure to help ensure safety, reliability and efficiency across our operations, which will require capital investments. We are also working to improve product lifecycle management and address slower-moving inventory in our
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network. Our investments in our supply chain may not provide the anticipated benefits, and experiencing sub-optimal inventory levels, inventory availability or increases in our costs could adversely affect our business, financial condition, results of operations and cash flows.
Our reliance on suppliers, including freight carriers and other third parties in our global supply chain, subjects us to various risks and uncertainties which could adversely affect our financial results.
We source the products we sell from a wide variety of domestic and international suppliers, and place significant reliance upon various third parties to transport, store and distribute those products to our distribution centers, stores and customers. 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 provisions 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. If we encounter any of these issues with our suppliers, our business, financial condition, results of operations and cash flows could be adversely impacted.
In addition, our suppliers, including those within our global supply chain, are impacted by global conditions that in turn may impact our ability to source merchandise at competitive prices or timely supply product at levels adequate to meet consumer demand. For example, disruptions to the global supply chain resulting from lack of carrier capacity, labor shortages, geopolitical unrest, port congestion and/or closures, amongst other factors, may negatively impact costs, inventory availability and operating results. If suppliers increase prices charged to us for products, including transportation and distribution, as a result of these or other factors such as inflation or the cost of participating in vendor financing programs, it may negatively impact our results. If we experience transitions or changeover with any of our significant vendors, or if they experience financial difficulties or otherwise are unable to deliver merchandise to us on a timely basis, or at all, we could have product shortages in our stores that could adversely affect customers’ perceptions of us and cause us to lose customers and sales.
If we are unable to 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 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 locations and brands. There is uncertainty about the profitability of newly opened locations, including whether newly opened stores will 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 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 online 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. For example, during 2021 through 2022 we experienced significant delays associated with our planned opening of new locations in California, primarily as a result of permitting challenges, and such delays increased our costs and resulted in significant lost sales opportunities. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores. The early 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 employee-related severance or other facility closure costs for stores that are closed or relocated.
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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 be adversely impacted.
Omnichannel and e-commerce retail are competitive and evolving environments. 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.
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. Website or catalog downtime and other technology disruptions in our omnichannel business, including interruptions due to cyber-related issues, aging informational technology infrastructure or natural disasters, as well as supply and distribution delays and other related issues may negatively affect our operations. 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.
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, to a significant extent, depends on the continued engagement, services and experience of our executives and other team members. 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. Failure to recruit or retain qualified team members may impact our ability to serve our customers, increase our costs and impair our efficiency and 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, impair our ability to execute, distract other team members from their key areas of focus or otherwise negatively impact our business and results. For example, we experienced turnover in senior leadership positions in our accounting function during 2023 that led to our having a material weakness in our internal control over financial reporting. If we are unable to attract and retain personnel with expertise in the required areas, there may be disruptions in our financial processes and reporting, delays to full remediation of the material weakness in our internal controls or higher likelihood of additional control deficiencies or future material weaknesses in internal control over financial reporting.
We operate in a competitive labor market and are investing in key roles in our frontline organization, and there is a risk that increases in compensation could have an adverse effect on our profitability. Additionally, 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 negative impact on our profitability. Approximately 1.3% of our team members are represented by unions. If these team members, or if non-union 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.
We work diligently to maintain the privacy and security of our customers, suppliers, team members and business information and the functioning of our computer systems, website and other online 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. We have taken and continue to undertake significant steps, including contractual provisions and third-party risk management processes, to protect such personally identifiable information and other confidential information and to protect the functioning of our computer systems, website and other online offerings. Despite these efforts, 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,
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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. Additionally, since we do not control our third-party service providers and our ability to monitor their data security is limited, we cannot ensure the security measures they take will be sufficient to protect our data. A weakness or failure or a breach of a third-party provider’s software or systems or controls could result in the compromise of the confidentiality, integrity or availability of our systems or the data housed in our third-party solutions.
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 incident. 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 we maintain 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.
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 may continue to make strategic acquisitions and enter into strategic relationships as an element of our 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 but not limited to:
•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 of our strategic partners;
•significant transaction or integration costs that may not be offset by the synergies or other benefits achieved in the near term or at all;
•additional operational risks, such as those associated with doing business internationally or expanding operations into new territories, geographies or channels, that may become applicable to us; and
•loss contingencies that we may assume or become subject to, whether known or unknown, of acquired companies, which could relate to past, present or future facts, events, circumstances or occurrences.
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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 with quality products on payment terms that are favorable to us. If our merchandise offerings do not meet our customers’ expectations regarding safety, innovation 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. We have also 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. 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. 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. 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.
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 subject to a potential 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, weights and measures, building and zoning requirements, labor and employment, discrimination, anti-bribery/anti-corruption, data privacy, income taxes and trade sanctions and compliance. 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.
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, civil or geopolitical unrest, 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.
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Terrorist attacks, warfare, geopolitical instability, 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.
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 due to various reasons such as power outages, telecommunication failures, computer viruses, security breaches, malicious cyber attacks 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.
Risks Related to Our Industry and the Business Environment
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 we sell 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 ride sharing services, because fewer vehicles means less maintenance and repairs, and lower vehicle mileage, which decreases the need for maintenance and repair;
•the economy, because 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; additionally, overall climate changes could create greater variability in weather events, which may result in greater volatility for our business, or lead to other significant weather conditions that could impact our business;
•the average duration of vehicle manufacturer warranties and average age of vehicles 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;
•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, including the rate of adoption of electric vehicles, hybrid vehicles, ride sharing services, alternative modes of transportation, autonomously driven vehicles and future legislation related thereto, and the increase in the 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 electric and hybrid vehicles, do not require or require less frequent 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.
We may be adversely affected by legal, regulatory or market responses regarding technological adaptation in the automotive industry.
Policy makers in the U.S. may enact legislative or regulatory proposals that would impose mandatory requirements on greenhouse gas emissions and encourage more rapid adoption of vehicles that minimize emissions. Such laws, if enacted, are likely to impact our business in a number of ways. For example, significant increases in fuel economy requirements, new federal or state restrictions on emissions of carbon dioxide or new federal or state incentive programs that may be imposed on vehicles and automobile fuels could adversely affect annual miles driven, purchases of used vehicles that are likely to have a higher need for maintenance and repair, or the relevancy of the products we sell to new vehicles coming into production. We may not be able to accurately predict, prepare for and respond to new kinds of technological innovations with respect to
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electric vehicles and other technologies that minimize emissions. Additionally, 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. Our inability to appropriately respond to such changes, adapt our business to meet evolving demands or innovate to remain competitive could adversely impact our business, financial condition, results of operations or cash flows.
If we are unable to compete successfully against other companies in the automotive aftermarket industry, we may lose customers and market share 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 availability, change inventory assortment, increase delivery speeds, incur higher shipping costs or lower prices, any of which could adversely impact our financial results. 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 online. 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, as well as our integrity and reputation, we could lose customers to our competition. The products we sell are brands of our vendors and our owned brands. If the perceived quality or value of the brands we sell declines in the perception 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 and market share, our revenues and profit margins may decline and we may be less profitable or potentially unprofitable.
Our inventory and ability to meet customer expectations may be adversely impacted by factors out of our control.
For the 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, shipping disruptions, 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 in meeting our customers’ needs for automotive products (particularly parts availability) in a timely manner could undermine our business strategy.
Deterioration of general macroeconomic conditions, including unemployment, inflation or deflation, consumer debt levels, and/or 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 results.
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 products 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.
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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 certain 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 macroeconomic 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 repairs 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
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 indentures governing our senior unsecured 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 our performance, deteriorating and uncertain credit markets or other factors that may or may not be within our control. The interest rates on our revolving credit facility are linked directly to our credit ratings and the interest rates on future debt we issue or incur likely would be affected by our credit ratings in effect at the time such debt is issued or incurred. Accordingly, any further negative impact on our credit ratings would likely result in higher interest rates and interest expense on any borrowings under our revolving credit facility and less favorable terms on our other operating and financing arrangements, including additional debt we may issue or incur in the future. 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.
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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 or financial guidance that we provide to the investment community. Inability to accurately forecast our operational and financial performance could increase volatility in our stock. Failure to meet expectations set by us or our analysts, 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. Such litigation could result in substantial costs and a diversion of our attention and resources, which could have an adverse effect on our business. For example, a potential securities class action regarding past public disclosures and a related derivative shareholder litigation suit have been filed against us following a period of significant decline in our stock price (See Item 3. Legal Proceedings of this Annual Report on Form 10-K.
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 or repurchase of debt. Changes in operational results, 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 stockholders, 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 stockholders and is in compliance with all applicable laws and contractual obligations.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
We have processes in place for assessing, identifying and managing significant risks from potential cyber threats and vulnerabilities. To protect our information systems from cyber threats, we use a wide variety of tools, controls, technologies, methods, systems and other processes that are designed to prevent, detect, escalate, investigate, mitigate and/or remediate data loss, theft, misuse, unauthorized access or other security incidents or vulnerabilities affecting information systems and data.
Our Senior Vice President, Chief Information Security Officer (“CISO”) and Senior Vice President, Internal Audit and Risk, who oversees our enterprise risk management (“ERM”) framework, partner on definition and treatment of cyber risks. Cybersecurity is a component of our ERM framework and processes. We utilize a wide range of capabilities to help us identify and assess potential cyber threats and vulnerabilities, which feed into our development and regular updating of a risk treatment plan to help us manage our cybersecurity risk posture. We evaluate risks on an ongoing basis across several categories in terms of probability of the likelihood and magnitude of potential impact, using evaluation results to inform our areas of focus and prioritization.
We evaluate risks associated with use of third-party providers through a lifecycle-based approach, conducting risk-based due diligence before engagement, using contractual provisions to apportion risk, and for certain third-party providers, engaging in architectural review and validation at the beginning of engagement. We use third parties to assist with penetration testing, simulated attacks and survey and other threat intelligence reporting on third parties, as well as review and enhancement of associated response processes.
Our cyber risk treatment plan is reviewed in a bimonthly cadence with a cross-functional Cyber Steering Committee, the managerial governing body that regularly reviews our top cyber risks and receives reports on progress on key cyber initiatives. Our CISO leads the Cyber Steering Committee, which also includes individuals with experience identifying and managing enterprise risks, including our President and Chief Executive Officer, Executive Vice President, Chief Financial Officer, Executive Vice President, General Counsel and Corporate Secretary and Senior Vice President, Internal Audit, as well as individuals with technical expertise in information technology, data and cyber matters and/or experience in managing cyber incident responses, including our Executive Vice President, Chief Technology Officer, Senior Vice President, Information Technology Operations and Senior Vice President, Deputy General Counsel and Chief Compliance Officer. Our CISO has over 15 years of Chief Information Security Officer experience leading security strategy and execution for large companies. He holds a Certificate in Secure Software and Information Engineering from Pace University and is a Certified Information Systems Security Professional.
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The Internal Audit function assesses cyber security risks and audits components of cyber security on an annual basis. At least every three years, we use an external party to evaluate the maturity of our program against the National Institute of Standards and Technology (“NIST”) Cybersecurity Framework.
The Audit Committee of our Board of Directors is charged with reviewing, discussing with management and overseeing the Company’s information technology and cybersecurity risk. Our CISO and Senior Vice President, Internal Audit and Risk report regularly to the Audit Committee, and at least annually, to the full Board of Directors on cybersecurity risks and management thereof.
Item 2. Properties.
The following table summarizes the location, ownership status and total square footage of space utilized for distribution centers, principal corporate office and retail stores and branches as of December 30, 2023:
Square Footage (in thousands) | ||||||||||||||||||||
| Location | Leased | Owned | ||||||||||||||||||
| Distribution centers | 50 locations in 31 U.S. states and four Canadian provinces | 8,106 | 4,591 | |||||||||||||||||
Executive office | Raleigh NC | 245 | — | |||||||||||||||||
| Stores and branches | 4,935 stores and branches in 48 U.S. states and two U.S. territories and 172 stores and branches in nine Canadian provinces | 36,644 | 6,289 | |||||||||||||||||
Item 3. Legal Proceedings.
Refer to discussion in Note 13. Contingencies, of the Notes to the Consolidated Financial Statements included herein for information relating to 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 under the symbol “AAP.”
As of March 5, 2024, there were 1,067 holders of record of our common stock, which does not include the number of beneficial owners whose shares were represented by security position listings.
The following table sets forth information with respect to repurchases of our common stock for the fourth quarter ended December 30, 2023:
| 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) (2) | ||||||||||||||||||||||
| October 8, 2023 to November 4, 2023 | 20 | $ | 51.20 | — | $ | 947,339 | ||||||||||||||||||||
| November 5, 2023 to December 2, 2023 | 5,340 | $ | 52.49 | — | $ | 947,339 | ||||||||||||||||||||
| December 3, 2023 to December 30, 2023 | 1 | $ | 56.25 | — | $ | 947,339 | ||||||||||||||||||||
| Total | 5,361 | $ | 52.49 | — | ||||||||||||||||||||||
(1)The aggregate cost of repurchasing shares in connection with the net settlement of shares issued as a result of the vesting of restricted stock units was $0.3 million, or an average price of $52.49 per share, during the twelve weeks ended December 30, 2023.
(2)On February 8, 2022, our Board of Directors authorized an additional $1 billion to the existing share repurchase program. This authorization is incremental to the $1.7 billion that was previously authorized by our Board of Directors.
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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 S&P’s Retail Index. The graph assumes that the value of an investment in our common stock was $100.00 on December 29, 2018, 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 | December 29, 2018 | December 28, 2019 | January 2, 2021 | January 1, 2022 | December 31, 2022 | December 30, 2023 | ||||||||||||||||||||||||||||||||
| Advance Auto Parts | $ | 100.00 | $ | 102.01 | $ | 102.25 | $ | 158.16 | $ | 100.43 | $ | 41.52 | ||||||||||||||||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 132.97 | $ | 157.02 | $ | 202.09 | $ | 165.49 | $ | 209.00 | ||||||||||||||||||||||||||
| S&P Retail Index | $ | 100.00 | $ | 129.15 | $ | 187.82 | $ | 224.09 | $ | 147.26 | $ | 209.70 | ||||||||||||||||||||||||||
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Item 6. [Reserved]
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. The discussion of our financial condition and changes in our results of operations, liquidity and capital resources for the fiscal year ended December 31, 2022 (“2022”) compared with the fiscal year ended January 1, 2022 (“2021”) has been omitted from this Form 10-K, but are included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for 2022, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023. Amounts are presented in thousands, except per share data, unless otherwise stated.
Management Overview
A high-level summary of our financial results and other highlights from 2023 includes:
•Net sales during 2023 were $11.3 billion, an increase of 1.2% compared with 2022, driven by new store openings and favorable product mix, partially offset by a 0.3% decline in comparable store sales.
•Gross profit margin for 2023 was 40.1% of Net sales, a decrease of 414 basis points compared with 2022. This decrease was primarily due to higher product costs, inventory-related charges and elevated supply chain costs.
•Operating income for 2023 was $114.4 million, a decrease of $555.9 million from 2022. As a percentage of Net sales, operating income was 1.0%, a decrease of 500 basis points compared with 2022. The increase in Selling, general and administrative (“SG&A”) costs was primarily driven by increased labor-related costs and occupancy expenses.
•Cash flow from operations was $287.4 million during 2023, a decrease of 61.0% compared with 2022, primarily due to lower Net income.
•Diluted earnings per share (“Diluted EPS”) was $0.50 during 2023 compared with $7.65 in 2022.
Refer to “Results of Operations” and “Liquidity and Capital Resources” for further details on our results.
Business and Risk Update
We have been executing various initiatives to improve the customer experience, expand margins and drive consistent execution for both professional and do-it-yourself (“DIY”) customers, including:
•Continued refinement of a demand-based assortment, leveraging purchase and search history from our common catalog
•Advancement towards optimizing our footprint by market to drive share, repurpose our in-market store and asset base and streamline our distribution network
•Progress in the implementation of a more efficient end-to-end supply chain to deliver our broad assortment of inventory
•Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures
•Rationalization of product assortment
•Investment in our frontline workforce
•Incremental investments in store and distribution center distribution
As announced in the third quarter of 2023, we initiated a comprehensive operational and strategic review of our business to help improve execution and position Advance for long-term success and increased shareholder value. We have identified and are pursuing cost reductions that we expect will generate at least $150 million in savings on an annualized basis, of which, we intend to invest approximately $50 million in employee compensation and training with a clear focus on improving the retention of our frontline team members. In addition, we recently launched an initiative to eliminate costs related to our indirect spend by an additional $50 million on an annualized basis We also announced the potential sales of our Worldpac business and the Canadian portion of our Carquest business. Our operational and strategic review progress is ongoing.
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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 “Business and Risk Update” section included within Management’s Discussion and Analysis of Financial Condition and Results of Operations, these factors include, but are not limited to:
•Inflationary pressures, including logistics and labor
•Global supply chain disruptions
•Rising fuel costs
•Miles driven
•Unemployment rates
•Consumer confidence and purchasing power
•Competition
•Changes in new car sales
•Vehicle manufacturer warranties
•Average age of vehicles in operation
•Economic and geopolitical uncertainty
•Deferral of elective automotive maintenance and improvements in new car quality
•Increased foreign currency exchange volatility
While these factors tend to fluctuate, we remain confident in the long-term growth prospects for the automotive parts industry.
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 | 2023 vs. 2022 $ Change | Basis Points | 2022 vs. 2021 $ Change | Basis Points | ||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 11,287.6 | 100.0 | % | $ | 11,154.7 | 100.0 | % | $ | 10,998.0 | 100.0 | % | $ | 132.9 | — | $ | 156.7 | — | ||||||||||||||||||||||||||||||||
| Cost of sales | 6,764.1 | 59.9 | 6,222.5 | 55.8 | 6,074.0 | 55.2 | 541.6 | 414 | 148.5 | 55 | ||||||||||||||||||||||||||||||||||||||||
| Gross profit | 4,523.5 | 40.1 | 4,932.2 | 44.2 | 4,924.0 | 44.8 | (408.7) | (414) | 8.2 | (55) | ||||||||||||||||||||||||||||||||||||||||
| SG&A | 4,409.1 | 39.1 | 4,262.0 | 38.2 | 4,101.6 | 37.3 | 147.1 | 85 | 160.4 | 91 | ||||||||||||||||||||||||||||||||||||||||
| Operating income | 114.4 | 1.0 | 670.2 | 6.0 | 822.4 | 7.5 | (555.8) | (500) | (152.2) | (147) | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | (88.1) | (0.8) | (51.1) | (0.5) | (37.8) | (0.3) | (37.0) | (32) | (13.3) | (11) | ||||||||||||||||||||||||||||||||||||||||
| Loss on debt extinguishment | — | — | (7.4) | (0.1) | — | — | 7.4 | 7 | (7.4) | (7) | ||||||||||||||||||||||||||||||||||||||||
Other income (expense), net | 5.5 | 0.0 | (7.4) | (0.1) | (2.1) | 0.0 | 12.9 | 12 | (5.3) | (5) | ||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 2.1 | — | 140.0 | 1.3 | 185.9 | 1.7 | (137.9) | (124) | (45.9) | (44) | ||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 29.7 | 0.3 | % | $ | 464.3 | 4.16 | % | $ | 596.6 | 5.42 | % | $ | (434.6) | (390) | $ | (132.3) | (126) | ||||||||||||||||||||||||||||||||
Note 1: Table amounts may not foot due to rounding.
Net Sales
Net sales for 2023 were $11.3 billion, an increase of $132.9 million, or 1.2%, compared with 2022, and was primarily driven by new store openings and favorable product mix, partially offset by a decline in units sold. Category growth was led by brakes and batteries. Comparable store sales decreased 0.3% due to a decline in the DIY business.
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We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete four-week 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. 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 in 2023 was $4.52 billion, or 40.1% of Net sales, compared with $4.93 billion, or 44.2% of Net sales in 2022, a decrease of 414 basis points. Gross profit as a percentage of Net sales was negatively impacted by higher product costs not fully covered by pricing actions of $180.9 million, a change in estimate associated with inventory reserves and other inventory-related charges of $143.5 million as well as elevated supply chain expenses. Gross margin decline was partially offset by favorable product mix.
Selling, General and Administrative Expenses
SG&A for 2023 was $4.41 billion, or 39.1% of Net sales, compared with $4.26 billion, or 38.2% of Net sales for 2022, an increase of 85 basis points. This increase as a percentage of Net sales was primarily driven by increased labor-related costs and occupancy expenses.
Interest Expense
Interest expense for 2023 was $88.1 million, an increase of $37.0 million compared with 2022. This increase was primarily due to interest incurred on higher borrowings against our revolver as well as issuances of senior unsecured notes in 2023. 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 2023 was $2.1 million compared with $140.0 million for 2022, a favorable change of $137.9 million primarily due to a decrease in taxable income. Our effective tax rate was 6.6% for 2023 and 23.2% for 2022. In 2023, the rate decreased compared with prior year primarily due to a tax benefit resulting from the expiration of statute of limitations for certain tax years in multiple states as well as enhanced utilization of tax credits in the current year and a discrete charge related to share-based compensation.
Liquidity and Capital Resources
Overview
Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities, including payment of interest on our long-term debt. Historically, we have also used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our share repurchase program, to pay our quarterly cash dividend and for acquisitions; however, depending on the priorities of our business and in consideration of ongoing uncertainties related to general global macroeconomic conditions, our future uses of cash may differ, including with respect to the weight we place on the preservation of cash and liquidity, degree of investment in our business and other capital allocation factors.
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. We also believe such funds, cash and available borrowings, together with our ability to generate cash through credit facilities and notes offerings as needed, will be sufficient to fund our obligations long-term. Cash requirements for obligations next year and beyond are discussed in the “Contractual and Off Balance Sheet Obligations” section below.
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Share Repurchases
In August 2019, our Board of Directors approved a share repurchase program. Under the program, we may periodically repurchase shares of our common stock at market prices through open market purchases effected through a broker dealer and in privately negotiated transactions. The Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program without prior notice. On February 8, 2022, our Board of Directors authorized an additional $1.0 billion toward our share repurchase program. Previously, in April 2021 and November 2019, our Board of Directors authorized $1.0 billion and $700.0 million for our share repurchase program.
During 2023, we did not repurchase any shares of our common stock in connection with our share repurchase program. During 2022, we repurchased 3.0 million shares of our common stock at an aggregate cost of $598.2 million, or an average price of $201.88 per share, under our share repurchase program. Given macroeconomic uncertainties and our focus on strengthening our balance sheet, we expect to continue our pause on share repurchases in 2024, but may resume share repurchases in the future.
We had $947.3 million remaining under our share repurchase program as of December 30, 2023. Refer to “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further details on our share repurchase program.
Capital Expenditures
Our primary capital requirements have been the funding of our investments in information technology and supply chain, e-commerce and maintenance of existing stores and branches. We lease approximately 84% of our stores and branches.
Our capital expenditures were $242.4 million in 2023, a decrease of $181.7 million from 2022, related to the decrease of spend in information technology and supply chain as well as fewer store openings from 2022 to 2023.
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 2024, we anticipate that our capital expenditures related to such investments will range from $200 million to $250 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 | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| Cash flows provided by operating activities | $ | 287,375 | $ | 736,571 | $ | 1,107,022 | |||||||||||
| Cash flows used in investing activities | (235,489) | (424,448) | (287,314) | ||||||||||||||
Cash flows provided by (used in) financing activities | 189,267 | (620,704) | (1,064,112) | ||||||||||||||
| Effect of exchange rate changes on cash | (8,487) | (8,664) | 5,474 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 232,666 | $ | (317,245) | $ | (238,930) | |||||||||||
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Operating Activities
In 2023, Net cash provided by operating activities decreased $449.2 million to $287.4 million. The net decrease in cash flows provided by operating activities compared with the prior year was primarily driven by lower Net income and higher accounts receivable. Refer to “Results of Operations” for further details on our results.
Investing Activities
In 2023, Net cash used in investing activities decreased $189.0 million to $235.5 million compared with 2022. This decrease was attributable to reduced purchases of property and equipment due to the completion of back office integration in the prior year, partially offset by investments in new store openings.
Financing Activities
In 2023, Net cash provided by financing activities increased by $810.0 million to $189.3 million compared with 2022. The net increase in cash provided by financing activities was attributable to a reduction in share repurchases of our common stock of $604.0 million and the incremental net proceeds of $251 million from the issuances of senior unsecured notes in 2023 compared with 2022.
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.
Long-Term Debt
On March 9, 2023, we issued our 5.90% senior unsecured notes due 2026 (the “2026 Notes”) at 99.94% of the principal amount of $300.0 million and our 5.95% senior unsecured notes due 2028 (the “2028 Notes”) at 99.92% of the principal amount of $300.0 million. The 2026 Notes and 2028 Notes bear interest at a rate of 5.90% and 5.95%, respectively, and are payable semi-annually in arrears in March and September. Proceeds from our 2026 and 2028 Notes were utilized to make repayments on our revolving facility and supplement operational and capital expenditures.
For additional information on transactions entered into relating to long-term debt during the fifty-two weeks ended December 30, 2023, refer to Note 6. Long-term Debt and Fair Value of Financial Instruments of the Notes to the Consolidated Financial Statements included herein.
As of March 12, 2024, we had a credit rating from S&P of BB+ and from Moody’s Investor Service of Baa3. The current outlooks by S&P and Moody’s were stable and negative, respectively. The current pricing grid used to determine our borrowing rate under our revolving credit facility is based on our credit ratings. If our credit ratings further decline, it would negatively impact our interest rate, and our access to additional financing on favorable terms may be limited. In addition, further decline in our credit ratings would likely reduce the attractiveness of our supplier finance programs, whereby our suppliers are provided financing arrangements based on our credit rating. This could result in significantly lower supplier or bank participation in those programs. Following the downgrade in our credit rating from S&P, certain banks reduced participation in our programs. This capacity has been substantially replaced with new participating banks as well as existing participating banks providing increased capacity. Lower participation in our supplier payment programs would shorten our payable terms, resulting in an increase in our working capital requirements, and may have a material negative impact on our liquidity or capital resources.
With respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides a full and unconditional guarantee, Advance Stores, a wholly-owned subsidiary of the Issuer, serves as the guarantor (“Guarantor Subsidiary”). The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiary. Our captive insurance subsidiary, an insignificant wholly-owned subsidiary of the Issuer, does not serve as guarantor of our senior unsecured notes.
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Contractual and Off Balance Sheet Obligations
We enter into operating leases for certain store locations, distribution centers, office spaces, 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. As of December 30, 2023, our operating lease obligations were $2.66 billion. As of December 30, 2023, our long-term debt, consisting of senior unsecured notes with varying maturities through 2032, was $1.8 billion. Future interest payable related to long-term debt was $380.0 million as of December 30, 2023. As part of our normal operations, we enter into purchase commitments primarily for the purchase of 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. As of December 30, 2023, our purchase commitments were $133.0 million.
On February 27, 2023, we entered into Amendment No. 1 (“Amendment No. 1”) to the Credit Agreement, dated November 9, 2021, with Advance Auto Parts, Inc., as Borrower, Advance Stores Company, Incorporated, as a Guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent (“2021 Credit Agreement”). Amendment No. 1 extends the maturity date of the 2021 Credit Agreement by one year from November 9, 2026, to November 9, 2027. Amendment No. 1 also replaces an adjusted LIBOR benchmark rate with a Term Secured Overnight Financing Rate benchmark rate, as adjusted by an increase of ten basis points, plus the applicable margin under the 2021 Credit Agreement. Amendment No. 1 made no other material changes to the terms of the 2021 Credit Agreement. On August 21, 2023, we entered into Amendment No. 2 (“Amendment No. 2”) to the 2021 Credit Agreement in order to amend certain financial covenants related to the Consolidated Coverage Ratio (as defined therein), and on November 20, 2023, we entered into Amendment No. 3 (“Amendment No. 3”) to the 2021 Credit Agreement in order to further amend financial covenants related to the Consolidated Coverage Ratio. Pursuant to Amendment No. 2 and Amendment No. 3, we will not permit the Consolidated Coverage Ratio to be less than (a) 1.75 to 1.00 for each period of four fiscal quarters ending on October 7, 2023 through and including the period of four fiscal quarters ending on October 5, 2024, (b) 2.00 to 1.00 for each period of four fiscal quarters ending on December 28, 2024 through and including the period of four fiscal quarters ending on October 4, 2025 and (c) 2.25 to 1.00 for each period of four fiscal quarters ending after October 4, 2025. Amendment No. 2. and Amendment No. 3 made no other material changes to the terms of the 2021 Credit Agreement. On February 26, 2024, we entered into Amendment No. 4 (“Amendment No. 4”) to the Credit Agreement dated November 9, 2021, with Advance Auto Parts, Inc., as Borrower, Advance Stores Company, Incorporated, as a Guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent to enable certain addbacks to the definition of Consolidated EBITDA contained therein for specific write-downs of inventory and vendor receivables. Amendment No. 4 also updated certain limitations on future incurrences of other indebtedness and liens, replacing the cap thereon of 10% of consolidated net tangible assets with $400 million, and eliminated the $250 million basket for accounts receivable securitization transactions. Amendment No. 4 made no other material changes to the terms of the 2021 Credit Agreement.
In addition to our Consolidated Coverage Ratio requirement, we are required to maintain a maximum leverage ratio of 3.75 to 1.00. Our compliance with these covenants will depend upon achieving our financial targets including improvements in operating income. As of December 30, 2023, giving consideration to the amendments to our 2021 Credit Agreement, we were in compliance with the financial covenants required thereby. We currently expect to be in compliance with these financial covenants for the next 12 months. However, risk of noncompliance increases if our financial performance worsens or we are required to increase borrowings to fund operations. If we are not in compliance with the financial covenants required by our 2021 Credit Agreement, and cannot timely secure an amendment or waiver thereof, we would be in default of our 2021 Credit Agreement and our outstanding senior unsecured notes, which would have a material adverse impact on our financial condition.
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.
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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. Advertising allowances received 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. Volume rebates and vendor promotional allowances that do not meet the requirements for offsetting in SG&A and that are earned based on inventory purchases are initially recorded as a reduction to inventory. 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. Periodic assessments of the accruals are performed to determine the appropriateness of the estimate and are adjusted accordingly.
Amounts received or receivable from vendors that are not yet earned are reflected initially as a reduction to inventory, which subsequently is recorded to Cost of sales. 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, 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 Other long-term liabilities.
While we do not expect the amounts ultimately paid to differ significantly from our estimates, our self-insurance reserves and corresponding Cost of sales and 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 December 30, 2023 would result in a change in expense of approximately $15.0 million for 2023.
Excess and Obsolete Inventory Reserves
In connection with a strategic and operational review of the business, we reviewed the rationalization of product assortment and planned decisive actions related to inventory. As a result, we made a change in our estimate of excess inventory reserves resulting in an increase to Cost of sales of approximately $116 million. Our excess and obsolete inventory reserve assessment includes analyzing our inventory at the SKU level by assessing each SKU quantity based on years on hand, the stage within the product lifecycle the SKU is assigned and sales history. From this data analysis, our excess and obsolete inventory is identified, analyzed and compared against our reserve. Additionally, from time to time, specific SKUs may be identified as excess and/or obsolete for which a reserve will be recognized.
We classify each product into a product lifecycle category: introduction, expansion, saturation, reduction and disposition. This assessment is routinely performed and includes, but is not limited to, the analysis of anticipated, historical and actual demand; and changes in customer preferences. SKU-level classifications are updated as warranted.
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.
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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 Term Secured Overnight Financing Rate (“SOFR”) plus a margin, or an alternate base rate plus a margin. As of December 30, 2023, we had no borrowings outstanding under our revolving credit facility. As of December 31, 2022, we had $185.0 million of 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 2023 and 2022, foreign currency transactions did not materially impact Net income.
Item 8. Financial Statements and Supplementary Data.
This information is included in “Item 15. Exhibits, Financial Statement Schedules” of this annual report and is incorporated herein by reference.
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 management’s controls and other procedures that are designed to ensure that information required to be disclosed by management in the Company’s reports that are filed or submitted 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 management, including the Company’s 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
Management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of its disclosure controls and procedures as of December 30, 2023. Based on this evaluation, the Company’s principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective to accomplish their objectives at the reasonable assurance level due to the material weakness described below.
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Management’s Report on Internal Control over Financial Reporting
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. Management’s 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. Management’s 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 the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that its receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide “reasonable assurance” regarding prevention or timely detection of unauthorized acquisition, use or disposition of its assets that could have a material effect on the financial statements.
As of December 30, 2023, management, including the Company’s principal executive officer and principal financial officer, assessed the effectiveness of its 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 evaluation, the Company’s principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s internal control over financial reporting was not effective to accomplish their objectives at the reasonable assurance level solely due to the material weakness described below.
As previously disclosed in our Form 10-Q for the period ended April 22, 2023 and continuing to exist as of December 30, 2023, management identified a material weakness in our internal control over financial reporting that existed due to turnover of key accounting positions. The Company was not able to attract, develop and retain sufficient resources to fulfill internal control and accounting responsibilities.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Management has corrected the relevant prior periods of its Consolidated Financial Statements and related footnotes in this Form 10-K for the immaterial errors identified for comparative purposes. Further, management believes that the Consolidated Financial Statements and related financial information included present fairly, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.
Attestation Report of Registered Public Accounting Firm
Management’s internal control over financial reporting as of December 30, 2023 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, who also audited the Company’s consolidated financial statements for the year ended December 30, 2023, as stated in their report included herein, which expresses an adverse opinion on the effectiveness of its internal control over financial reporting as of December 30, 2023.
Remediation Efforts to Address the Previously Disclosed Material Weakness
The Company has devoted, and will continue to devote, significant time and resources to complete its remediation of the material weakness. The following components of the remediation plan, among others, have been executed:
•Backfilled open roles and hired approximately 30 experienced personnel (both permanent employees and contract labor) with the requisite accounting and internal controls knowledge and experience to sufficiently complement the existing global controllership organization;
•Completed the review of the organizational structure of the global controllership function by a third-party consultant and implemented recommended changes;
•Assessed our methodologies, policies and procedures to ensure adequate design and effectiveness of processes supporting internal control over financial reporting;
•Added redundant and compensating internal controls to enhance our internal control structure and commenced testing of certain controls during the third quarter and completed full testing in the fourth quarter;
•Assessed the specific training needs for newly hired and existing personnel and developed and delivered training programs designed to uphold our internal controls standards;
•Following the departure of the Company’s Chief Financial Officer during the third fiscal quarter of 2023, hired a new Chief Financial Officer who began employment with the Company on November 27, 2023; and
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•Following the departure of the Company’s Chief Accounting Officer during the fourth fiscal quarter of 2023, hired a new Chief Accounting Officer who began employment with the Company on January 9, 2024.
The Company considers the remediation of the material weakness to be a top priority and has made significant progress in executing the remediation plan. The material weakness will not be considered fully remediated until the remediation actions are tested and deemed to have been operating effectively for a sufficient period of time.
Changes in Internal Control Over Financial Reporting
Except for the changes described above, there has been no change in the Company’s internal control over financial reporting during the fourth quarter ended December 30, 2023 that has materially affected or is reasonably likely to materially affect its internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Item 9B. Other Information.
During the twelve weeks ended December 30 , 2023no
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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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 and subsections entitled “Proposal No. 1 - Election of Directors,” “Corporate Governance,” “Additional Information Regarding Executive Compensation - Information Concerning our Executive Officers,” “Audit Committee Report,” and “Additional Information Regarding Executive Compensation - Delinquent Section 16(a) Reports,” “Code of Ethics and Business Conduct” and “Code of Ethics for Finance Professionals” in our proxy statement for the 2024 annual meeting of stockholders to be filed with the SEC within 120 days after the close of our fiscal year ended December 30, 2023 (the “2024 Proxy Statement”), which is incorporated herein by reference.
Item 11. Executive Compensation.
See the information set forth in the sections entitled “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Compensation Program Risk Assessment,” “Additional Information Regarding Executive Compensation” and “Director Compensation” in the 2024 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 subsections entitled “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 2024 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 subsections entitled “Corporate Governance - Related Party Transactions” and “Board Independence and Structure” in the 2024 Proxy Statement, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
See the information set forth in the subsection entitled “2023 and 2022 Audit Fees” in the 2024 Proxy Statement, which is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
| (1) Financial Statements | ||||||||
Audited Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries for the years ended | ||||||||
| (2) Financial Statement Schedule | ||||||||
| (3) Exhibits | ||||||||
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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 December 30, 2023 and December 31, 2022, 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 December 30, 2023, 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 December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2023, 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 December 30, 2023, 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 March 12, 2024, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.
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.
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 $67.9 million as of December 30, 2023.
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.
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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 from the income recognized as a reduction to cost of sales during the year and from incentive income that was 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 confirmed directly with the vendor that the agreement obtained from the Company and used in the determination of recording vendor incentives as a reduction in cost of sales was the most recent for the applicable period between the parties.
/s/Deloitte & Touche LLP
March 12, 2024
We have served as the Company’s auditor since 2002.
32
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 December 30, 2023, 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, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 30, 2023, 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 December 30, 2023, of the Company and our report dated March 12, 2024, 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 Controls 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.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. Management has identified a material weakness in internal control over financial reporting due to the inability to attract, develop and retain sufficient resources to fulfill internal control and accounting responsibilities. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of
33
the consolidated financial statements and financial statement schedule as of and for the year ended December 30, 2023, of the Company, and this report does not affect our report on such financial statements.
/s/Deloitte & Touche LLP
March 12, 2024
34
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share data)
| December 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories, net | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Current portion of long-term debt | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Non-current operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, nonvoting, $ | |||||||||||
Common stock, voting, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost, | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
35
Advance Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| Net sales | $ | $ | $ | ||||||||||||||
| Cost of sales | |||||||||||||||||
| Gross profit | |||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Operating income | |||||||||||||||||
| Other, net: | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Loss on early redemptions of senior unsecured notes | ( | ||||||||||||||||
Other income (expense), 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 | |||||||||||||||||
Consolidated Statements of Comprehensive Income
(in thousands)
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
Net income | $ | $ | $ | ||||||||||||||
Other comprehensive loss: | |||||||||||||||||
Changes in net unrecognized other postretirement benefit costs, net of tax of $( | ( | ( | |||||||||||||||
| Currency translation adjustments | ( | ( | ( | ||||||||||||||
Total other comprehensive loss | ( | ( | ( | ||||||||||||||
Comprehensive income | $ | $ | $ | ||||||||||||||
The accompanying notes to the consolidated financial statements are an integral part of these statements.
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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, January 2, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Issuance of shares upon the exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Total other comprehensive loss | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Restricted stock units and deferred stock units vested | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Stock issued under employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
Cash dividends declared ($ | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Balance, | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
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 Cash Flows (in thousands) | |||||||||||||||||
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| 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 | |||||||||||||||||
| Provision for deferred income taxes | ( | ||||||||||||||||
| Other, net | ( | ||||||||||||||||
| 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 intangible asset | ( | ||||||||||||||||
| Proceeds from sales of property and equipment | |||||||||||||||||
| Net cash used in investing activities | ( | ( | ( | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Borrowings under credit facilities | |||||||||||||||||
| Payments on credit facilities | ( | ( | |||||||||||||||
| Proceeds from issuance of senior unsecured notes, net | |||||||||||||||||
| Payments on senior unsecured notes | ( | ||||||||||||||||
| Dividends paid | ( | ( | ( | ||||||||||||||
| Repurchases of common stock | ( | ( | ( | ||||||||||||||
| Other, net | ( | ||||||||||||||||
| Net cash provided by (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.
38
Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
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., 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 December 30, 2023, we operated a total of 4,786 stores and 321 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of December 30, 2023, we served 1,245 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico and various Caribbean islands. Our stores operate primarily under the trade names “Advance Auto Parts” and “Carquest,” and our branches operate under the “Worldpac” trade names.
Accounting Period
Our fiscal year ends on the Saturday closest to December 31st. All references herein for the years 2023, 2022 and 2021 represent the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively, and consisted of fifty-two weeks.
Basis of Presentation
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.
Revision of Previously Issued Financial Statements for Correction of Immaterial Errors
During the forty weeks ended October 7, 2023, we identified errors impacting Cost of sales by $10.2 million and Selling, general and administrative (“SG&A”) expenses by $17.3 million . These charges were incurred in prior periods but not recorded and primarily related to product returns and vendor credits. During the twelve weeks ended December 30, 2023, we identified additional errors impacting Cost of sales, SG&A expenses and Other income (expense), net, of $52.7 million, $19.3 million and $1.7 million incurred in prior years but not previously recognized. These charges primarily related to product costs and vendor credits. We assessed the materiality of the errors, including the presentation on prior period consolidated financial statements, on a qualitative and quantitative basis in accordance with SEC Staff Accounting Bulletin No. 99, Materiality, codified in Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections. We concluded that these errors and the related impacts did not result in a material misstatement of our previously issued consolidated financial statements as of and for the years ended December 31, 2022 and January 1, 2022 and our previously issued unaudited condensed consolidated interim financial statements as of and for the sixteen weeks ended April 22, 2023; the twelve and twenty-eight weeks ended July 15, 2023; and the twelve and forty weeks ended October 7, 2023. Correcting the cumulative effect of these errors in the fifty-two weeks ended December 30, 2023 would have had a significant effect on the results of operations for such periods.
We have corrected the relevant prior periods of our consolidated financial statements and related footnotes for these and other immaterial errors for comparative purposes and will also correct previously reported financial information for such immaterial errors in future filings, as applicable. A summary of the corrections to the impacted financial statement line items from our previously issued financial statements are presented in Note 18. Immaterial Misstatement of Prior Period Financial Statements.
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Advance Auto Parts, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(Amounts presented in thousands, except per share data, unless otherwise stated)
2. Significant Accounting Policies
Cash and Cash Equivalents
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 2023 and prior years. We regularly review inventory quantities on-hand, consider whether we may have excess or obsolete inventory based on our current approach for managing slower moving inventory and adjust the carrying value as necessary. In 2023, we performed a strategic and operational review of the business, which included the rationalization of product assortment and planned decisive actions. As a result, we made a change in our estimate of excess inventory reserves resulting in a $116.0 million charge to cost of sales.
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 or more frequent basis. 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 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 volume rebates and allowances are earned based on inventory purchases. Total deferred vendor incentives recorded as a reduction of Inventories were $67.9 million and $77.5 million as of December 30, 2023 and December 31, 2022.
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.
Costs incurred with the acquisition or development of software for internal use are capitalized and amortized over the expected useful life of the software, generally five years. Subsequent additions, modifications or upgrades are capitalized to the extent it enhances the software’s functionality. Capitalized software is classified in the Construction in progress category, but once placed into service is removed from Construction in progress and classified within the Furniture, fixtures and equipment category and is depreciated on the straight-line method over to ten years .
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Goodwill and Other Indefinite-Lived Intangible Assets
We perform our evaluation for the impairment of goodwill and other 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. Our evaluation of goodwill and other indefinite-lived intangibles may be a Step-0 analysis, which consists of a qualitative assessment, or a Step-1 analysis, which includes a quantitative assessment. In a Step-0 analysis, 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 impairment test, we compare the carrying value of a reporting unit to its fair value. In performing a Step-1 analysis, we have historically used an income approach which requires many assumptions including forecast, discount rate, long-term growth rate, among other items. We have also utilized the market approach which derives metrics from comparable publicly-traded companies. We have generally engaged a third-party valuation firm to assist in the fair value assessment of goodwill. 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 other indefinite-lived intangible assets are tested for impairment at the asset group level. Other indefinite-lived intangible assets 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.
We have three operating segments, defined as “Advance Auto Parts/Carquest U.S.,” “Carquest Canada” and “Worldpac”. As each operating segment represents a reporting unit, goodwill is assigned to each reporting unit. See Note 4. Goodwill and Intangibles for additional information.
Valuation of Long-Lived Assets
Self-Insurance
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 non-lease components, such as taxes, maintenance, insurance and other certain costs applicable to the leased asset. For leases related to our store locations, distribution centers, office spaces and vehicles, we account for lease and non-lease components as a single amount.
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Fair Value Measurements
Share-Based Payments
Revenues
Accounting Standards Codification 606, Revenue From Contracts With Customers (Topic 606) (“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.
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 one to 30 days. Based on the nature of receivables, no significant financing components exist. For e-commerce sales, revenue is recognized either at the time of pick-up at one of our store locations or at the time of shipment depending on the customer's order designation. Sales are recorded net of discounts, sales incentives and rebates, sales taxes, and estimated returns and allowances. We estimate the reduction to Net sales and Cost of sales for returns based on current sales levels and our historical return experience.
We provide assurance-type warranty coverage primarily on batteries, brakes and struts whereby we are required to provide replacement product at no cost or a reduced cost for a set period of time. 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.
Some of our products include a core component, which represents a recyclable piece of the auto part. If a customer purchases an auto part that includes a core component, the customer is charged for the core unless a used core is returned at the time of sale. Customers that return a core subsequent to the sale date will be refunded.
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The following table summarizes financial information for each of our product groups:
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| Percentage of Sales, by Product Group | |||||||||||||||||
| Parts and Batteries | % | % | % | ||||||||||||||
| Accessories and Chemicals | |||||||||||||||||
| Engine Maintenance | |||||||||||||||||
| Other | |||||||||||||||||
| Total | % | % | % | ||||||||||||||
Receivables, net, consists primarily of receivables from professional customers and is stated at net realizable value. We grant credit to certain professional customers who meet our pre-established credit requirements. We regularly review accounts receivable balances and maintain allowances for credit losses estimated whenever events or circumstances indicate the carrying value may not be recoverable. We consider the following factors when determining if collection is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. We control credit risk through credit approvals, credit limits and accounts receivable and credit monitoring procedures.
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 inventory-related reserves and costs associated with moving merchandise inventories from our distribution centers to stores, branch locations and customers.
Selling, General and Administrative Expenses
Preopening Expenses
Preopening expenses, which consist primarily of payroll and occupancy costs related to the opening of new stores, are expensed as incurred as a component of SG&A in the accompanying Consolidated Statements of Operations.
Advertising Costs
Foreign Currency Translation
The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates. Revenues, expenses and cash flows are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component in the Consolidated Statements of Comprehensive Income. Foreign currency transactions, which are included in Other income (expense), net, were a loss of $3.4 million in 2023, loss of $4.8 million in 2022 and income of $1.7 million in 2021.
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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 in an 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.
Earnings per Share
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 three operating segments, for the purpose of allocating resources and evaluating financial performance.
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Recently Issued Accounting Pronouncements - Not Yet Adopted
Disclosure Improvements
In October 2023, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2023-06, Disclosure Improvements (“ASU 2023-06”), which defers when companies will be required to improve and clarify disclosure and presentation requirements by June 2027. ASU 2023-06 applies to all entities subject to meeting the Securities and Exchange (“SEC”) disclosure requirements. These updates would require additional qualitative information to the Statement of Cash Flows, Earnings Per Share, Debt and Shareholder’s Equity disclosures. The related disclosures are effective for the fiscal year beginning after December 15, 2024. We are currently evaluating the impact of adopting ASU 2023-06 on our consolidated financial statements and related disclosures, and do not believe it will have a material impact on our consolidated financial statements.
Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires a company to disclose additional, more detailed information about a reportable segment’s significant expenses, even if there is one reportable segment, and is intended to improve the disclosures about a public entity’s reportable segments. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2023-07 and do not believe it will have a material impact on our consolidated financial statements and segment reporting.
Income Tax Disclosure Improvements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (“ASU 2023-09”), which requires a company to enhance their income tax disclosures. In each annual reporting period, the company should disclose the specific categories used in the rate reconciliation and additional information for reconciling items that meet a quantitative threshold, including disaggregation of taxes paid by jurisdiction. The related disclosures are effective for the fiscal year beginning after December 15, 2024. We are currently evaluating the impact of adopting ASU 2023-09 on our consolidated financial statements and related disclosures and do not believe it will have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements - Adopted
Supplier Finance Programs
In September 2022, the FASB issued ASU 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations (“ASU 2022-04”), which requires a company to disclose sufficient qualitative and quantitative information about any supplier finance program in which it participates as a buyer. In each annual reporting period, the company should disclose the key terms of the program, including a rollforward of those obligations outstanding at the beginning of the period. ASU 2022-04 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the requirement on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The adoption of ASU 2022-04 on our consolidated financial statements and related disclosures does not have a material impact on our consolidated financial statements.
Reference Rate Reform
3.Inventories
We used the LIFO method of accounting for approximately 91.4 % of Inventories at December 30, 2023 and 92.4 % of Inventories at December 31, 2022. As a result of changes in the LIFO reserve, we recorded a decrease to Cost of sales of $94.6
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million in 2023 and an increase to Cost of sales of $311.8 million in 2022 and a decrease to Cost of sales of $122.3 million in 2021.
Purchasing and warehousing costs included in Inventories as of December 30, 2023 and December 31, 2022 were $576.9 million and $635.9 million.
Inventory balances were as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| Inventories at first-in, first-out (“FIFO”) | $ | $ | |||||||||
| Adjustments to state inventories at LIFO | ( | ( | |||||||||
| Inventories at LIFO | $ | $ | |||||||||
4.Goodwill and Other Intangible Assets, Net
Goodwill
At December 30 , 2023991.7 million and $990.5 million. The change in Goodwill during 2023 and 2022 was $1.2 million and $3.3 million, and related to foreign currency translation. There has been no history of impairment of goodwill experienced to date.
Other Intangible Assets, Net
Amortization expense was $29.5 million, $31.0 million and $31.1 million for 2023, 2022 and 2021. A summary of the composition of the gross carrying amounts and accumulated amortization of acquired other intangible assets are presented in the following table:
| December 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| 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 trade names | |||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Future Amortization Expense
The expected amortization expense for the next five years and thereafter for acquired intangible assets recorded as of December 30, 2023 was as follows:
| Year | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| $ | ||||||||
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5. Receivables, net
Receivables, net, consisted of the following:
| December 30, 2023 | December 31, 2022 | ||||||||||
| Trade | $ | $ | |||||||||
| Vendor | |||||||||||
| Other | |||||||||||
| Total receivables | |||||||||||
| Less: allowance for credit losses | ( | ( | |||||||||
| Receivables, net | $ | $ | |||||||||
6.Long-term Debt and Fair Value of Financial Instruments
Long-term debt consisted of the following:
| December 30, 2023 | December 31, 2022 | ||||||||||
| $ | $ | ||||||||||
Revolving credit facility (interest rate of | |||||||||||
| Less: Current portion of long-term debt | ( | ||||||||||
| Long-term debt, excluding the 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. The carrying amounts of our Cash and cash equivalents, Receivables, net, Accounts payable and Accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Bank Debt
On November 9, 2021, we entered into a credit agreement that provides a $1.2 billion unsecured revolving credit facility (the “2021 Credit Agreement”) with Advance Auto Parts, Inc., as Borrower, Advance Stores, as a Guarantor, the lenders party thereto, and Bank of America, N.A., as the Administrative Agent, and replaced the previous credit agreement. The revolver under the 2021 Credit Agreement replaced the revolver under the previous credit agreement. The revolver under the 2021 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 $500.0 million during the term of the 2021 Credit Agreement.
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As of December 30, 2023, we had no outstanding borrowings under the 2021 Credit Agreement and borrowing availability was $1.2 billion. Under the 2021 Credit Agreement, we had no 185.0 million outstanding borrowings under the 2021 Credit Agreement and borrowing availability was $1.0 billion. Under the 2021 Credit Agreement, we had no
Interest on any borrowings on the 2021 Credit Agreement is 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 1.00 % for the adjusted LIBOR and 0.00 % for alternate base rate borrowings. A facility fee of 0.125 % per annum is charged on the total revolving facility commitment, payable quarterly in arrears. Under the terms of the 2021 Credit Agreement, the interest rate spread and facility fee are based on our credit rating. The interest rate spread ranges from 0.795 % to 1.30 % for adjusted LIBOR borrowings and 0.00 % to 0.30 % for alternate base rate borrowings. The facility fee ranges from 0.08 % to 0.20 %.
On February 27, 2023, we entered into Amendment No. 1 (“Amendment No. 1”) to the 2021 Credit Agreement. Amendment No. 1 extends the maturity date of the 2021 Credit Agreement by one year from November 9, 2026, to November 9, 2027. Amendment No. 1 also replaces an adjusted LIBOR benchmark rate with a term secured overnight financing rate benchmark rate, as adjusted by an increase of ten basis points, plus the applicable margin under 2021 Credit Agreement.
On August 21, 2023, we entered into Amendment No. 2 (“Amendment No. 2”) to the 2021 Credit Agreement in order to amend certain financial covenants related to the Consolidated Coverage Ratio (as defined therein), and on November 20, 2023, we entered into Amendment No. 3 (“Amendment No. 3”) to the 2021 Credit Agreement in order to further amend financial covenants related to the Consolidated Coverage Ratio. Pursuant to Amendment No. 2 and Amendment No. 3, we will not permit the Consolidated Coverage Ratio to be less than (a) 1.75 to 1.00 for each period of four fiscal quarters ending on October 7, 2023 through and including the period of four fiscal quarters ending on October 5, 2024, (b) 2.00 to 1.00 for each period of four fiscal quarters ending on December 28, 2024 through and including the period of four fiscal quarters ending on October 4, 2025 and (c) 2.25 to 1.00 for each period of four fiscal quarters ending after October 4, 2025. Amendment No. 2. and Amendment No. 3 made no other material changes to the terms of the 2021 Credit Agreement.
On February 26, 2024, we entered into Amendment No. 4 (“Amendment No. 4”) to the 2021 Credit Agreement to enable certain addbacks to the definition of Consolidated EBITDA contained therein for specific write-downs of inventory and vendor receivables. Amendment No. 4 also updated certain limitations on future incurrences of other indebtedness and liens, replacing the cap thereon of 10% of consolidated net tangible assets with $400 million , and eliminated the $250 million basket for accounts receivable securitization transactions. Amendment No. 4 made no other material changes to the terms of the 2021 Credit Agreement.
The 2021 Credit Agreement contains customary covenants restricting the ability of: (a) Advance Auto Parts, Inc. and its subsidiaries to, among other things, (i) create, incur or assume additional debt (only with respect to subsidiaries of Advance Auto Parts, Inc.), (ii) incur liens, (iii) guarantee obligations, and (iv) change the nature of their business; (b) Advance Auto Parts, Inc., 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 Auto Parts, Inc., among other things, to change its holding company status. Advance is also required to comply with financial covenants with respect to a maximum leverage ratio and a minimum coverage ratio. The 2021 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults of Advance’s other material indebtedness. We were in compliance with our financial covenants with respect to the 2021 Credit Agreement as of December 30, 2023.
As of December 30, 2023 and December 31, 2022, we had $91.2 million and $90.2 million of bilateral letters of credit issued separately from the 2021 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.
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Senior Unsecured Notes
Our 4.50 % senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69 % of the principal amount of $450.0 million. The 2023 Notes bear interest, payable semi-annually in arrears on June 1 and December 1, at a rate of 4.50 % per year. Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $256.3 million of 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. On April 4, 2022, we redeemed the remaining $193.2 million principal amount of our outstanding 2023 Notes with the net proceeds from the issuance of the 3.50 % senior unsecured notes due March 15, 2032 (the “2032 Notes”). In connection with this early redemption, we incurred charges related to the make-whole provision and debt issuance costs of $7.0 million and $0.4 million.
Our 3.90 % senior unsecured notes due April 15, 2030 (the “Original Notes”) were issued April 16, 2020, at 99.65 % of the principal amount of $500.0 million, and were not registered under the Securities Act of 1933, as amended (the “Securities Act”). The Original Notes bear interest, payable semi-annually in arrears on April 15 and October 15, at a rate of 3.90 % per year. On July 28, 2020, we completed an exchange offer whereby the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), were exchanged 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.
Our 1.75 % senior unsecured notes due October 1, 2027 (the “2027 Notes”) were issued September 29, 2020, at 99.67 % of the principal amount of $350.0 million. The 2027 Notes bear interest, payable semi-annually in arrears on April 1 and October 1, at a rate of 1.75 % per year. In connection with the 2027 Notes offering, we incurred $2.9 million of debt issuance costs.
Our 3.50 % senior unsecured notes due March 15, 2032 (the “2032 Notes”) were issued March 4, 2022, at 99.61 % of the principal amount of $350.0 million. The 2032 Notes bear interest, payable semi-annually in arrears on March 15 and September 15, at a rate of 3.50 % per year. In connection with the 2032 Notes offering, we incurred $3.2 million of debt issuance costs.
Our 5.90 % senior unsecured notes due March 9, 2026 (the “2026 Notes”) were issued March 9, 2023, at 99.94 % of the principal amount of $300.0 million. The 2026 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of 5.90 % per year. In connection with the 2026 Notes offering, we incurred $1.6 million of debt issuance costs.
Our 5.95 % senior unsecured notes due March 9, 2028 (the “2028 Notes”) were issued March 9, 2023, at 99.92 % of the principal amount of $300.0 million. The 2028 Notes bear interest, payable semi-annually in arrears on March 9 and September 9, at a rate of 5.95 % per year. In connection with the 2028 Notes offering, we incurred $1.9 million of debt issuance costs.
Our 2023 Notes, 2026 Notes, 2027 Notes, 2028 Notes, 2030 Notes and 2032 Notes are collectively referred to herein as our “senior unsecured notes” or the “Notes.” The terms of the 2023 Notes, 2026 Notes, 2027 Notes, 2028 Notes and 2032 notes are governed by an indenture dated as of April 29, 2010 (as amended, supplemented, waived or otherwise modified, the “2010 Indenture”) among Advance Auto Parts, Inc., the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee. The terms of the 2030 Notes are governed by an indenture dated as of April 16, 2020 (as amended, supplemented, waived or otherwise modified, the “2020 Indenture” and together with the 2010 Indenture, the “Indentures”) among Advance Auto Parts, Inc., the subsidiary guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Trustee.
We may redeem some or all of the senior unsecured notes at any time or from time to time, at the redemption prices described in the Indentures. In addition, in the event of a Change of Control Triggering Event (as defined in the Indentures), we will be required to offer to repurchase the Notes at a price equal to 101 % of the principal amount thereof, plus accrued and unpaid interest to the repurchase date. Currently, the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated and unsecured basis by guarantor and subsidiary guarantees, as defined by the Indenture.
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The Indentures contain customary provisions for events of default including for: (i) failure to pay principal or interest when due and payable; (ii) failure to comply with covenants or agreements in the Indentures or the Notes and failure to cure or obtain a waiver of such default upon notice; (iii) a default under any debt for money borrowed by us or any of our subsidiaries that results in acceleration of the maturity of such debt, or failure to pay any such debt within any applicable grace period after final stated maturity, in an aggregate amount greater than $25.0 million without such debt having been discharged or acceleration having been rescinded or annulled within ten days after receipt by us of notice of the default by the Trustee or holders of not less than 25 % in aggregate principal amount of the Notes then outstanding; and (iv) events of bankruptcy, insolvency or reorganization affecting us and certain of its subsidiaries. In the case of an event of default, the principal amount of the Notes plus accrued and unpaid interest may be accelerated. The Indentures also contain covenants limiting our ability to incur debt secured by liens and to enter into certain sale and lease-back transactions.
Future Payments
As of December 30, 2023, the aggregate future annual maturities of long-term debt instruments were as follows:
| Year | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 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 $106.9 million as of December 30, 2023. 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 was $221.2 million as of December 30, 2023. We believe that the likelihood of performance under these guarantees is remote.
7. Property and Equipment
Property and equipment consisted of the following:
Useful Lives | December 30, 2023 | December 31, 2022 | |||||||||||||||
Land and land improvements (1) | $ | $ | |||||||||||||||
| Buildings | |||||||||||||||||
| Building and leasehold improvements | |||||||||||||||||
| Furniture, fixtures and equipment | |||||||||||||||||
| Vehicles | |||||||||||||||||
| Construction in progress | |||||||||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||||||||
| Property and equipment, net | $ | $ | |||||||||||||||
(1) Land is deemed to have an indefinite life.
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8. Leases and Other Commitments
Leases
Substantially all of our leases are for facilities and vehicles. The initial term for facilities are typically to ten years , with renewal options at five-year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically to six years . Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease liabilities consisted of the following:
| December 30, 2023 | December 31, 2022 | ||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
| ( | ( | ||||||||||
| Non-current operating lease liabilities | $ | $ | |||||||||
The current portion of operating lease liabilities was included in Other current liabilities in the accompanying Consolidated Balance Sheets.
Total lease cost was included in Cost of sales and SG&A in the accompanying Consolidated Statements of Operations and is recorded net of immaterial sublease income. Total lease cost comprised the following:
| Year Ended | |||||||||||
| December 30, 2023 | December 31, 2022 | ||||||||||
| Operating lease cost | $ | $ | |||||||||
| Variable lease cost | |||||||||||
| Total lease cost | $ | $ | |||||||||
The future maturity of lease liabilities are as follows:
| Year | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: Imputed interest | ( | |||||||
| Total operating lease liabilities | $ | |||||||
Operating lease liabilities included $30.0 million related to options to extend lease terms that are reasonably certain of being exercised and excluded $49.7 million of legally binding lease obligations for leases signed, but not yet commenced.
The weighted average remaining lease term and weighted average discount rate for our operating leases were 6.5 years and 3.9 % as of December 30 , 2023
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Other information relating to our lease liabilities were as follows:
| Year Ended | |||||||||||
| December 30, 2023 | December 31, 2022 | ||||||||||
| 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 December 30, 2023, future payments of these arrangements were $133.0 million and were not accrued in our Consolidated Balance Sheet.
9. Accrued Expenses
Accrued expenses consisted of the following:
| December 30, 2023 | December 31, 2022 | ||||||||||
| Payroll and related benefits | $ | $ | |||||||||
| Taxes payable | |||||||||||
| Self-insurance reserves | |||||||||||
| Inventory related accruals | |||||||||||
| Accrued rebates | |||||||||||
| Accrued professional services/legal | |||||||||||
| Capital expenditures | |||||||||||
| Other | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
10. Share Repurchase Program
In February 2022, our Board of Directors authorized an additional $1.0 billion toward the existing share repurchase program. Previously in April 2021 and November 2019, our Board of Directors authorized $1.0 billion and $700.0 million for our share repurchase program. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time. The Board of Directors may increase or otherwise modify, renew, suspend or terminate the share repurchase program without prior notice.
During 2023, we did not repurchase any shares of our common stock under our share repurchase program. We had $947.3 million remaining under our share repurchase program as of December 30, 2023. During 2022, we repurchased 3.0 million shares of our common stock at an aggregate cost of $598.2 million or an average price of $201.88 per share, under our share repurchase program.
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11. Earnings per Share
The computations of basic and diluted earnings per share were as follows:
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| 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 | $ | $ | $ | ||||||||||||||
12. Income Taxes
Provision for Income Taxes
Provision for income taxes consisted of the following:
| Current | Deferred | Total | |||||||||||||||
| 2023 | |||||||||||||||||
| Federal | $ | $ | ( | $ | ( | ||||||||||||
| State | ( | ( | |||||||||||||||
| Foreign | |||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||
| 2022 | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | ( | ||||||||||||||||
| $ | $ | $ | |||||||||||||||
| 2021 | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
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The provision for income taxes differed from the amount computed by applying the federal statutory income tax rate due to:
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
Income before provision for income taxes at statutory U.S. federal income tax rate ( | $ | $ | $ | ||||||||||||||
State income taxes, net of federal income tax | ( | ||||||||||||||||
| Other, net | ( | ( | |||||||||||||||
| Provision for income taxes | $ | $ | $ | ||||||||||||||
Deferred Income Tax Assets (Liabilities)
Temporary differences that give rise to significant deferred income tax assets (liabilities) were as follows:
| December 30, 2023 | December 31, 2022 | ||||||||||
| 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 December 30, 2023 and December 31, 2022, our net operating loss (“NOL”) carryforwards comprised state NOLs of $102.2 million and $108.9 million. These NOLs may be used to reduce future taxable income and expire periodically through 2039. 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 $2.9 million as of December 30, 2023 and $3.0 million as of December 31, 2022. In addition, we recorded a $2.2 million valuation allowance on foreign tax credit carryforwards as of December 30, 2023. The amount of deferred income tax assets realizable 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 December 30, 2023 and December 31, 2022, these accumulated net earnings generated by our foreign operations were $118.3 million and $98.7 million, which did not include earnings deemed to be repatriated as part of the U.S. Tax Cuts and Jobs Act. It is not practicable to determine the income tax liability that would be payable if such earnings were repatriated.
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Unrecognized Tax Benefits
The following table summarizes the activity of our gross unrecognized tax benefits:
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| 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 | $ | $ | $ | ||||||||||||||
As of December 30, 2023, December 31, 2022 and January 1, 2022, the entire amount of unrecognized tax benefits, if recognized, would reduce our annual effective tax rate of 6.6 %, 23.2 % and 23.8 %. During 2023, 2022 and 2021, we recorded income tax-related interest and penalties of $0.2 million, $0.6 million and $0.7 million due to uncertain tax positions included in the Provision for income taxes in the accompanying Consolidated Statements of Operations. As of December 30, 2023 and December 31, 2022, we recorded a liability for potential interest of $2.5 million and $2.7 million and for potential penalties of $0.1 million for each year. We do not provide for any penalties associated with tax contingencies unless considered probable of assessment. We do not expect our unrecognized tax benefits to change significantly over the next 12 months. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2020.
13. Contingencies
Currently and from time to time, we are subject to litigation, claims and other disputes, including legal and regulatory proceedings, arising in the normal course of business. We record a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. Although the final outcome of pending legal matters cannot be determined, based on the facts presently known, it is management’s opinion that the final outcome of any pending matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Our Western Auto subsidiary, together with other defendants (including Advance and other of its subsidiaries), has been named as a defendant in lawsuits alleging injury as a result of exposure to asbestos-containing products. The plaintiffs have alleged that certain products contained asbestos and were manufactured, distributed and/or sold by the various defendants. Many of the cases pending against us are in the early stages of litigation. While the damages claimed against the defendants in some of these proceedings are substantial, we believe many of these claims are at least partially covered by insurance and historically asbestos claims against us have been inconsistent in fact patterns alleged and immaterial. We do not believe the cases currently pending will have a material adverse effect on our financial position, results of operations or cash flows.
On October 9, 2023 and October 27, 2023, two putative class actions on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 16, 2022 and May 30, 2023, inclusive (the “Class Period”), were commenced against us and certain of our former officers in the United States District Court for the Eastern District of North Carolina. The plaintiffs allege that the defendants made certain false and materially misleading statements during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These cases were consolidated on February 9, 2024 and the matter is in preliminary stages. We strongly dispute the allegations and intend to defend the case vigorously.
On January 17, 2024, a derivative shareholder complaint was commenced against our directors and certain former officers alleging derivative liability for the allegations made in the securities class action complaints noted above. This case is still in preliminary stages. We strongly dispute the allegations of the complaint and intend to defend the case vigorously.
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In the normal course of business, the Company identified a potential discrepancy in trade compliance pertaining to customs transactions. The Company is conducting a thorough review of transactions, and if the review identifies any relevant errors, the Company will reimburse U.S. Customs and Border Protection (“CBP”) for duties, fees and interest owed, if any. The Company has submitted a voluntary initial prior disclosure with the CBP. Since filing its voluntary initial prior disclosure, the Company has not identified any material errors. Based on currently known information, it is too early for management to reasonably estimate the loss, or range of loss, if any, that may result. Accordingly, management has not recorded a loss contingency as of December 30, 2023, related to this matter.
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 $26.3 million, $24.5 million and $27.3 million in 2023, 2022 and 2021.
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 maintain a deferred compensation liability for this plan. As of December 30, 2023 and December 31, 2022, these liabilities were $14.3 million and $13.7 million and are included within Accrued Expenses in the Consolidated Balance Sheets.
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 2023 Omnibus Incentive Compensation Plan (“2023 Plan”), approved on May 24, 2023, which replaced our 2014 Long-Term Incentive Plan. In 2023, 2022 and 2021, we granted share-based compensation in the form of RSUs or deferred stock units (“DSUs”). Our grants, which have three methods of measuring fair value, generally include a time-based service or a performance-based or a market-based portion, which collectively represent the target award.
In 2023 and 2022, we also granted options to purchase common stock to certain employees under our 2023 Plan. The options are granted at an exercise price equal to the closing market price of Advance's common stock on the date of the grant, expire after ten years and vest one-third annually over three years. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.
At December 30, 2023, there were 2.4 million shares of common stock available for future issuance under the 2023 Plan based on management’s current estimate of the probable vesting outcome for performance-based awards. Shares forfeited become available for reissuance and are included in availability.
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 the 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
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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 December 30, 2023.
There were 22 thousand performance-based RSUs granted during 2023. There were no performance-based RSUs granted during 2022 or 2021. 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 December 30, 2023. Compensation expense for performance-based awards of $6.4 million, $11.8 million and $22.8 million in 2023, 2022 and 2021 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:
| 2023 | 2022 | 2021 | |||||||||||||||
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 a 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 12.2 % using the Chaffe Model to adjust the fair value for the post-vest restrictions. Vesting of market-based RSUs 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.
The following table summarizes activity for time-based, performance-based and market-based RSUs in 2023:
| Time-Based | Performance-Based | Market-Based | |||||||||||||||||||||||||||||||||
| 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 31, 2022 | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Granted | $ | $ | $ | ||||||||||||||||||||||||||||||||
Change in units based on performance | $ | ( | $ | $ | |||||||||||||||||||||||||||||||
Vested (1) | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||
| Forfeited | ( | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Nonvested at December 30, 2023 | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1) The vested shares of market-based RSUs were not exercised due to low multiplier effect for 2020 awards.
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The following table summarizes certain information concerning activity for time-based, performance-based and market-based RSUs:
| Year Ended | |||||||||||||||||
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |||||||||||||||
| 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 December 30, 2023, the maximum potential payout under our currently outstanding performance-based and market-based RSUs were 44 thousand and 255 thousand units.
Stock Options
In 2023, we granted 316 thousand stock options where the weighted average fair value of stock options granted was $28.97 per share. The fair value was estimated on the date of grant by applying the Black-Scholes-Merton option-pricing valuation model.
The following table includes summary information for stock options as of December 30 , 2023
| Number of Awards | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding at December 31, 2022 | $ | ||||||||||||||||||||||
| Granted | $ | ||||||||||||||||||||||
| Exercised | $ | ||||||||||||||||||||||
| Forfeited | ( | $ | |||||||||||||||||||||
| Outstanding at December 30, 2023 | $ | $ | |||||||||||||||||||||
| Exercisable at December 30, 2023 | $ | $ | |||||||||||||||||||||
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The following table presents the range of the weighted-average assumptions used in determining the fair values of options granted:
| Year Ended | |||||||||||
| December 30, 2023 | |||||||||||
Risk-free interest rate (1) | – | ||||||||||
Expected life (2) | |||||||||||
Expected volatility (3) | – | ||||||||||
Expected dividend yield (4) | – | ||||||||||
(1) The risk-free interest rate is based on the yield in effect at grant for zero-coupon U.S. Treasury notes with maturities equivalent to the expected term of the stock options.
(2) The expected term represents the period of time options granted are expected to be outstanding. As we do not have sufficient historical data, we utilized the simplified method provided by the Securities and Exchange Commission to calculate the expected term as the average of the contractual term and vesting period.
(3) Expected volatility is the measure of the amount by which the stock price has fluctuated or is expected to fluctuate. We utilized historical trends and the implied volatility of our publicly traded financial instruments in developing the volatility estimate for our stock options.
(4) The expected dividend yield is calculated based on our expected quarterly dividend and the three-month average stock price as of the grant date.
Other Considerations
Total income tax benefit related to share-based compensation expense for 2023, 2022 and 2021 was $11.0 million, $12.5 million and $15.2 million.
As of December 30, 2023, there was $69.5 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.50 years.
Deferred Stock Units
We grant share-based awards annually to our Board of Directors in connection with our 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 74 thousand, nine thousand and ten thousand DSUs in 2023, 2022 and 2021. The weighted average fair value of DSUs granted during 2023, 2022 and 2021 was $66.60 , $193.05 and $191.24 . The DSUs were awarded at a price equal to the market price of our underlying common stock on the date of the grant. For 2023, 2022 and 2021, we recognized $3.4 million, $1.7 million and $1.6 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 December 30, 2023, there were 2.5 million shares available to be issued under the ESPP.
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16. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax, consisted of the following:
| Unrealized Gain (Loss) on Postretirement Plan | Foreign Currency Translation | Accumulated Other Comprehensive (Loss) Income | |||||||||||||||
| Balance, January 2, 2021 | $ | $ | ( | $ | ( | ||||||||||||
| 2021 activity | ( | ( | ( | ||||||||||||||
| Balance, January 1, 2022 | ( | ( | |||||||||||||||
| 2022 activity | ( | ( | ( | ||||||||||||||
| Balance, December 31, 2022 | ( | ( | |||||||||||||||
| 2023 activity | ( | ( | |||||||||||||||
| Balance, | $ | $ | ( | $ | ( | ||||||||||||
17. Supplier Finance Programs
We maintain supply chain financing agreements with third-party financial institutions to provide our suppliers with enhanced receivables options. Through these agreements, our suppliers, at their sole discretion, may elect to sell their receivables due from us to the third-party financial institution at terms negotiated between the supplier and the third-party financial institution. We do not provide any guarantees to any third party in connection with these financing arrangements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted, and no assets are pledged under the agreements. All outstanding amounts due to third-party financial institutions related to suppliers participating in such financing arrangements are recorded within Accounts payable and represent obligations outstanding under these supplier finance programs for invoices that were confirmed as valid and owed to the third-party financial institutions in our Consolidated Balance Sheets. As of December 30 , 20233.4 billion and $3.1 billion of our were to suppliers participating in these financing arrangements.
Our confirmed obligations to suppliers participating in these financing arrangements consist of the following:
December 30, 2023 | |||||
| Confirmed obligations outstanding at the beginning of the year | $ | ||||
| Invoices confirmed during the year | |||||
| Confirmed invoices paid during the year | ( | ||||
| Confirmed obligations outstanding at the end of the year | $ | ||||
18. Immaterial Restatement of Prior Period Financial Statements
As discussed in Note 1, we identified errors in our consolidated financial statements for fiscal years ended 2022 and 2021 and for the quarterly periods of 2023. A summary of the corrections, inclusive of adjustments discovered in the third and fourth quarters of 2023, are as follows (tables may not foot or cross foot due to rounding):
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| Condensed Consolidated Balance Sheet | |||||||||||||||||
| January 1, 2022 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | ( | $ | |||||||||||||
| Receivables, net | ( | ||||||||||||||||
| Inventories, net | |||||||||||||||||
| Total current assets | ( | ||||||||||||||||
| Total assets | $ | $ | ( | $ | |||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Deferred income taxes | ( | ||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | ||||||||||||||
| Retained earnings | ( | ||||||||||||||||
| Total stockholders’ equity | ( | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ( | $ | |||||||||||||
| Condensed Consolidated Balance Sheet | |||||||||||||||||
| December 31, 2022 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Receivables, net | ( | ||||||||||||||||
| Inventories, net | ( | ||||||||||||||||
| Total current assets | ( | ||||||||||||||||
| Total assets | $ | $ | ( | $ | |||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Deferred income taxes | ( | ||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||||||||
| Retained earnings | ( | ||||||||||||||||
| Total stockholders’ equity | ( | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ( | $ | |||||||||||||
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| Condensed Consolidated Balance Sheet | |||||||||||||||||
| April 22, 2023 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | ( | $ | |||||||||||||
| Receivables, net | ( | ||||||||||||||||
| Inventories, net | ( | ||||||||||||||||
| Other current assets | |||||||||||||||||
| Total current assets | ( | ||||||||||||||||
| Total assets | $ | $ | ( | $ | |||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Deferred income taxes | ( | ||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||||||||
| Retained earnings | ( | ||||||||||||||||
| Total stockholders’ equity | ( | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ( | $ | |||||||||||||
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| Condensed Consolidated Balance Sheet | |||||||||||||||||
| July 15, 2023 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | ( | $ | |||||||||||||
| Receivables, net | ( | ||||||||||||||||
| Inventories, net | ( | ||||||||||||||||
| Other current assets | |||||||||||||||||
| Total current assets | ( | ||||||||||||||||
| Total assets | $ | $ | ( | $ | |||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||||||||
| Retained earnings | ( | ||||||||||||||||
| Total stockholders’ equity | ( | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ( | $ | |||||||||||||
| Condensed Consolidated Balance Sheet | |||||||||||||||||
| October 7, 2023 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | ( | $ | |||||||||||||
| Receivables, net | ( | ||||||||||||||||
| Inventories, net | ( | ||||||||||||||||
| Other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Accrued expenses | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||||||||
| Retained earnings | ( | ||||||||||||||||
| Total stockholders’ equity | ( | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | $ | ||||||||||||||
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| Condensed Consolidated Statement of Operations | |||||||||||||||||
| January 1, 2022 | |||||||||||||||||
| Year Ended | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Cost of sales | $ | $ | $ | ||||||||||||||
| Gross profit | ( | ||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Operating income | ( | ||||||||||||||||
| Other (expense) income, net | ( | ( | |||||||||||||||
| Total other, net | ( | ( | ( | ||||||||||||||
| Income before provision for income taxes | ( | ||||||||||||||||
| Provision for income taxes | ( | ||||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Basic earnings per share | $ | $ | ( | $ | |||||||||||||
| Diluted earnings per common share | $ | $ | ( | $ | |||||||||||||
| Condensed Consolidated Statement of Operations | |||||||||||||||||
| December 31, 2022 | |||||||||||||||||
| Year Ended | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Cost of sales | $ | $ | $ | ||||||||||||||
| Gross profit | ( | ||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Operating income | ( | ||||||||||||||||
| Other (expense) income, net | ( | ( | ( | ||||||||||||||
| Total other, net | ( | ( | ( | ||||||||||||||
| Income before provision for income taxes | ( | ||||||||||||||||
| Provision for income taxes | ( | ||||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Basic earnings per share | $ | $ | ( | $ | |||||||||||||
| Diluted earnings per common share | $ | $ | ( | $ | |||||||||||||
64
| Condensed Consolidated Statement of Operations | |||||||||||||||||
| April 22, 2023 | |||||||||||||||||
| Sixteen Weeks Ended | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Cost of sales | $ | $ | $ | ||||||||||||||
| Gross profit | ( | ||||||||||||||||
| Selling, general and administrative expenses | ( | ||||||||||||||||
| Operating income | |||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||
| Provision for income taxes | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Basic earnings per share | $ | $ | $ | ||||||||||||||
| Diluted earnings per common share | $ | $ | $ | ||||||||||||||
| Condensed Consolidated Statement of Operations | ||||||||||||||||||||||||||||||||||||||
| July 15, 2023 | ||||||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | |||||||||||||||||||||||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | As Previously Reported | Adjustments | As Corrected | |||||||||||||||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Gross profit | ( | ( | ||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | ( | |||||||||||||||||||||||||||||||||||||
| Operating income | ( | ( | ||||||||||||||||||||||||||||||||||||
| Income before provision for income taxes | ( | ( | ||||||||||||||||||||||||||||||||||||
| Provision for income taxes | ( | |||||||||||||||||||||||||||||||||||||
| Net income | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Basic earnings per share | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
65
| Condensed Consolidated Statement of Operations | |||||||||||||||||||||||||||||||||||
| October 7, 2023 | |||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | As Previously Reported | Adjustments | As Corrected | ||||||||||||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Gross profit | ( | ( | |||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
Operating (loss) income | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
(Loss) income before provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Net (loss) income | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
Basic (loss) earnings per share | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
Diluted (loss) earnings per common share | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
| Condensed Consolidated Statement of Comprehensive Income | |||||||||||||||||
| January 1, 2022 | |||||||||||||||||
| Year Ended | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||
Total other comprehensive income (loss) | ( | ( | |||||||||||||||
| Comprehensive income | $ | $ | ( | $ | |||||||||||||
| Condensed Consolidated Statement of Comprehensive Income | |||||||||||||||||
| December 31, 2022 | |||||||||||||||||
| Year Ended | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||
| Total other comprehensive loss | ( | ( | |||||||||||||||
| Comprehensive income | $ | $ | ( | $ | |||||||||||||
66
| Condensed Consolidated Statement of Comprehensive Income | |||||||||||||||||
| April 22, 2023 | |||||||||||||||||
| Sixteen Weeks Ended | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Currency translation adjustments | ( | ||||||||||||||||
| Total other comprehensive loss | ( | ||||||||||||||||
| Comprehensive income | $ | $ | $ | ||||||||||||||
| Condensed Consolidated Statement of Comprehensive Income | |||||||||||||||||||||||||||||||||||
| July 15, 2023 | |||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended | Twenty-Eight Weeks Ended | ||||||||||||||||||||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | As Previously Reported | Adjustments | As Corrected | ||||||||||||||||||||||||||||||
| Net income | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||||||||||||||||||||
Total other comprehensive income | ( | ( | |||||||||||||||||||||||||||||||||
| Comprehensive income | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Condensed Consolidated Statement of Comprehensive Income | |||||||||||||||||||||||||||||||||||
| October 7, 2023 | |||||||||||||||||||||||||||||||||||
| Twelve Weeks Ended | Forty Weeks Ended | ||||||||||||||||||||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | As Previously Reported | Adjustments | As Corrected | ||||||||||||||||||||||||||||||
Net (loss) income | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
| Currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Total other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Comprehensive (loss) income | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
67
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Fifty-Two Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at January 2, 2021 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | ( | $ | ( | ||||||||||||||||||
| Net Income | — | ( | ( | ||||||||||||||||||||
| Total other comprehensive income | ( | — | ( | ||||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | ( | $ | ( | |||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at January 2, 2021 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Fifty-Two Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | ( | $ | ( | |||||||||||||||||
| Net Income | — | ( | ( | ||||||||||||||||||||
Total other comprehensive loss | — | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | $ | ( | ||||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
68
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Sixteen Weeks Ended April 22, 2023 | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Sixteen Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at April 22, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | $ | ( | ||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | ( | — | ( | ||||||||||||||||||||
| Balance at April 22, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at April 22, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Twelve Weeks Ended July 15, 2023 | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Twelve Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at April 22, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at July 15, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at April 22, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
| Net income | — | ( | ( | ||||||||||||||||||||
Total other comprehensive income | ( | — | ( | ||||||||||||||||||||
| Balance at July 15, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at April 22, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at July 15, 2023 | $ | ( | $ | $ | |||||||||||||||||||
69
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Twenty-Eight Weeks Ended July 15, 2023 | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Twenty-Eight Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at Dec 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at July 15, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at Dec 31, 2022 | $ | $ | ( | $ | ( | ||||||||||||||||||
| Net income | — | ( | ( | ||||||||||||||||||||
Total other comprehensive income | ( | — | ( | ||||||||||||||||||||
| Balance at July 15, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at Dec 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
Total other comprehensive income | — | ||||||||||||||||||||||
| Balance at July 15, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Twelve Weeks Ended October 7, 2023 | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Twelve Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at July 15, 2023 | $ | ( | $ | $ | |||||||||||||||||||
Net loss | — | ( | ( | ||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at October 7, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at July 15, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
Net loss (1) | — | ( | ( | ||||||||||||||||||||
| Total other comprehensive loss | — | ||||||||||||||||||||||
| Balance at October 7, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at July 15, 2023 | $ | ( | $ | $ | |||||||||||||||||||
Net loss | — | ( | ( | ||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at October 7, 2023 | $ | ( | $ | $ | |||||||||||||||||||
(1) Adjustments to retained earnings do not foot due to the previous adjustments made in third quarter 2023.
70
| Condensed Consolidated Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||
| Forty Weeks Ended October 7, 2023 | |||||||||||||||||||||||
| Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||
| Forty Weeks As Previously Reported | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at October 7, 2023 | $ | ( | $ | $ | |||||||||||||||||||
| Adjustments | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | $ | ( | ||||||||||||||||||
Net income (1) | — | ( | ( | ||||||||||||||||||||
| Total other comprehensive loss | — | ||||||||||||||||||||||
| Balance at October 7, 2023 | $ | $ | ( | $ | ( | ||||||||||||||||||
| As Corrected | |||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | $ | |||||||||||||||||||
| Net income | — | ||||||||||||||||||||||
| Total other comprehensive loss | ( | — | ( | ||||||||||||||||||||
| Balance at October 7, 2023 | $ | ( | $ | $ | |||||||||||||||||||
(1) Adjustments to retained earnings do not foot due to the previous adjustments made in third quarter 2023.
| Condensed Consolidated Statement of Cash Flows | |||||||||||||||||
| Fifty-Two Weeks Ended January 1, 2022 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Provision for deferred income taxes | ( | ||||||||||||||||
| Net change in: | |||||||||||||||||
| Receivables, net | ( | ( | |||||||||||||||
| Inventories, net | ( | ( | ( | ||||||||||||||
| Accounts payable | |||||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Net cash provided by operating activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||||||||
Net (decrease) increase in cash and cash equivalents | ( | ( | ( | ||||||||||||||
| Cash and cash equivalents, beginning of period | ( | ||||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ( | $ | |||||||||||||
71
| Condensed Consolidated Statement of Cash Flows | |||||||||||||||||
| Fifty-Two Weeks Ended December 31, 2022 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Provision for deferred income taxes | |||||||||||||||||
| Net change in: | |||||||||||||||||
| Receivables, net | ( | ||||||||||||||||
| Inventories, net | ( | ( | |||||||||||||||
| Accounts payable | |||||||||||||||||
| Accrued expenses | ( | ( | ( | ||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ( | |||||||||||||||
| Cash and cash equivalents, beginning of period | ( | ||||||||||||||||
Cash and cash equivalents, end of period | $ | $ | $ | ||||||||||||||
| Condensed Consolidated Statement of Cash Flows | |||||||||||||||||
| Sixteen Weeks Ended April 22, 2023 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
Other, net | |||||||||||||||||
| Net change in: | |||||||||||||||||
| Receivables, net | ( | ( | ( | ||||||||||||||
| Inventories, net | ( | ( | ( | ||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||
| Accrued expenses | |||||||||||||||||
| Other assets and liabilities, net | ( | ( | |||||||||||||||
Net cash used in operating activities | ( | ( | ( | ||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||
| Net cash used in financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ( | ( | ||||||||||||||
Cash and cash equivalents, beginning of period | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ( | $ | |||||||||||||
72
| Condensed Consolidated Statement of Cash Flows | |||||||||||||||||
| Twenty-Eight Weeks Ended July 15, 2023 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Provision for deferred income taxes | $ | $ | |||||||||||||||
| Other, net | $ | $ | |||||||||||||||
| Net change in: | |||||||||||||||||
| Receivables, net | ( | ( | ( | ||||||||||||||
| Inventories, net | ( | ( | ( | ||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Other assets and liabilities, net | ( | ( | ( | ||||||||||||||
Net cash used in operating activities | ( | ( | ( | ||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||
| Net cash used in financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ( | $ | |||||||||||||
| Condensed Consolidated Statement of Cash Flows | |||||||||||||||||
| Forty Weeks Ended October 7, 2023 | |||||||||||||||||
| As Previously Reported | Adjustments | As Corrected | |||||||||||||||
| Net income | $ | $ | ( | $ | |||||||||||||
| Provision for deferred income taxes | ( | ( | |||||||||||||||
| Other, net | |||||||||||||||||
| Net change in: | |||||||||||||||||
| Receivables, net | ( | ( | ( | ||||||||||||||
| Inventories, net | ( | ( | |||||||||||||||
| Accounts payable | ( | ( | |||||||||||||||
| Accrued expenses | |||||||||||||||||
| Other Assets and Liabilities | ( | ( | ( | ||||||||||||||
| Net cash provided by operating activities | ( | ||||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||
| Net cash used in financing activities | ( | ||||||||||||||||
| Effect of exchange rate changes on cash | ( | ( | |||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ( | $ | |||||||||||||
73
Advance Auto Parts, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
| Allowance for credit losses | Balance at Beginning of Period | Charges to Expenses | Deductions(1) | Balance at End of Period | ||||||||||||||||||||||
| January 1, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||
| December 30, 2023 | $ | $ | $ | ( | $ | |||||||||||||||||||||
(1)Accounts written off during the period. These amounts did not impact our Statements 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.
74
EXHIBIT INDEX
| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| 10-Q | 3.1 | 8/14/2018 | |||||||||||||||
8-K | 3.1 | 8/14/2023 | |||||||||||||||
| 10-K | 4.0 | 2/18/2020 | |||||||||||||||
| 8-K | 4.1 | 4/29/2010 | |||||||||||||||
| 8-K | 10.45 | 6/3/2011 | |||||||||||||||
| 8-K | 4.4 | 1/17/2012 | |||||||||||||||
| 8-K | 4.5 | 12/21/2012 | |||||||||||||||
| 8-K | 4.6 | 4/19/2013 | |||||||||||||||
| 8-K | 4.7 | 12/9/2013 | |||||||||||||||
| 10-Q | 4.11 | 5/28/2014 | |||||||||||||||
| 8-K | 4.1 | 4/17/2020 | |||||||||||||||
| 8-K | 4.6 | 9/30/2020 | |||||||||||||||
| 8-K | 4.1 | 3/4/2022 | |||||||||||||||
8-K | 4.1 | 3/9/2023 | |||||||||||||||
8-K | 4.1 | 3/9/2023 | |||||||||||||||
8-K | 4.6 | 9/30/2020 | |||||||||||||||
8-K | 4.1 | 3/9/2023 | |||||||||||||||
8-K | 4.1 | 4/17/2020 | |||||||||||||||
75
| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| 8-K | 4.1 | 3/4/2022 | |||||||||||||||
| 8-K | 10.19 | 5/20/2004 | |||||||||||||||
| 10-K | 10.17 | 3/1/2011 | |||||||||||||||
| 10-K | 10.52 | 3/3/2015 | |||||||||||||||
| 10-K | 10.54 | 3/3/2015 | |||||||||||||||
10-K | 10.55 | 2/28/2017 | |||||||||||||||
10-K | 10.56 | 2/28/2017 | |||||||||||||||
10-K | 10.58 | 2/21/2018 | |||||||||||||||
| X | |||||||||||||||||
10-K | 10.57 | 2/9/2019 | |||||||||||||||
| 10-Q | 10.1 | 6/2/2021 | |||||||||||||||
| 10-Q | 10.2 | 6/2/2021 | |||||||||||||||
| 10-Q | 10.3 | 6/2/2021 | |||||||||||||||
| 10-Q | 10.2 | 5/24/2022 | |||||||||||||||
| 10-Q | 10.3 | 5/24/2022 | |||||||||||||||
| 10-Q | 10.4 | 5/24/2022 | |||||||||||||||
| 10-Q | 10.3 | 6/6/2023 | |||||||||||||||
10-Q | 10.4 | 6/6/2023 | |||||||||||||||
10-Q | 10.5 | 6/6/2023 | |||||||||||||||
76
| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
10-Q | 10.1 | 6/6/2023 | |||||||||||||||
10-Q | 10.6 | 6/6/2023 | |||||||||||||||
10-Q | 10.7 | 6/6/2023 | |||||||||||||||
10-Q | 10.8 | 6/6/2023 | |||||||||||||||
10-K | 10.45 | 2/22/2021 | |||||||||||||||
X | |||||||||||||||||
| 10-Q | 10.1 | 5/31/2016 | |||||||||||||||
| 10-Q | 10.2 | 5/31/2016 | |||||||||||||||
| 10-K | 10.50 | 2/28/2017 | |||||||||||||||
10-Q | 10.9 | 6/6/2023 | |||||||||||||||
| 10-Q | 10.1 | 11/13/2018 | |||||||||||||||
| 10-K | 10.53 | 2/9/2019 | |||||||||||||||
X | |||||||||||||||||
8-K | 10.01 | 8/23/2023 | |||||||||||||||
8-K | 10.01 | 11/15/2023 | |||||||||||||||
| 8-K | 10.1 | 11/15/2021 | |||||||||||||||
| 8-K | 10.2 | 11/15/2021 | |||||||||||||||
10-K | 10.29 | 02/28/2023 | |||||||||||||||
10-Q | 10.1 | 8/23/2023 | |||||||||||||||
10-Q | 10.5 | 11/21/2023 | |||||||||||||||
| X | |||||||||||||||||
8-K | 10.1 | 2/28/2024 | |||||||||||||||
| X | |||||||||||||||||
| X | |||||||||||||||||
| X | |||||||||||||||||
77
| Incorporated by Reference | Filed | ||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | ||||||||||||
| X | |||||||||||||||||
| X | |||||||||||||||||
| 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 | |||||||||||||||
78
Item 16. Form 10-K Summary.
None.
79
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: | March 12, 2024 | By: | /s/ Ryan P. Grimsland | |||||||||||
Ryan P. Grimsland | ||||||||||||||
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/ Shane M. O’Kelly | President and Chief Executive Officer and Director | March 12, 2024 | ||||||||||||
| Shane M. O’Kelly | (Principal Executive Officer) | |||||||||||||
| /s/ Ryan P. Grimsland | Executive Vice President, Chief Financial Officer | March 12, 2024 | ||||||||||||
| Ryan P. Grimsland | (Principal Financial Officer) | |||||||||||||
/s/ Elizabeth E. Dreyer | Senior Vice President, Controller and Chief Accounting Officer | March 12, 2024 | ||||||||||||
Elizabeth E. Dreyer | (Principal Accounting Officer) | |||||||||||||
| /s/ Eugene I. Lee, Jr. | Chairman and Director | March 12, 2024 | ||||||||||||
| Eugene I. Lee, Jr. | ||||||||||||||
| /s/ Carla J. Bailo | Director | March 12, 2024 | ||||||||||||
| Carla J. Bailo | ||||||||||||||
| /s/ John F. Ferraro | Director | March 12, 2024 | ||||||||||||
| John F. Ferraro | ||||||||||||||
| /s/ Joan M. Hilson | Director | March 12, 2024 | ||||||||||||
| Joan M. Hilson | ||||||||||||||
| /s/ Jeffrey J. Jones II | Director | March 12, 2024 | ||||||||||||
| Jeffrey J. Jones II | ||||||||||||||
| /s/ Douglas A. Pertz | Director | March 12, 2024 | ||||||||||||
| Douglas A. Pertz | ||||||||||||||
| Director | March 12, 2024 | |||||||||||||
Gregory L. Smith | ||||||||||||||
| Director | March 12, 2024 | |||||||||||||
Thomas W. Seboldt | ||||||||||||||
| /s/ Sherice R. Torres | Director | March 12, 2024 | ||||||||||||
| Sherice R. Torres | ||||||||||||||
| /s/ Arthur L. Valdez Jr. | Director | March 12, 2024 | ||||||||||||
| Arthur L. Valdez Jr. | ||||||||||||||
| Director | March 12, 2024 | |||||||||||||
| A. Brent Windom | ||||||||||||||
80
Exhibit 10.8
ARTICLE I
INTRODUCTION AND PURPOSE
The purpose of the Plan is to motivate and reward excellent performance, attract and retain outstanding talent and foster a strong link between achievement of the Company’s strategic plan and compensation through cash incentive awards to eligible employees of the Company. This Plan replaces and supersedes any prior annual incentive plan for eligible Employees at the corporate level, including the Advance Auto Parts, Inc. 2017 Amended and Restated Executive Incentive Plan.
ARTICLE II
DEFINITIONS
For purposes of the Plan, the following terms shall have the following meanings:
(a) “Award” means an incentive award which, subject to such terms and conditions as may be prescribed by the Committee, entitles a Participant to receive a cash payment from the Company or a Subsidiary pursuant to Article IV.
(b) “Board” means the Board of Directors of the Company.
(c) “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute, and applicable regulations promulgated thereunder.
(d) “Committee” means the Compensation Committee of the Board or such other committee or subcommittee as may be designated by the Board consistent of no fewer than two “independent directors” within the meanings of applicable rules and regulations.
(e) “Company” means Advance Auto Parts, Inc., a Delaware corporation.
(f) “Employee” means any person who is employed by the Company or a Subsidiary.
(g) “Participant” means an Employee who is granted an Award under the Plan.
(h) “Performance Objective” is defined in Section 4.2.
(i) “Performance Period” is defined in Section 4.2.
(j) “Plan” means the this Advance Auto Parts, Inc. Executive Incentive Award Plan, as set forth herein and as amended from time to time.
(k) “Subsidiary” means any corporation (other than the Company), limited liability company, partnership, or other business organization of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company.
ARTICLE III
ELIGIBILITY
Awards may be granted to any Employee who is designated as a Participant from time to time by the Committee. The Committee shall determine which Employees shall be Participants and the terms, conditions, and limitations applicable to each Award not inconsistent with the Plan. Not all Employees are eligible to participate in the Plan. A Participant has no contractual right to Award. The Committee has discretion to determine whether a Participant will receive an Award and has discretion to determine the amount of the Award, if any. No Award will be paid until all conditions of payment are met. Designation by the Committee as a Participant for an Award in one period shall not confer on a Participant the right to participate in the Plan for any other period.
ARTICLE IV
INCENTIVE AWARDS
Section 4.1 General. Awards may be granted to a Participant in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee. The Committee, at the time an Award is made, shall specify the terms and conditions which govern the Award, which terms and conditions shall prescribe that the Award shall be earned only upon, and to the extent that, Performance Objectives as described in Section 4.2, are satisfied within a designated period. Different terms and conditions may be established by the Committee for different Awards and for different Participants.
Section 4.2 Performance Objectives. The vesting and payment of Awards shall be contingent upon the degree of attainment of such performance goals (the “Performance Objectives”) over such period (the “Performance Period”) as shall be specified by the Committee at the time the Award is granted, and the other conditions to payment described in Section 4.3 below. The Performance Objectives may be stated with respect to one or any combination of the following measures, or such other measures as determined by the Committee, based on the Company, a Subsidiary, or an operating unit: cash flow; free cash flow; earnings (including gross
margin, earnings before interest and taxes, earnings before taxes, earnings before interest, taxes, depreciation, amortization and charges for stock-based compensation, earnings before interest, taxes, depreciation and amortization, adjusted earnings before interest, taxes, depreciation and amortization and net earnings); earnings per share; growth in earnings or earnings per share; book value growth; stock price; return on equity or average stockholder equity; total stockholder return or growth in total stockholder return either directly or in relation to a comparative group; return on capital; return on assets or net assets; revenue, growth in revenue or return on sales; sales; expense reduction or expense control; expense to revenue ratio; income, net income or adjusted net income; operating income, net operating income, adjusted operating income or net operating income after tax; operating profit or net operating profit; operating margin; gross profit margin; return on operating revenue or return on operating profit; regulatory filings; regulatory approvals, litigation and regulatory resolution goals; other operational, regulatory or departmental objectives; budget comparisons; growth in stockholder value relative to established indexes, or another peer group or peer group index; development and implementation of strategic plans and/or organizational restructuring goals; development and implementation of risk and crisis management programs; workforce diversity, equity and inclusion goals; compliance requirements and compliance relief; safety goals; productivity goals; talent or people goals; workforce management and succession planning goals; economic value added (including typical adjustments consistently applied from generally accepted accounting principles required to determine economic value added performance measures); measures of customer or employee satisfaction or engagement; development or marketing collaborations, formations of joint ventures or partnerships or the completion of other similar transactions intended to enhance the Company’s performance; merger and acquisitions; strategic goals or objectives (including objectives related to qualitative or quantitative environmental, social or governance matters); and other similar criteria as determined by the Committee. Performance Objectives applicable to an Award shall be determined by the Committee, and may be established on an absolute or relative basis and may be established on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries or business segments. Relative performance may be measured against a group of peer companies, a financial market index or other objective and quantifiable indices. Without limiting the Committee’s authority hereunder, the Committee may make adjustments in the terms and conditions of, the criteria included in, and the performance results applicable to, Awards in recognition of extraordinary, unusual or nonrecurring events affecting the Company or the financial statements of the Company, changes in applicable laws, regulations, or accounting principles, or such other items or events, whenever the Committee determines, in its sole discretion, that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
Section 4.3 Payment of Awards. Awards shall be made to Participants in a single lump sum in cash at a time determined by the Committee, but in no event later than two and one-half months after the end of the fiscal year in which the Performance Period ends. The Participant must be employed in good standing, and not have given notice of resignation to the Company or any Subsidiary or received notice of termination by the Company or
any Subsidiary, for any reason, and not be under investigation for misconduct on the Award payment date to receive payment of an Award hereunder. The actual amount of payment under an Award will be calculated by applying the degree of attainment of Performance Objectives. The Committee shall have sole discretion to determine whether and to what extent the Performance Objectives have been attained and the amount of the Award, if any, to be paid.
ARTICLE V
ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have all of the powers necessary to enable it to properly carry out its duties under the Plan. Not in limitation of the foregoing, the Committee shall have the full power and discretionary authority to construe and interpret the Plan, to prescribe, amend and rescind any rules, forms or procedures as the Committee deems necessary or appropriate for the proper administration of the Plan, and to make any other determinations and take such other actions as the Committee deems necessary or advisable in carrying out its duties under the Plan. The Committee shall have such other and further specified duties, powers, authority, and discretion as are elsewhere in the Plan either expressly or by necessary implication conferred upon it. Any action required of the Committee under the Plan shall be made in the Committee’s sole discretion and not in a fiduciary capacity. The Committee may appoint such agents, who need not be members of the Committee, as it may deem necessary for the effective performance of its duties, and may delegate to such agents such powers and duties as the Committee may deem expedient or appropriate that are not inconsistent with the intent of the Plan to the fullest extent permitted under applicable law. The decision of the Committee or any agent of the Committee upon all matters within the scope of its authority shall be final and conclusive on all persons. All Awards shall be awarded conditional upon the Participant’s acknowledgement, by participating in the Plan, that all decisions and determinations of the Committee shall be final and binding on the Participant, his or her beneficiaries and any other person having or claiming an interest in such Award.
ARTICLE VI
AMENDMENT AND TERMINATION
Section 6.1 Amendment of Plan. The Company has the right, at any time, to amend in whole or in part any of the terms and provisions of the Plan to the extent permitted by law for whatever reason(s) the Company may deem appropriate.
Section 6.2 Termination of Plan. The Company expressly reserves the right, at any time, to suspend or terminate the Plan in whole or in part to the extent permitted by law for whatever reason(s) the Company may deem appropriate, including, without limitation, suspension or termination as to any Subsidiary, Employee, or class of Employees.
Section 6.3 Procedure for Amendment or Termination. Any amendment to the Plan or termination of the Plan shall be made by the Company by resolution of the Committee and shall not require the approval or consent of any Subsidiary or Participant to be effective to the extent permitted by law. Any amendment to the Plan or termination of the Plan may be retroactive to the extent not prohibited by applicable law.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Rights of Employees. Status as an eligible Employee shall not be construed as a commitment that any Award will be made under the Plan to such eligible Employee or to eligible Employees generally. Nothing contained in the Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Employee any right to continue in the employ or service of the Company or any Subsidiary or constitute any contract or limit in any way the right of the Company to change such person’s compensation or other benefits or to terminate the employment or service of such person with or without cause.
Section 7.2 Unfunded Status. The Plan shall be unfunded. Neither the Company, any Subsidiary, the Committee, nor the Board shall be required to segregate any assets that may at any time be represented by Awards made pursuant to the Plan. Neither the Company, any Subsidiary, the Committee, nor the Board shall be deemed to be a trustee of any amounts to be paid under the Plan.
Section 7.3 Limits on Liability. Any liability of the Company or any Subsidiary to any Participant with respect to an Award shall be based solely upon contractual obligations created by the Plan. Neither the Company nor any Subsidiary nor any member of the Board or the Committee, nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration, or application of the Plan, shall have any liability to any party for any action taken or not taken in good faith under the Plan. To the extent permitted by applicable law, the Company shall indemnify and hold harmless each member of the Board and the Committee from and against any and all liability, claims, demands, costs, and expenses (including the costs and expenses of attorneys incurred in connection with the investigation or defense of claims) in any manner connected with or arising out of any actions or inactions in connection with the administration of the Plan except for such actions or inactions which are not in good faith or which constitute willful misconduct.
Section 7.4 Code Section 409A. The Plan is intended to meet the short-term deferral exception under Code Section 409A such that payments made to Participants under the Plan are not deferred compensation subject to the provisions of Code Section 409A. If and to the extent that any payment under this Plan is deemed to be deferred compensation subject to the provisions of Code Section 409A, this Plan shall be administered so that such payments are made in accordance with the requirements of Code Section 409A, including the requirement that
any Award that is to be paid to a key employee (as defined below for this purpose) upon “separation from service” (within the meaning of such terms under Code Section 409A) shall be administered so that payment shall be postponed for six months following the date of the Participant’s separation from service, if required by Code Section 409A. If payment is delayed pursuant to Code Section 409A, the payment shall be made within 30 days after the end of the six-month period. If the Participant dies during such six-month period, any postponed payments shall be paid within 90 days of the Participant’s death. The determination of key employees, including the number and identity of persons considered key employees and the identification date, shall be made by the Committee or its delegate each year in accordance with Code Section 416(i) and the “specified employee” requirements of Code Section 409A.
Section 7.5 Withholding. The Company or Subsidiary that employs the Participant shall be entitled to withhold from any payment made under the Plan the full amount of any required federal, state, or local taxes. An Award may be reduced, to the extent permitted by law, in an amount equal to any sum owed by the employee to the Company for loans, credit cards, etc.
Section 7.6 Recoupment. Awards shall be subject to any applicable clawback or recoupment policies and other policies that may be implemented by the Board from time to time.
Section 7.7 Nontransferability of Benefits. A Participant may not assign, pledge or transfer any interest in an Award, nor shall any Award be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee’s process, or any other legal or equitable process available to any creditor of a Participant. Notwithstanding the foregoing, upon the death of a Participant, the Participant’s rights and benefits under the Plan shall pass by will or by the laws of descent and distribution.
Section 7.8 Successors. The Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and each Participant and his or her heirs, executors, administrators and legal representatives.
Section 7.9 Governing Law. To the extent not governed by federal law, the Plan shall be construed in accordance with and governed by the laws of the State of Delaware.
Exhibit 10.24
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 $100,000 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 $25,000, the Compensation Committee Chair receives $20,000, the Nominating and Corporate Governance Chair receives $17,500 and the Finance Committee Chair receives $17,500. The independent Board Chair (or the independent Lead Director in the event the Board Chair is not independent) receives an additional $200,000 annual retainer. Members of the Succession Committee received $5,000 per month of service ($10,000 for the Chair) while such Committee was in service during 2023.
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 $165,000 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 10.31
Executed Version
EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") dated as of October 2, 2022, is between Advance Auto Parts, Inc. ("Advance" or the "Company"), a Delaware corporation, its subsidiaries, predecessors, successors, affiliated corporations, companies and partnerships, and its current and former officers, directors, and agents (collectively, the "Company") and Herman L. Word, Jr. (the "Executive").
The Company and the Executive agree as follows:
1.Position; Term of Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ the Executive, and the Executive agrees to serve the Company, as its Executive Vice President, U.S. Stores and Carquest Independents ("Executive's Position"). The parties intend that the Executive shall continue to so serve in this capacity throughout the Employment Term (as such term is defined below).
The term of Executive's employment by the Company pursuant to this Agreement shall be considered to have commenced on October 2, 2022 ("Commencement Date") and shall end on the day prior to the first anniversary of the Commencement Date, unless sooner terminated under the provisions of Paragraph 4 below ("Employment Term"); provided, however, that commencing on the first anniversary of the Commencement Date ("Anniversary Date") the Employment Term shall be automatically extended for an additional period of one year unless, not later than 90 days prior to the Anniversary Date, either party shall have given notice to the other that it does not wish to extend the Employment Term (a "Non-Renewal"), in which case the Employment Term shall end on the day prior to the Anniversary Date; and on each Anniversary Date thereafter the Employment Term shall be automatically extended for an additional period of one year unless, not later than 90 days prior to such Anniversary Date, either party shall have given notice of a Non Renewal to the other, in which case the Employment Term shall end 90 days following such notice. For purposes of clarification, the provision of an Employment Term does not change Executive's at will status as stated in Section 4(1) below nor does it entitle Executive to payment of any compensation if Executive's employment is terminated during the Employment Term, other than as specifically provided for below.
2.Duties.
(a)Duties and Responsibilities; Location. The Executive shall have such duties and responsibilities of the Executive's Position and such other duties and responsibilities that are reasonably consistent with the Executive's Position as the Company may request from time to time and Executive shall perform such duties and carry out such responsibilities to the best of the Executive's ability for the purpose of advancing the business of the Company and its subsidiaries, if any (jointly and severally, "Related Entities"). The Executive shall observe and conform to the applicable policies and directives promulgated from time to time by the Company and its Board of Directors or by any superior officer(s) of the Company. Subject to the provisions of Subsection 2(b) below, the Executive shall devote the Executive's full time, skill and attention during normal business hours to the business and affairs of the Company and its Related Entities, except for holidays and vacations consistent with applicable
Company policy and except for illness or incapacity. The services to be performed by the Executive hereunder may be changed from time to time at the discretion of the Company. The Company shall retain full direction and control of the means and methods by which the Executive performs the Executive's services and of the place or places at which such services are to be rendered. Effective on the Commencement Date, the Executive's principal office location shall be the Company's offices located in Raleigh, North Carolina. Executive understands that, while Executive's principal office is located in North Carolina, the Executive's Position will entail involvement with the entire range of the Company's operations across the United States and Canada and may from time to time require travel throughout the United States and Canada.
(b)Other Activities. During the Term of this Agreement, it shall not be a violation of this Agreement for the Executive to, and the Executive shall be entitled to (i) serve on corporate, civic, charitable, retail industry association or professional association boards or committees within the limitations of the Company's Guidelines on Significant Governance Issues, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions and (iii) manage personal investments, so long as the activities set forth in (i), (ii), and (iii) above (x) do not significantly interfere with the performance of the Executive's duties and responsibilities as required by this Agreement and do not involve a conflict of interest with the Executive's duties or responsibilities hereunder, (y) are in compliance with the Company's policies and procedures in effect from time to time, including the Code of Ethics & Business Conduct and the Guidelines on Significant Governance Issues, in each case as may be amended periodically, and (z) do not violate Section 18 of this Agreement.
3.Compensation.
(a)Base Salary. During the Employment Term, the Company shall pay to the Executive a salary of $575,000 per annum, payable consistent with the Company's standard payroll practices then in effect ("Base Salary"). Such Base Salary shall be reviewed by the Compensation Committee of Advance's Board of Directors (hereinafter the "Compensation Committee") at least annually, with any changes taking into account, among other factors, Company and individual performance.
(b)Bonus. The Executive shall be eligible to receive a bonus in such amounts and based upon achievement of such corporate and/or individual performance and other criteria as shall be approved by the Compensation Committee from time to time, with a target amount, if such performance and other criteria are achieved, of eighty-five percent (85%) of the Base Salary (the "Target Bonus Amount"), which bonus shall be paid in a manner consistent with the Company's bonus practices then in effect. The Target Bonus Amount and the maximum payout for any subsequent renewal Term of the Agreement shall be determined by the Compensation Committee. To be eligible to receive a bonus, the Executive must be employed by the Company on the date the bonus is paid.
(c)Incentive Compensation Clawback. Any compensation provided by the Company to the Executive, excepting only compensation pursuant to Section 3(a) above, shall be subject to the Company's Incentive Compensation Clawback Policy as such policy shall be adopted, and from time to time amended, by the Board or the Compensation Committee.
(d)Benefit Plans. During the Employment Term, the Executive shall be eligible to participate in all retirement and employment benefit plans and programs of the Company that are generally available to senior executives of the Company. Executive may also receive long term incentive grants pursuant to the Company's long-term incentive program(s). Such participation shall be pursuant to the terms and conditions of such plans and programs, as the same shall be amended from time to time.
(e)Business Expenses. During the Employment Term, the Company shall, in accordance with policies then in effect with respect to payments of business expenses, pay or reimburse the Executive for all reasonable out-of-pocket travel and other expenses (other than ordinary commuting expenses) incurred by the Executive in performing services hereunder; provided, however, that, with respect to reimbursements, if any, not otherwise excludible from the Executive's gross income, to the extent required to comply with the provisions of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), no reimbursement of expenses incurred by the Executive during any taxable year shall be made after the last day of the following taxable year, and the right to reimbursement of such expenses shall not be subject to liquidation or exchange for another benefit. All such expenses shall be accounted for in such reasonable detail as the Company may require.
4.Termination of Employment.
(a)Death. In the event of the death of the Executive during the Employment Term, the Executive's employment shall be automatically terminated as of the date of death and a lump sum amount, equivalent to the Executive's annual Base Salary and Target Bonus Amount then in effect, shall be paid, within 60 days after the date of the Executive's death, to the Executive's designated beneficiary, or to the Executive's estate or other legal representative if no beneficiary was designated at the time of the Executive's death. In the event of the death of the Executive during the Employment Term, the restrictions and deferral limitations applicable to any Option, Stock Appreciation Right ("SAR"), Restricted Stock, Restricted Stock Unit, Performance Share, Performance Unit, Deferred Stock Unit, Dividend Equivalent or any Stock Grant Awards (collectively "Awards"), as such Awards are defined in the Advance Auto Parts 2014 Long-Term Incentive Plan, as amended, effective August 7, 2018 ("2014 LTIP" or "Advance's 2014 LTIP") (or any applicable successor or predecessor plan of the Company), granted to the Executive shall be subject to the provisions regarding vesting and transferability in those circumstances as are set forth in the applicable award agreement or grant. The foregoing benefit will be provided in addition to any death, disability or other benefits provided under the Company's benefit plans and programs in which the Executive was participating at the time of Executive's death. Except in accordance with the terms of the Company's benefit programs and other plans and programs then in effect, after the date of the Executive's death, the Executive shall not be entitled to any other compensation or benefits from the Company or hereunder.
(b)Disability. In the event of the Executive's Disability as hereinafter defined, the employment of the Executive may be terminated by the Company, effective upon the Disability Termination Date (as defined below). In such event, the Company shall pay the Executive an amount equivalent to thirty percent (30%) of the Executive's Base Salary for a one year period, which amount shall be paid in one lump sum within 45 days following the Executive's "separation from service," as that term is defined in Section 409A of the Code and regulations promulgated thereunder, from the Company (his "Separation From Service"),
provided that the Executive or an individual duly authorized to execute legal documents on the Executive's behalf executes and does not revoke within any applicable revocation period the release described in Section 4(j)(ii). The foregoing benefit will be provided in addition to any disability or other benefits provided under the Company's benefit plans in which the Executive participates. For the avoidance of doubt, participation by the Executive in the Company's long-term and/or short-term disability insurance benefit plans is voluntary on the part of the Executive and is made available by the Company at the sole cost of the Executive. The purpose and intent of the preceding three sentences is to ensure that the Executive receives a combination of insurance benefits and Company payments following the Disability Termination Date equal to 100% of Executive's then-applicable Base Salary for such one-year period. In the event that Executive does not elect to participate in the Company's long-term and/or short-term disability insurance benefit plans, the Company shall not be obligated to pay the Executive any amount in excess of thirty percent (30%) of the Executive's Base Salary. In the event of the Disability of the Executive during the Employment Term, the restrictions and deferral limitations applicable to any Option, SAR, Restricted Stock, Restricted Stock Unit, Performance Unit, Deferred Stock Unit, Dividend Equivalent or any Stock Grant Awards (collectively "Awards"), as such Awards are defined in the 2014 LTIP (or any applicable successor or predecessor plan of the Company), granted to the Executive shall be subject to the provisions regarding vesting and transferability in those circumstances as are set forth in the applicable award agreement or grant. The Company shall also pay to the Executive a lump sum amount equivalent to the Executive's Target Bonus Amount then in effect, which amount shall be paid in one lump sum within 45 days following the Executive's Separation from Service, provided that the Executive or an individual duly authorized to execute legal documents on the Executive's behalf executes and does not revoke within any applicable revocation period the release described in Section 4(i)(ii). Otherwise, after the Disability Termination Date, except in accordance with the Company's benefit programs and other plans then in effect, the Executive shall not be entitled to any compensation or benefits from the Company or hereunder.
"Disability," for purposes of this Agreement, shall mean the Executive's incapacity due to physical or mental illness causing the Executive's complete and full-time absence from the Executive's duties, as defined in Paragraph 2, for either a consecutive period of more than six months or at least 180 days within any 270-day period. The "Disability Termination Date" shall be the date on which the Company makes such determination of the Executive's Disability.
(c)Termination by the Company for Due Cause. Nothing herein shall prevent the Company from terminating the Executive's employment at any time for "Due Cause" (as hereinafter defined). The Executive shall continue to receive the Base Salary provided for in this Agreement only through the period ending with the date of such termination. Any rights and benefits the Executive may have under employee benefit plans and programs of the Company shall be determined in accordance with the terms of such plans and programs. Except as provided in the two immediately preceding sentences, after termination of employment for Due Cause, the Executive shall not be entitled to any compensation or benefits from the Company or hereunder.
For purposes of this Agreement, "Due Cause" shall mean:
(i) a material breach by the Executive of the Executive's duties and obligations under this Agreement or violation in any material respect of any code or standard of conduct generally applicable to the officers of the Company, including, but not limited to, the Company's Code of Ethics and Business Conduct, which, if curable, has not been cured by the Executive within 15 business days after the Executive's receipt of notice to the Executive specifying the nature of such breach or violations;
(ii) a material violation by the Executive of the Executive's Loyalty Obligations as provided in Paragraph 18;
(iii) the commission by the Executive or indictment for a crime of moral turpitude or a felony involving fraud, breach of trust, or misappropriation;
(iv) the Executive's willfully engaging in bad faith conduct that is demonstrably and materially injurious to the Company, monetarily or otherwise; or
(v) a determination by the Company that the Executive is in violation of the Company's Substance Abuse Policy.
(d)Termination by the Company Other than for Due Cause, Death or Disability. The foregoing notwithstanding, the Company may terminate the Executive's employment for any or no reason, as it may deem appropriate in its sole discretion and judgment; provided, however, that in the event such termination is not due to Death, Disability or Due Cause, the Executive shall (i) be entitled to a Termination Payment as hereinafter defined and (ii) be sent written notice stating the termination is not due to Death, Disability or Due Cause. In the event of such termination by the Company, the Executive shall receive certain payments and benefits as set forth in this Subsection 4(d).
(i) Termination Payment. If the Company terminates the Executive's employment for other than Death, Disability or Due Cause prior to the expiration of the Employment Term, the term "Termination Payment" shall mean a cash payment equal to the sum of:
(A) an amount equal to the Executive's annual Base Salary, as in effect immediately prior to such termination (unless the termination is in connection with an action that would have enabled the Executive to terminate Executive's employment for Good Reason pursuant to Section 4(e)(i)(A), in which case, it shall be the Base Salary in effect prior to any such material diminution of the Base Salary) (the "Termination Salary Payment"), and
(B) an amount equal to the average value of the annual bonuses pursuant to Section 3(b) paid to Executive for the three completed fiscal years immediately prior to the date of such termination; provided, however, that if Executive has been employed by the Company for fewer than three complete fiscal years prior to the date of such termination, Executive shall receive an amount equal to the average value of the annual bonuses pursuant to Section
3(b) that the Executive has received during the period of the Executive's employment.
(ii) Outplacement Services. The Company shall make outplacement services available to the Executive, at a cost to the Company not to exceed $12,000, for a period of time not to exceed 12 months following the date of termination pursuant to the Company's Executive outplacement program with the Company's selected vendor, to include consulting, search support and administrative services.
(iii) Medical Coverage. In addition, the Company shall provide the Executive with medical, dental and vision insurance benefits (which may also cover, if applicable, the Executive's spouse and eligible dependents) for three hundred sixty-five (365) days from the date of the Executive's termination of employment or until such time as the Executive is eligible for group health coverage under another employer's plan, whichever occurs first. In order to trigger the Company's obligation to provide health care continuation benefits, the Executive must elect continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), upon such eligibility. The Company's obligation shall be satisfied solely through the payment of the Executive's COBRA premiums during the 365-day period, but only to the extent that such premiums exceed the amount that would otherwise have been payable by the Executive for coverage of the Executive and the Executive's eligible dependents that were covered by the Company's medical, dental, and vision insurance programs at the time of the Executive's termination of employment had the Executive continued to be employed by the Company.
(iv) Timing of Payments. The Termination Salary Payment and Termination Bonus Payment shall be paid in one lump sum within 45 days following the date of the Executive's Separation From Service, provided that the Executive executes and does not revoke within any applicable revocation period the release described in Section 4(i)(ii) below.
(v) Entire Obligation. Except as provided in Subsection 4(i) of this Agreement, following the Executive's termination of employment under this Subsection 4(d), the Executive will have no further obligation to the Company pursuant to this Agreement (other than under Sections 4(i) and 18 (to the extent such policies, guidelines and codes by their terms apply post-employment)). Except for the Termination Payment and as otherwise provided in accordance with the terms of the Company's benefit programs and plans then in effect or as expressly required under applicable law, after termination by the Company of employment for other than Death, Disability or Due Cause, the Executive shall not be entitled to any other compensation or benefits from the Company or hereunder.
(e)Resignation from Employment by the Executive for Good Reason. Termination by the Company without Due Cause under Subsection 4(d) shall be deemed to have occurred if the Executive elects to resign from employment for Good Reason.
(i) Good Reason. For purposes of this Agreement, "Good Reason" shall mean:
(A)a material diminution in the Executive's "Total Direct Compensation," which shall mean the value of the total of the Executive's Base Salary, Target Bonus opportunity, and annual equity award taken together;
(B)a material diminution in the Executive's authority, duties, or responsibilities (provided that a future transfer of oversight for the Independent business to someone other than the Executive, or a future reduction or discontinuation of the Independent business, shall not be a material diminution of the Executive's authority, duties or responsibilities);
(C)the Company's requiring the Executive to be based more than 60 miles from the Company's office in Raleigh, North Carolina;
(D)delivery by the Company of a notice of Non-Renewal; or
(E)any other action or inaction that constitutes a material breach by the Company of the terms of this Agreement.
(ii) Notice of Good Reason Condition. In order to be considered a resignation for Good Reason for purposes of this Agreement, the Executive must provide the Company with written notice and description of the existence of the Good Reason condition within 60 days of the initial discovery by the Executive of the existence of said Good Reason condition and the Company shall have 30 business days to cure such Good Reason condition.
(iii) Effective Date of Resignation. The effective date of the Executive's resignation for Good Reason must occur no longer than six (6) months following the expiration of the cure period set forth in Section 4(e)(ii), above. If Executive has not resigned for Good Reason effective within six (6) months following the expiration of the cure period set forth in Section 4(e)(ii), above, the Executive shall be deemed to have waived said Good Reason condition.
(f)Termination by the Company Other Than For Due Cause, Death or Disability or Resignation from Employment for Good Reason Within Twelve Months After a Change in Control. If the Company terminates the Executive's employment for other than Death, Disability or Due Cause prior to the expiration of the Employment Term and within twelve (12) months after a Change In Control (as defined below), or if the Executive elects to terminate the Executive's employment for Good Reason prior to the expiration of the Employment Term and within twelve (12) months after a Change In Control, then (i) the Executive shall be entitled to a Change In Control Termination Payment as hereinafter defined in lieu of the Termination Payment set forth in Subsection 4(d)(i) above, (ii) the Executive shall receive benefits as defined in Subsections 4(d)(ii) and (iii) above, and (iii) either the Company or the Executive, as the case may be, shall provide Notice of Termination pursuant to Subsection 4U)(i) other than in the case of a Non-Renewal, which shall be communicated in accordance with Section 1.
(i) Change In Control Termination Payment. The term "Change In Control Termination Payment" shall mean a cash payment equal to the sum of:
(A) an amount equal to two times the Executive's annual Base Salary, as in effect immediately prior to such termination (unless the termination is due to Section 4(e)(i)(A), in which case, it shall be two times the Executive's annual Base Salary in effect prior to any such material diminution of the Base Salary) (the "Change In Control Termination Salary Payment"), and
(B) an amount equal to two times the Executive's Target Bonus Amount, as in effect immediately prior to such termination (unless the termination is due to Sections 4(e)(i)(A) or (E), in which case, it shall be two times the Executive's Target Bonus Amount in effect prior to any such material diminution of the Target Bonus Amount or termination of the bonus plan, respectively) (the "Change In Control Termination Bonus Payment").
(ii) Timing of Payments. The Change In Control Termination Salary Payment and the Change In Control Termination Bonus Payment shall be paid in lump sum payments within 45 days following the date of the Executive's Separation From Service, provided that the Executive executes and does not revoke within any applicable revocation period the release described in Section 4G)(ii) below.
(iii) Entire Obligation. Except as provided in Subsection 4(i) of this Agreement, following the Executive's termination of employment under this Subsection 4(f), the Executive will have no further obligation to the Company pursuant to this Agreement (other than under Sections 4(i) and 18 (to the extent such policies, guidelines and codes by their terms apply post-employment)). Except for the Change In Control Termination Payment and as otherwise provided in accordance with the terms of the Company's benefit programs and plans then in effect or as expressly required under applicable law, within twelve (12) months after a Change In Control, after termination by the Company of employment for other than Death, Disability or Due Cause or after termination by the Executive for Good Reason, the Executive shall not be entitled to any other compensation or benefits from the Company or hereunder.
(iv) Change In Control. For purposes of this Agreement, "Change In Control" shall mean the occurrence of any of the following events:
(A)a Transaction, as defined below, unless securities possessing more than 50% of the total combined voting power of the survivor's or acquiror's outstanding securities (or the securities of any parent thereof) are held by a person or persons who held securities possessing more than 50% of the total combined voting power of the Company's outstanding securities immediately prior to that transaction, or
(B)any person or group of persons (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended and in effect from time to time) directly or indirectly acquires, including but not limited to
by means of a merger or consolidation, beneficial ownership (determined pursuant to Securities and Exchange Commission Rule 13d-3 promulgated under the said Exchange Act) of securities possessing more than 25% of the total combined voting power of the Company's outstanding securities unless pursuant to a tender or exchange offer made directly to the Company's stockholders that the Board recommends such stockholders accept, other than (i) the Company or any of its Affiliates, (ii) an employee benefit plan of the Company or any of its Affiliates, (iii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, or (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or
(C)over a period of thirty-six (36) consecutive months or less, there is a change in the composition of the Board such that a majority of the Board members (rounded up to the next whole number, if a fraction) ceases, by reason of one or more proxy contests for the election of Board members, to be composed of individuals who either (i) have been Board members continuously since the beginning of that period, or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in the preceding clause (i) who were still in office at the time that election or nomination was approved by the Board.
For purposes of Section 4(t)(iv)(A), "Transaction" means (1) consummation of any merger or consolidation of the Company with or into another entity as a result of which the Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property or is cancelled, (2) any sale or exchange of all of the Stock of the Company for cash, securities or other property, (3) any sale, transfer, or other disposition of all or substantially all of the Company's assets to one or more other persons in a single transaction or series of related transactions or (4) any liquidation or dissolution of the Company.
(v) RC 280G "Net-Best". Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (A) any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of Executive (whether pursuant to the terms of this Agreement or otherwise) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code (the "Excise Tax"), and (B) the reduction of the amounts payable to Executive to the maximum amount that could be paid to Executive without giving rise to the Excise Tax (the "Safe Harbor Cap") would provide Executive with a greater after tax amount than if such amounts were not reduced, then the amounts payable to Executive shall be reduced (but not below zero) to the Safe Harbor Cap. If the reduction of the amounts payable would not result in a greater after tax result to Executive, no amounts payable under this Agreement shall be reduced pursuant to this provision.
(A)Reduction of Payments. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first cash amounts payable under this Agreement (in contrast to benefit amounts), and applying any reduction to amounts payable in the following order: (A) first, any cash amounts payable to Executive as a Termination Payment or Change in Control Termination Payment under this Agreement, as applicable; (B) second, any cash amounts payable by Company for Outplacement Services on behalf of Executive under the terms of this Agreement; (C) third, any amounts payable by Company on behalf of Executive under the terms of this Agreement for continued Medical Coverage; (D) fourth, any other cash amounts payable by Company to or on behalf of Executive under the terms of this Agreement: (E) fifth, outstanding performance-based equity grants to the extent that any such grants would be subject to the Excise Tax; and (F) finally, any time-vesting equity grants to the extent that any such grants would be subject to the Excise Tax.
(B)Determinations by Accounting Firm. All determinations required to be made under this Section 4(f)(v) shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from the Company or Executive that there has been a Payment, or such earlier time as is requested by the Company. Notwithstanding the foregoing, in the event (A) the Board shall determine prior to the Change in Control that the Accounting Finn is precluded from performing such services under applicable auditor independence rules or (B) the Audit Committee of the Board determines that it does not want the Accounting Firm to perform such services because of auditor independence concerns or (C) the Accounting Firm is serving as accountant or auditor for the person(s) effecting the Change in Control, the Board shall appoint another nationally recognized public accounting firm reasonably acceptable to Executive to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees, costs and expenses (including, but not limited to, the costs of retaining experts) of the Accounting Firm shall be borne by the Company. If Payments are reduced to the Safe Harbor Cap or the Accounting Firm determines that no Excise Tax is payable by Executive without a reduction in Payments, the Accounting Firm shall provide a written opinion to Executive to the effect that the Executive is not required to report any Excise Tax on the Executive's federal income tax return, and that the failure to report the Excise Tax, if any, on Executive's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The determination by the Accounting Firm shall be binding upon the Company and Executive (except as provided in paragraph 4(f)(v)(C) below).
(C)Excess Payment/Underpayment. If it is established pursuant to a final determination of a court or an Internal Revenue Service (the "IRS") proceeding which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Executive, which are in
excess of the limitations provided in this Section (referred to hereinafter as an "Excess Payment"), Executive shall repay the Excess Payment to the Company on demand, together with interest on the Excess Payment at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of Executive's receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the determination, it is possible that Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made under this Section. In the event that it is determined (i) by the Accounting Firm, the Company (which shall include the position taken by the Company, or together with its consolidated group, on its federal income tax return) or the IRS or (ii) pursuant to a determination by a court, that an Underpayment has occurred, the Company shall pay an amount equal to such Underpayment to Executive within ten (10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Executive until the date of payment. Executive shall cooperate, to the extent the Executive's reasonable expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the IRS in connection with the Excise Tax or the determination of the Excess Payment. Notwithstanding the foregoing, in the event that amounts payable under this Agreement were reduced pursuant to paragraph 4(f)(v)(A) and the value of stock options is subsequently re-determined by the Accounting Firm within the context of Treasury Regulation §1.280G-1 QIA 33 that reduces the value of the Payments attributable to such options, the Company shall promptly pay to Executive any amounts payable under this Agreement that were not previously paid solely as a result of paragraph 4(f)(v)(A) up to the Safe Harbor Cap.
(g)Voluntarv Termination Without Good Reason. In the event that the Executive terminates the Executive's employment at the Executive's own volition prior to the expiration of the Employment Term (except as provided in Subsection 4(e) above), such termination shall constitute a "Voluntary Termination" and in such event the Executive shall be limited to the same rights and benefits as provided in connection with a termination for Due Cause under Subsection 4(c) above.
(h)Compliance With Code Section 409A. Notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and operated so that the payment of the benefits set forth herein shall either be exempt from the requirements of Section 409A of the Code or shall comply with the requirements of such provision; provided however that in no event shall the Company be liable to the Executive for or with respect to any taxes, penalties or interest which may be imposed upon the Executive pursuant to Section 409A. To the extent that any amount payable pursuant to Subsections 4(b), (d)(i), (d)(iii) or (f) constitutes a "deferral of compensation" subject to Section 409A (a "409A Payment"), then, if on the date of the Executive's "separation from service," as such term is defined in Treas. Reg. Section l.409A-l(h)(l), from the Company (his "Separation from Service"), the Executive is a "specified employee," as such term is defined in Treas. Reg. Section 1.409-1(i), as determined from time to time by the Company, then such 409A Payment shall not be made to the Executive earlier than the earlier of (i) six (6) months after the Executive's
Separation from Service; or (ii) the date of Executive's death. The 409A Payments under this Agreement that would otherwise be made during such period shall be aggregated and paid in one lump sum, without interest, on the first business day following the end of the six (6) month period or following the date of the Executive's death, whichever is earlier, and the balance of the 409A Payments, if any, shall be paid in accordance with the applicable payment schedule provided in this Section 4. To the extent any 409A Payment is conditioned on the Executive (or Executive's legal representative) executing a release of claims, which 409A Payment would be made in a later taxable year of the Executive than the taxable year in which Executive's Separation from Service occurs if such release were executed and delivered and became irrevocable at the last possible date allowed under this Agreement, such 409A Payment will be paid no earlier than such later taxable year. In applying Section 409A to compensation paid pursuant to this Agreement, any right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments. The Executive hereby acknowledges that Executive has been advised to seek and has sought the advice of a tax advisor with respect to the tax consequences to the Executive of all payments pursuant to this Agreement, including any adverse tax consequences or penalty taxes under Code Section 409A and applicable State tax law. Executive hereby agrees to bear the entire risk of any such adverse federal and State tax consequences and penalty taxes in the event any payment pursuant to this Agreement is deemed to be subject to Code Section 409A, and that no representations have been made to the Executive relating to the tax treatment of any payment pursuant to this Agreement under Code Section 409A and the corresponding provisions of any applicable State income tax laws.
(i)Cooperation. During the term of the Executive's employment by the Company and following the termination of the Executive's employment with the Company, the Executive agrees to be reasonably available to assist the Company and its representatives and agents with any business and/or litigation (or potential litigation) matters affecting or involving the Company. The Company will reimburse the Executive for all associated reasonable costs of travel.
(ii)Notice of Termination, Resignation and Release. Any termination under Subsection 4(b) by the Company for Disability or Subsection 4(c) for Due Cause or by the Executive for Good Reason under Subsection 4(e) or by the Company or the Executive within twelve (12) months after a Change in Control under Subsection 4(f) or by the Executive by Voluntary Termination under Subsection 4(g) shall be communicated by Notice of Termination to the other party thereto given in accordance with Paragraph 10.
(i) Notice of Termination. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the termination date is other than the date of receipt of such Notice, specifies the termination date (which date shall not be prior to the date of such notice or more than 15 days after the giving of such Notice).
(ii) Resignation and Release. Notwithstanding anything in this Agreement to the contrary, unless the Company provides otherwise, upon termination of employment for any reason, Executive shall be deemed to have resigned as a
member of the Board of Directors of the Company, if applicable, and as an officer, director, manager and employee of the Company and its Related Entities and shall execute any documents and take any actions to effect the foregoing as requested by the Company. In order to be eligible to receive any payments or benefits hereunder as a result of the termination of the Executive's employment, in addition to fulfilling all other conditions precedent to such receipt, the Executive or the Executive's legal representative must within 21 days (or such other period as required under applicable law) after presentation of a release in form and substance reasonably satisfactory to the Company and its legal counsel, execute said release, and within 7 days (or such other period as required under applicable law) after such execution not revoke said release, on behalf of the Executive and the Executive's estate, heirs and representatives, releasing the Company, its Related Entities and each of the Company's and such Related Entities' respective officers, directors, employees, members, managers, agents, independent contractors, representatives, shareholders, successors and assigns (all of which persons and entities shall be third party beneficiaries of such release with full power to enforce the provisions thereof) from any and all claims related to the Executive's employment with the Company; termination of the Executive's employment; all matters alleged or which could have been alleged in a charge or complaint against the Company; any and all injuries, losses or damages to Executive, including any claims for attorney's fees; any and all claims relating to the conduct of any employee, servant, officer, director or agent of the Company; and any and all matters, transactions or things occurring prior to the date of said release, including any and all possible claims, known or unknown, which could have been asserted against the Company or the Company's employees, agents, servants, officers or directors. Notwithstanding the foregoing, the form of release shall except out therefrom, and acknowledge the Executive's continuing rights with respect to, the following: (i) all vested rights that the Executive may have under all welfare, retirement and other plans and programs of the Company in which the Executive was participating at the time of Executive's employment termination, including all equity plans and programs of the Company with respect to which equity awards were made to the Executive, (ii) all continuing rights that the Executive may have under this Agreement, (iii) all rights that the Executive may have following the termination of Executive's employment under the Company's Certificate of Incorporation and Bylaws, any applicable Company insurance and any indemnity agreements to which the Executive is a party which provide for indemnification, insurance or other, similar coverage for the Executive with respect to Executive's actions or inactions as an officer, employee and/or member of the Board, and (iv) claims which by law cannot be waived by signing this Agreement. For clarification, unless and until the Executive executes and does not, within any applicable revocation period, revoke the release, the Company shall have no obligation to make any Termination Payment to the Executive, and, even if the Executive does not execute the release, the Executive shall be bound by the post-termination provisions of this Agreement, including without limitation Section 18.
(k) Earned and Accrued Payments. The foregoing notwithstanding, upon the termination of the Executive's employment at any time, for any reason, the Executive shall be paid all amounts that had already been earned and accrued as of the time of termination, including but not limited to (i) any bonus that had been earned but not yet paid; and (ii) reimbursement for any business expenses accrued in accordance with Subsection 3(e).
(l) Employment at Will. The Company and Executive expressly understand and agree that nothing herein shall be construed as a guarantee of employment for any specific time, nor does it change the at will employment relationship. Either the Company or Executive may terminate the Executive's employment under this Paragraph 4 at will, for any or no reason, subject to compliance with the applicable post-termination obligations of each contained herein.
5.Treatment of Equity Awards Upon Change In Control. In the event of a Change in Control as defined hereinabove, the restrictions and deferral limitations applicable to any Option, Stock Appreciation Right ("SAR"), Restricted Stock, Restricted Stock Unit, Performance Share, Perfom1ance Unit, Deferred Stock Unit, Dividend Equivalent or any Stock Grant Awards (collectively "Awards") as such Awards are defined in the 2014 LTIP (or any applicable successor or predecessor plan of the Company), granted to the Executive shall be subject to such provisions regarding vesting and transferability in those circumstances as are set forth in the applicable award agreement or grant.
6.Successors and Assigns.
(a)Assignment by the Company. This Agreement shall be binding upon and inure to the benefit of the Company or any corporation or other entity to which the Company may transfer all or substantially all of its assets and business and to which the Company may assign this Agreement, in which case the term "Company," as used herein, shall mean such corporation or other entity, provided that no such assignment shall relieve the Company from any obligations hereunder, whether arising prior to or after such assignment.
(b)Assignment by the Executive. The Executive may not assign this Agreement or any part hereof without the prior written consent of the Company: provided, however, that nothing herein shall preclude the Executive from designating one or more beneficiaries to receive any amount that may be payable following occurrence of the Executive's legal incompetency or Death and shall not preclude the legal representative of the Executive's estate from assigning any right hereunder to the person or persons entitled thereto under the Executive's will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to the Executive's estate. The term "beneficiaries," as used in this Agreement, shall mean a beneficiary or beneficiaries so designated to receive any such amount or, if no beneficiary has been so designated, the legal representative of the Executive (in the event of the Executive's incompetency) or the Executive's estate.
7.Governing Law. This Agreement shall be governed by the laws of the State of North Carolina.
8.Entire Agreement. This Agreement, which shall include the Exhibits hereto, contains all of the understandings and representations between the parties hereto pertaining to the matters referred to herein, and supersedes all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto, including without limitation any previous employment, severance or separation agreements (including any severance or change in control benefits contained therein); provided that the obligations set forth in Section 18 of this Agreement are in addition to any similar obligations Executive has
to the Company or its affiliates. This Agreement may only be modified by an instrument in writing signed by both parties hereto.
9.Waiver of Breach. The waiver by any party of a breach of any condition or provision of this Agreement to be performed by such other party shall not operate or be construed to be a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time.
10.Notices. Any notice to be given hereunder shall be in writing and delivered personally, or sent by certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing:
If to the Company:
Advance Auto Parts, Inc.
4200 Six Forks Road
Raleigh, NC 27609
Attn: General Counsel
With a copy to:
Advance Auto Parts, Inc.
4200 Six Forks Road
Raleigh, NC 27609
Attn: Chief Executive Officer
If to the Executive:
Herman L. Word
1033 Linenhall Way
Wake Forest, NC 27587
or Executive's address currently on file in the Company's records if different from the above.
11.Arbitration. Any controversy or claim arising out of or relating to this Agreement, or any breach thereof, excepting only the enforcement of any Loyalty Obligations arising under Paragraph 18 of this Agreement, shall be settled by arbitration in the state of North Carolina in accordance with the Employment Arbitration Rules of the American Arbitration Association then in effect in the State of North Carolina and judgment upon such award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The board of arbitrators shall consist of one arbitrator to be appointed by the Company, one by the Executive, and one by the two arbitrators so chosen. The arbitration shall be held at such place as may be agreed upon at the time by the parties to the arbitration. The cost of arbitration shall be borne as determined by the arbitrators.
12.Withholding. Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive or the Executive's estate or beneficiaries shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. In lieu
of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes and withholdings as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold have been satisfied.
13.Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.
14.Titles. Titles to the paragraphs and subsections in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any paragraph or subsection.
15.Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
16.Amendment. Except as provided in Paragraph 13 above, this Agreement may not be modified or amended except by written instrument signed by all parties hereto.
17.Independent Counsel. The Executive acknowledges that Executive has been represented (or has had the opportunity to be represented) in the signing of this Agreement and in the making of its terms by independent legal counsel, selected of the Executive's own free will, and that the Executive has had the opportunity to discuss this Agreement with counsel. Executive further acknowledges that Executive has read and understands the meaning and ramifications of this Agreement and as evidence of this fact signs this Agreement below. The Executive further acknowledges that the Company has not made any representations or given any advice with respect to the tax or other consequences of this Agreement or any transactions contemplated by this Agreement to Executive and that the Executive has been advised of the importance of seeking independent counsel with respect to such consequences. By executing this Agreement, the Executive represents that the Executive has, after being advised of the potential conflicts between Executive and the Company with respect to the future consequences of this Agreement, either consulted independent legal counsel or elected, notwithstanding the advisability of seeking such independent legal counsel, not to consult with such independent legal counsel.
18.Loyalty Obligations. The Executive agrees that, immediately upon execution of this Agreement, the following obligations ("Loyalty Obligations") shall apply in consideration of the Executive's employment by or continued employment with the Company:
(a) Confidential Information.
(i)Company Information. Except as otherwise provided in Section 18(a)(iii) of this Agreement, the Executive agrees at all times during the term of the Executive's employment and thereafter, to hold any Confidential Information of the Company or its Related Entities in strictest confidence, and not to use (except for the benefit of the Company to fulfill the Executive's employment obligations) or to disclose to any person, firm or corporation other than the Company or those
designated by it said Confidential Information without the prior authorization of the Company, except as may otherwise be required by law or legal process. The Executive agrees that "Confidential Information" means any proprietary information prepared or maintained in any format, including technical data, trade secrets or know-how in which the Company or Related Entities have an interest, including, but not limited to, business records, contracts, research, product or service plans, products, services, customer lists and customers (including, but not limited to, vendors to the Company or Related Entities on whom the Executive called, with whom the Executive dealt or with whom the Executive became acquainted during the term of the Executive's employment), pricing data, costs, markets, expansion plans, summaries, marketing and other business strategies, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration or marketing, financial or other business information obtained by the Executive or disclosed to the Executive by the Company or Related Entities or any other person or entity during the term of the Executive's employment with the Company either directly or indirectly electronically, in writing, orally, by drawings, by observation of services, systems or other aspects of the business of the Company or Related Entities or otherwise. Confidential Information does not include information that: (A) was available to the public prior to the time of disclosure, whether through press releases, SEC filings or otherwise; or (B) otherwise becomes available to the public through no act or omission of the Executive or through the wrongful act of a third party.
(ii)Third Party Information. The Executive recognizes that the Company and Related Entities have received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the part of the Company or Related Entities to maintain the confidentiality of such information and to use it only for certain limited purposes. Except as otherwise provided in Section 18(a)(iii) of this Agreement, the Executive agrees at all times during the Executive's employment and thereafter to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out the Executive's work for the Company consistent with the obligations of the Company or Related Entities with such third party.
(iii)Permitted Disclosure. Nothing in this Agreement shall prohibit or restrict the Executive from lawfully (A) initiating communications directly with, cooperating with, providing information to, causing information to be provided to, or otherwise assisting in an investigation by the Securities and Exchange Commission ("SEC"), the Department of Justice, the Equal Employment Opportunity Commission ("EEOC"), the Congress, or any other governmental or regulatory agency, entity, or official(s) or self-regulatory organization (collectively, "Governmental Authorities") regarding a possible violation of any law, rule, or regulation; (B) responding to any inquiry or legal process directed to you individually (and not directed to the Company and/or its subsidiaries) from any such Governmental Authorities, including an inquiry about the existence of this Agreement or its underlying facts or circumstances; (C) testifying, participating or otherwise assisting in an action or proceeding by any such Governmental Authorities relating to a possible violation of law; or (D) making any other disclosures that are protected under the whistleblower provisions of any
applicable law, rule, or regulation. Additionally, pursuant to the federal Defend Trade Secrets Act of 2016, Executive shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made to Executive's attorney in relation to a lawsuit for retaliation against Executive for reporting a suspected violation of law; or (C) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Nor does this Agreement require Executive to obtain prior authorization from the Company before engaging in any conduct described in this paragraph, or to notify the Company that Executive has engaged in any such conduct.
(b) Conflicting Employment. The Executive agrees that, during the term of the Executive's employment with the Company, the Executive will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company or Related Entities are now involved or become involved during the term of the Executive's employment. Nor will the Executive engage in any other activities that conflict with the business of the Company or Related Entities. Furthermore the Executive agrees to devote such time as may be necessary to fulfill the Executive's obligations to the Company and during the term of the Executive's employment with the Company to refrain from any other occupation, consulting or other business activity without the prior approval or consent of the Company.
(c) Returning Company Property. The Executive agrees that any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items developed by the Executive or others pursuant to or during the Executive's employment with the Company or otherwise shall be the property of the Company or its Related Entities and their respective successors or assigns. Upon separation of employment for any reason, or at any time during employment at the request of the Company, the Executive will deliver all material Company property to the Company or to the Company's designee and will not keep in the Executive's possession, recreate or deliver said property to anyone else. Upon separation of employment for any reason and upon request by the Company, the Executive agrees to sign and deliver the "Termination Certification" attached hereto as Exhibit A. Executive further agrees that at any time during employment or upon separation of employment for any reason, at the request of the Company, to reasonably cooperate with the Company to ensure that Executive does not possess any Company property or information within any mobile device, tablet, PDA, personal laptop, hard drive or thumb drive, personal cloud or email account, or any other personal electronic or data storage device, including providing access to any such devices to a third party forensic vendor for purposes of removing any such property and information, at the cost of the Company and through measures designed to protect Executive's personal information.
(d) Notification of New Employer. In the event that the Executive leaves the employ of the Company, the Executive agrees to notify the Executive's new employer and hereby grants consent to notification by the Company to the Executive's new employer (whether the Executive is employed as an employee, consultant, independent contractor,
director, partner, officer, advisor, Executive, volunteer or manager) about the Executive's Loyalty Obligations specified under this Agreement.
(e) Non-Interference. The Executive covenants and agrees that while the Executive is employed by the Company and for a period of one (1) year immediately following the termination of the Executive's employment with the Company for any reason, the Executive shall not, without the prior written approval of the Company, directly or indirectly, either on behalf of the Executive or any other person or entity, Interfere with the Company or any of its Related Entities.
(i)For purposes of this Agreement, "Interfere" shall mean, except in the performance of the Executive's duties and responsibilities on behalf of and for the benefit of the Company, (A) to solicit, entice, persuade, induce, influence or attempt to influence, directly or indirectly, Customers, suppliers, Employees or Independent Contractors of the Company or any of its Related Entities to restrict, reduce, sever or otherwise alter their relationship with the Company or any of its Related Entities; or (B) to hire or recruit on the Executive's own behalf or on behalf of any other person or entity, directly or indirectly, any Employee or Independent Contractor of the Company who at any time was supervised (1) directly by the Executive or (2) by another person who was supervised directly by the Executive; or (C) whether as a direct solicitor or provider of such services, or in a direct management or direct supervisory capacity over others who solicit or provide such services, to solicit or provide services that fall within the definition of Restricted Activities as defined in Subsection 18(f)(ii) below to any Customer of the Company or its Related Entities. Nothing in this section shall be construed to prohibit the Executive from engaging in non-targeted solicitation of Employees and Independent Contractors of the Company such as advertisements to the general public.
(ii) For purposes of this Agreement, a "Customer" shall mean any person or entity: (a) with which the Executive has engaged in material discussions regarding Restricted Activities at any time within 12 months prior to the end of the Executive's employment; (b) whose business dealings with the Company are or were managed or supervised by the Executive as part of Executive's duties for the Company; or (c) about which the Executive obtained Confidential Information solely as a result of the Executive's employment with the Company. "Customer" also includes a prospective customer with which the Executive has engaged in material discussions regarding Restricted Activities at any time within 12 months prior to the end of the Executive's employment or about which Executive obtained Confidential Information solely as a result of the Executive's employment with the Company. "Employee or Independent Contractor" shall mean any employee or independent contractor who, at the time of the recruitment or hire by the Executive or by anyone the Executive is overseeing, is currently employed or engaged with the Company or who was employed or engaged with the Company at any time during the twelve (12) month period preceding the date of the recruitment or hire by the Executive or by anyone the Executive is overseeing.
(f) Covenants Not to Compete
(i)Non-Competition. The Executive understands that the Company operates across the United States and Canada. The Executive acknowledges that the Executive's duties as Executive Vice President, U.S. Stores and Carquest Independents, will entail involvement with the entire range of the Company's operations across the United States and Canada, and that the Executive's extensive familiarity with the Company's business and Confidential Information justifies a restriction applicable across the entire geographic footprint in which the Company provides services and does business. To the fullest extent permitted by any applicable law, the Executive covenants and agrees that during employment, and for the period of one (1) year immediately following the termination, for any reason, of the Executive's employment with the Company (the "Non-Compete Period"), the Executive will not:
(A)own or hold, directly or beneficially, as a shareholder, option holder, warrant holder, partner, member or other equity or security owner or holder of any company or business that derives more than 15% of its revenue from the Restricted Activities (as defined below) within the Restricted Area (as defined below), or any company or business controlling, controlled by or under common control with any company, business or division directly engaged in such Restricted Activities within the Restricted Area (any of the foregoing, a "Restricted Company"); or
(B)engage or participate with any Restricted Company in the Restricted Activities within the Restricted Area in any capacity in which the Executive will use or disclose or could reasonably be expected to use or disclose any Confidential Information for the purpose of providing, or attempting to provide, such Restricted Company with a competitive advantage in the industry; or
(C)engage or participate in the same or similar capacity that the Executive worked for with the Company during the last twelve (12) months of Executive's employment with any Restricted Company in the Restricted Activities within the Restricted Area.
(ii)Restricted Activities/Restricted Area. For purposes of this Agreement, the te1m "Restricted Activities" means (I) the retail, commercial and/or wholesale sale, rental, and/or distribution of parts, accessories, supplies (including, but not limited to, paint), equipment and/or maintenance items for automobiles, light and heavy duty trucks (both commercial and non-commercial), off-road equipment, buses, recreational vehicles, and/or agricultural equipment, and/or (2) the provision of any automotive-related service (including, but not limited to, shop management, inventory control, and/or vehicle repair software or marketing) to auto repair shops, garages, specialty-service providers (e.g. any business that specializes in automotive oil changes, painting, tires, mufflers, brakes, transmission, and/or body work) and/or service centers, including, but not limited to painting, collision or body service
centers. The term "Restricted Area" means: (1) the United States of America and Canada, including their territories and possessions; (2) the United States of America; (3) in any location where a Customer is located if that Customer is purchasing products or services from the Company from that location as of the end of the Executive's employment; (4) the area within which Executive was assigned during the last 6 months of Executive's employment with the Company. In the event it is determined by judicial action that any portion of the Restricted Area is unenforceable, the geographic scope of the restriction shall be limited to any/all of the preceding as a court of competent jurisdiction shall deem reasonable and enforceable.
(iii) Association with Restricted Company. In the event that the Executive intends to associate (whether as an employee, consultant, independent contractor, officer, manager, advisor, partner, Executive, volunteer or director) with any Restricted Company during the Non-Compete Period, the Executive must provide information in writing to the Company relating to the activities proposed to be engaged in by the Executive for such Restricted Company. All such current associations are set forth on Exhibit B to this Agreement. In the event that the Company consents in writing to the Executive's engagement in such activity, the engaging in such activity by the Executive shall be conclusively deemed not to be a violation of this Subsection 18(f). Such consent is not intended and shall not be deemed to be a waiver or nullification of the covenant of non competition of the Executive or other similarly bound Executives.
(iv)Limitations. Nothing in this section shall be construed to limit Executive's ability to own a de minimis share of stock (defined as less than 5% of the outstanding common stock) of a publicly traded corporation, regardless of whether such entity is competitive with the Company. Nothing in this section shall be construed to limit the Executive's ability after separation to take a position with a company that competes with the Company which has multiple divisions or business units, so long as the Executive's employment with the competitor is not within the division or business unit that engages in Restricted Activities, and so long as the confidentiality and other provisions of this Agreement are adhered to in all respects.
(g) Non-Disparagement. Except as otherwise provided in Section 18(a)(iii) of this Agreement, the Executive agrees that while the Executive is employed by the Company and at all times following the termination of the Executive's employment with the Company for any reason, the Executive will not take any action or make any statement which disparages the Company or its practices or which disrupts or impairs its normal operations, such that it causes a material adverse impact to the Company.
(h) Effect of Non-Payment of Benefits; Clawback. The Executive's post-termination of employment obligations under this Paragraph 18 shall cease upon the Company's failure to make any payments or benefits hereunder as a result of the termination of the Executive's employment when due if within 15 days after written notice from the Executive to the Company of such failure, the Company does not make the required payment. In the event that the Executive materially violates Subsection 18(e) or 18(f), and does not cure such violation (if it can be cured) within five (5) days after written notice of such failure, the Executive agrees that calculation of the harm to the Company from such violation would be uncertain and not capable of being readily ascertained, and that as a
reasonable estimation of the harm to the Company from such violation the Executive shall repay to the Company a portion of the Termination Payment paid to the Executive pursuant to Section 4(d)(i) equal to a fraction, the numerator of which is the number of days left in the applicable period under Subsection 18(e) or 18(f), and the denominator of which is the total number of days in the applicable period under such Section. In the event that the Executive materially violates Subsection 18(a), 18(c) or 18(g), and does not cure such violation (if it can be cured) within five days after written notice of such failure, the Executive agrees that calculation of the harm to the Company from such violation would be uncertain and not capable of being readily ascertained, and that as a reasonable estimation of the harm to the Company from such violation the Executive shall repay to the Company a portion of the Termination Payment paid to the Executive pursuant to Section 4(d)(i) equal to a fraction, the numerator of which is the number of days left in the one (1) year period immediately following the termination and the denominator of which is 365. The Executive further agrees that in addition to Executive's repayment obligations with respect to breaches of Subsection 18(a), 18(c), 18(e), 18(f), or 18(g), the Company shall have the right to seek equitable relief pursuant to Subsection 18(i) hereunder.
(i) Specific Enforcement; Remedies Cumulative. The Executive acknowledges that the Company and Related Entities, as the case may be, will be irreparably injured if the provisions of Subsections 18(a), 18(b), 18(c), 18(e), 18(f) and 18(g) hereof are not specifically enforced and the Executive agrees that the terms of such provisions (including without limitation the periods set forth in Subsections 18(e), 18(f) and 18(g)) are reasonable and appropriate. If the Executive commits, or the Company has evidence based on which it reasonably believes the Executive threatens to commit, a material breach of any of the provisions of Subsections 18(a), 18(b), 18(c), 18(e), 18(f) or 18(g) hereof, the Company and/or Related Entities, as the case may be, shall have the right and remedy, in addition to and not in limitation of any other remedy that may be available at law or in equity, to have the provisions of Subsections 18(a), 18(b), 18(c), 18(e), 18(f) or 18(g) hereof specifically enforced by any court having jurisdiction through immediate injunctive and other equitable relief, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and/or Related Entities and that money damages will not provide an adequate remedy therefore. Such injunction shall be available without the posting of any bond or other security, and the Executive hereby consents to the issuance of such injunction.
(j) Re-Set of Period for Non-Competition and Non-Interference. In the event that a legal or equitable action is commenced with respect to any of the provisions of Subsections 18(e) or 18(f) hereof and the Executive has not complied, in all material respects, with the provisions in such subsections with respect to which such action has been commenced, then the one-year period, as described in such subsections not so complied with by the Executive, shall be extended from its original expiration date, day-for-day, for each day that the Executive is found to have not complied, in all material respects, with such subsections.
(k) Jurisdiction and Venue. WITH RESPECT TO THE ENFORCEMENT OF ANY AND ALL LOYALTY OBLIGATIONS ARISING UNDER PARAGRAPH 18, THE SUBSECTIONS 18(k) AND 18(1) OF THIS AGREEMENT SHALL APPLY. THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY CONSENT TO THE
EXCLUSIVE JURISDICTION OF THE FOLLOWING COURTS IN MATTERS RELATED TO THIS PARAGRAPH 18 AND AGREE NOT TO COMMENCE ANY SUIT, ACTION OR PROCEEDING RELATING THERETO EXCEPT IN ANY OF SUCH COURTS: THE STATE COURTS OF THE STATE OF NORTH CAROLINA, THE COURTS OF THE UNITED STATES OF AMERICA LOCATED IN THE CITY OF RALEIGH, NORTH CAROLINA.
(l) Executive Acknowledgments. The Executive acknowledges and agrees that (i) any and all loyalty obligations arising under Paragraph 18 were discussed with, and accepted by, the Executive prior to the commencement of the Executive's employment as Executive Vice President, [President, Stores]; (ii) the loyalty obligations arising under Paragraph 18 constitute a material inducement to the Company to enter into this Agreement and to agree to employ the Executive on the terms and conditions stated herein; (iii) the loyalty obligations arising under Paragraph 18 are reasonable in time, territory, and scope, and in all other respects; (iv) should any part or provision of any covenant be held invalid, void, or unenforceable in any court of competent jurisdiction, such invalidity, voidness, or unenforceability shall not render invalid, void, or unenforceable any other part or provision of this Agreement; and (v) if any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, territory, definition of activities, or definition of information covered is considered to be invalid or unreasonable in scope, the invalid or unreasonable terms shall be redefined to carry out the Executive's and the Company's intent in agreeing to these restrictive covenants. These restrictive covenants shall be construed as agreements independent of any other provision in this Agreement and the existence of any claim or cause of action of the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the loyalty obligations arising under Paragraph 18.
19.Adherence to Company Policies. The Executive agrees to adhere diligently to all established Company policies and procedures, including but not limited to the Company's Guidelines on Significant Governance Issues, Code of Ethics and Business Conduct and, if applicable, the Code of Ethics for Financial Professionals. The Executive agrees that if the Executive does not adhere to any of the provisions of such Guidelines and Codes, the Executive will be in breach of the provisions hereof.
20.Representations. The Executive agrees to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. The Executive represents that Executive's performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by the Executive in confidence or in trust prior to the Executive's employment by the Company. The Executive has not entered into, and the Executive agrees the Executive will not enter into, any oral or written agreement in conflict herewith and the Executive's employment by the Company and the Executive's services to the Company will not violate the terms of any oral or written agreement to which the Executive is a party.
EXECUTION VERSION
21. Binding Effect of Execution. The Company and the Executive agree that this Agreement shall not bind or be enforceable by or against either party until this Agreement has been duly executed by both the Executive and the Company.
IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date first written above.
| Advance Auto Parts, Inc. | ||
By: /s/ Thomas R. Greco (SEAL) | ||
| Print Name: Thomas R. Greco | ||
| Title: President and Chief Executive Officer | ||
| Address: 4200 Six Forks Road, Raleigh, NC 27609 | ||
| Executive | ||
| Name: Herman L. Word, Jr. | ||
| Signature: /s/ Herman L. Word, Jr. | ||
| Address: Executive's Address Currently on File in the Company's Records | ||
EXECUTION VERSION
EXHIBIT A
TERMINATION CERTIFICATION
This is to certify that I do not have in my possession, nor have I failed to return, any Confidential Information, including but not limited to, material devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to the Company.
I further certify that I have, to the best of my knowledge, complied in all material respects with all the terms of my Employment Agreement with the Company.
| Date: | ||
| Executive's Signature | ||
| Executive's Name (Print) | ||
EXECUTION VERSION
EXHIBIT B
LIST OF ASSOCIATIONS WITH RESTRICTED COMPANIES
__None
__Additional Sheets Attached
Signature of the Executive: /s/ Herman L. Word, Jr. | ||
Print Name of the Executive: Herman L. Word, Jr. | ||
Date: 2/21/2023 | ||
1
Employment Agreement - Junior Word (TM ID 234635)
Exhibit 10.39
Exhibit 21.1
Advance Auto Parts, Inc.
Subsidiaries of the Registrant
As of December 30, 2023
| Company Name | State or Sovereign Power of Incorporation | |||||||
| Advance Stores Company, Incorporated | Virginia | |||||||
| Advance Trucking Corporation | Virginia | |||||||
| Western Auto Supply Company | Delaware | |||||||
| Western Auto of St. Thomas, Inc. | Delaware | |||||||
| Western Auto of Puerto Rico, Inc. | Delaware | |||||||
| Discount Auto Parts, LLC | Virginia | |||||||
| Advance Auto Innovations, LLC | Virginia | |||||||
| Advance Patriot, Inc. | Delaware | |||||||
| Autopart International, LLC | Massachusetts | |||||||
| Advance Auto Business Support, LLC | Virginia | |||||||
| E-Advance, LLC | Virginia | |||||||
| Crossroads Global Trading Corp. | Virginia | |||||||
| Advance e-Service Solutions, Inc. | Virginia | |||||||
| Driverside, Inc. | Delaware | |||||||
| Motologic, Inc. | Delaware | |||||||
| AAP Financial Services, Inc. | Virginia | |||||||
| B.W.P. Distributors, Inc. | New York | |||||||
| General Parts International, Inc. | North Carolina | |||||||
| General Parts, Inc. | North Carolina | |||||||
| Worldpac, Inc. | Delaware | |||||||
| Worldpac, Puerto Rico, LLC | Delaware | |||||||
| Worldpac, Canada, Inc. | Canada | |||||||
| Golden State Supply, LLC | Nevada | |||||||
| Worldwide Auto Parts, Inc. | California | |||||||
| Straus-Frank Enterprises, LLC | Texas | |||||||
| General Parts Distribution, LLC | North Carolina | |||||||
| GPI Technologies, LLC | Delaware | |||||||
| Carquest Canada LTD | Canada | |||||||
| Neuse River Insurance Company, Inc. | Utah | |||||||
Exhibit 22.1
List of the Issuer and its Guarantor Subsidiaries
As of December 30, 2023, the following subsidiaries of Advance Auto Parts, Inc. (the “Issuer”) guarantee the 5.90% senior unsecured notes due March 9, 2026 (the "2026" Notes), and the 1.750% senior unsecured notes due October 1, 2027 (the “2027 Notes”), and the 5.95% senior unsecured notes due March 9, 2028 (the "2028" Notes), and the 3.90% senior unsecured notes due April 15, 2030 (the “2030 Notes”) and the 3.50% senior unsecured notes due March 15, 2032 (the “2032 Notes”), each issued by the Issuer:
| Entity | Jurisdiction of Incorporation or Organization | 2026 Notes | 2027 Notes | 2028 Notes | 2030 Notes | 2032 Notes | ||||||||||||||
| Advance Auto Parts, Inc. | Delaware | Issuer | Issuer | Issuer | Issuer | Issuer | ||||||||||||||
| Advance Stores Company, Incorporated | Virginia | Guarantor | Guarantor | Guarantor | Guarantor | Guarantor | ||||||||||||||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-274224 on Form S-3, Post-Effective Amendment on Registration Statement Nos. 333-196240, and 333-115772 on Form S-8, and Registration Statement Nos. 333-272497 and 333-272495 on Form S-8 of our reports dated March 12, 2024, 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 December 30, 2023.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
March 12, 2024
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shane M. O'Kelly, 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: March 12, 2024
| /s/ Shane M. O'Kelly | ||
| Shane M. O'Kelly | ||
| 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, Ryan P. Grimsland, 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: March 12, 2024
| /s/ Ryan P. Grimsland | ||
| Ryan P. Grimsland | ||
| 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, Shane M. O'Kelly, 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 December 30, 2023 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: | March 12, 2024 | By: | /s/ Shane M. O'Kelly | ||||||||
| Name: Shane M. O'Kelly Title: President and Chief Executive Officer and Director | |||||||||||
I, Ryan P. Grimsland, 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 December 30, 2023 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: | March 12, 2024 | By: | /s/ Ryan P. Grimsland | ||||||||
| Name: Ryan P. Grimsland Title: Executive Vice President, Chief Financial Officer | |||||||||||