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(Exact name of registrant as specified in its charter)
________________________
iDelaware
i54-2049910
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i2635 East Millbrook Road, iRaleigh, iNorth
Carolinai27604
(Address of principal executive offices) (Zip Code)
(i540) i362-4911
(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
iCommon
Stock, $0.0001 par value
iAAP
iNew York Stock Exchange
Not Applicable
(Former name,
former address and former fiscal year, if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒
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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐
No ☒
As of May 28, 2021, the number of shares of the registrant’s common stock outstanding was i65,438,870 shares.
Certain statements herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,”“believe,”“could,”“estimate,”“expect,”“forecast,”“intend,”“likely,”“may,”“plan,”“position,”“possible,”“potential,”“probable,”“project,”“should,”“strategy,”“will,” or similar language. All statements other than statements of historical fact are forward-looking statements, including, but not limited to, statements about our strategic initiatives, operational plans
and objectives, and future business and financial performance, as well as statements regarding underlying assumptions related thereto. Forward-looking statements reflect our views based on historical results, current information and assumptions related to future developments. Except as may be required by law, we undertake no obligation to update any forward-looking statements made herein. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements. They include, among others, factors related to the timing and implementation of strategic initiatives, the highly competitive nature of our industry, demand for our products and services, complexities in our inventory and supply chain, challenges with transforming and growing our business and factors related to the current global pandemic. Please refer to “Item 1A. Risk Factors.” of
our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission 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.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. iNature
of Operations and Basis of Presentation
Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“Professional”) and “do-it-yourself” (“DIY”) customers. The accompanying condensed consolidated financial statements have been prepared by us and include the accounts of Advance Auto Parts, Inc., its wholly owned subsidiaries, Advance Stores Company, Incorporated (“Advance Stores”) and Neuse River Insurance Company, Inc., and their subsidiaries (collectively referred to as “Advance,”“we,”“us”
or “our”).
As of April 24, 2021, we operated a total of i4,793 stores and i178 branches primarily within the United States, with additional
locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of April 24, 2021, we served i1,285 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,”“Carquest” and “Autopart International,” and our branches operate under the “Worldpac” trade name.
The
accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting principles. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for 2020 as filed with the SEC on February 22, 2021.
The accompanying condensed consolidated financial statements reflect all normal recurring adjustments that are necessary to present fairly the results for the interim
periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Our first quarter of the year contains sixteen weeks. Our remaining three quarters consist of twelve weeks.
2. iSignificant Accounting Policies
Revenues
i
The
following table summarizes disaggregated revenue from contracts with customers by product group:
iInventories
are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately ii88/%
of inventories as of April 24, 2021 and January 2, 2021. Under the LIFO method, our Cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in the sixteen weeks ended April 24, 2021 and prior years. We recorded an increase to Cost of sales of $i3.1 million and $i8.8
million for the sixteen weeks ended April 24, 2021 and April 18, 2020 to state inventories at LIFO.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
An actual valuation of inventory under the LIFO method is performed
by us at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.
Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $ii9.7/
million for the sixteen weeks ended April 24, 2021 and April 18, 2020.
The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of our cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.
Notes to the Condensed Consolidated
Financial Statements
(Unaudited)
Bank Debt
As of April 24, 2021 and January 2, 2021, we had iino/
outstanding borrowings, $i1.0 billion of borrowing availability and ino letters of credit outstanding under our unsecured revolving
credit facility (the “Credit Agreement”).
As of April 24, 2021 and January 2, 2021, we had $ii100.0/
million of bilateral letters of credit issued separately from the Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of ione year or less and primarily serve as collateral for our self-insurance policies.
We were in compliance with financial covenants required by our debt arrangements as of April 24, 2021.
Senior Unsecured Notes
Our
i4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at i99.69% of the principal amount of $i450.0 million.
The 2023 Notes bear interest at a rate of i4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year.
On April 16, 2020, we issued $i500.0
million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued at i99.65% of the principal amount of $i500.0 million, are due April
15, 2030 and bear interest at i3.90% per year payable semi-annually in arrears on April 15 and October 15 of each year.
On July 28, 2020, we completed an exchange offer whereby the Original Notes in the aggregate principal amount of $i500.0 million,
which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), were exchanged for a like principal amount of i3.90% 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.
OnSeptember 29, 2020, we issued $i350.0 million aggregate principal amount of senior unsecured notes (the “2027 Notes”). The 2027 Notes were issued at i99.67%
of the principal amount of $i350.0 million, are due October 1, 2027 and bear interest at i1.75% per year payable semi-annually in arrears
on April 1 and October 1 of each year. In connection with the 2027 Notes offering, we incurred $i2.9 million of debt issuance costs. Our 2023 Notes, 2027 Notes and 2030 Notes are collectively referred to herein as our “senior unsecured notes.”
Pursuant to a cash tender offer that was completed on September 29, 2020, we repurchased $i256.3 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 $i30.5 million and $i1.4 million.
Debt
Guarantees
We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $i73.7 million and $i23.6
million as of April 24, 2021 and January 2, 2021. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements is $i61.9 million and $i57.5
million as of April 24, 2021 and January 2, 2021. We believe that the likelihood of performance under these guarantees is remote.
7. iLeases
iSubstantially
all of our leases are for facilities and vehicles. The initial term for facilities is typically i5 years to i10 years, with renewal options at i5
year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically i3 years to i5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants./
Less:
Current portion of operating lease liabilities
(i425,166)
(i462,588)
Noncurrent
operating lease liabilities
$
i2,035,785
$
i2,014,499
/
The
current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheets.
Total lease cost is included in Cost of sales and Selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. iTotal lease cost is comprised of the following:
As of April 24, 2021, our operating lease payments include $i95.2
million related to options to extend lease terms that are reasonably certain of being exercised and exclude $i79.3 million of legally binding minimum lease payments for leases signed, but not yet commenced.
The weighted-average remaining lease term and weighted-average discount rate for our operating leases are i7.0
years and i3.4% as of April 24, 2021. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.
On April 19, 2021, our Board of Directors authorized an additional $i1.0 billion to our current share repurchase program. This authorization was incremental to the $i700.0 million
that was authorized previously by our Board of Directors in November 2019. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.
During the sixteen weeks ended April 24, 2021, we repurchased i1.1 million shares of our common stock at an aggregate cost of $i170.4 million,
or an average price of $i157.84 per share, in connection with our share repurchase program. During the sixteen weeks ended April 18, 2020, we purchased i0.2
million shares of our common stock under the share repurchase program at an aggregate cost of $i29.0 million, or an average price of $i128.36
per share. We had $i1.3 billion remaining under our share repurchase program as of April 24, 2021.
(1)For
the sixteen weeks ended April 24, 2021 and April 18, 2020, i43 thousand and i271 thousand
restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive.
/
11. iShare-Based
Compensation
During the sixteen weeks ended April 24, 2021, we granted i174 thousand time-based RSUs, i63
thousand market-based RSUs and i124 thousand stock options. The general terms of the time-based and market-based RSUs are similar to awards previously granted by us. We grant options to purchase common stock to certain employees under our 2014 Long-Term Incentive Plan. The options are granted at an exercise price equal to the closing market price of the Advance's common stock on the date of the grant, expire after i10
years and vest one-third annually over ithree years. We record compensation expense for the grant date fair value of the option awards evenly over the vesting period.
The weighted average fair values of time-based and market-based RSUs granted during the sixteen weeks ended April 24, 2021 were $i175.45
and $i204.97 per share. iFor
time-based RSUs, the fair value of each award was determined based on the market price of our stock on the date of grant adjusted for expected dividends during the vesting period, as applicable. The fair value of each market-based RSU was determined using a Monte Carlo simulation model.
The weighted average fair values of stock options granted during the sixteen weeks ended April 24, 2021 was $i47.19.
The fair value was estimated on the date of grant by applying the Black-Scholes option-pricing valuation model. iThe following table presents the weighted average assumptions used in determining the fair value of options granted:
(1)
The risk-free interest rate is based on the yield in effect at grant for zero-coupon U.S. Treasury notes with maturities equivalent to the expected term of the stock options.
(2) The expected term represents the period of time options granted are expected to be outstanding. As we do not have sufficient historical data, we utilized the simplified method provided by the SEC to calculate the expected term as the average of the contractual term and vesting period.
(3) Expected volatility is the measure of the amount by which the stock price has fluctuated or is expected to fluctuate. We utilized historical trends and the implied volatility of our publicly traded financial instruments in developing the volatility estimate for our stock options.
(4) The expected dividend yield
is calculated based on our expected quarterly dividend and the 3 month average stock price as of the grant date.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Total income tax benefit related to share-based compensation expense for the sixteen weeks ended April 24,
2021 was $i3.9 million. As of April 24, 2021, there was $i94.5
million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of i1.8 years.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended January 2, 2021 (filed with the SEC on February 22, 2021), which we refer to as our 2020 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.
Impact
of COVID-19 on Our Business
During the COVID-19 pandemic we are prioritizing protecting the health and safety of our Team Members and customers; working to drive financial performance by preserving our cash position, scrutinizing planned spending and prioritizing various initiatives; and working to help ensure that our team will emerge even stronger following the completion of the pandemic. We have continued to take additional measures to help ensure the health and safety of our Team Members and customers, including the continuation of certain labor-related benefits for Team Members, social distancing practices, sanitation practices, the use of health check screenings and offering contactless delivery.
Government imposed restrictions and stay at home orders related to the pandemic
occurred during our first quarter of 2020. These contributed to negative impacts to demand, primarily during the last six weeks of the sixteen weeks ended April 18, 2020. However, as the remainder of 2020 progressed, we experienced a significant improvement in demand, particularly in our DIY omnichannel business. This has continued in the first quarter of 2021, driven by external factors such as a second round of government stimulus, consumers’ increased use of personal vehicles and other factors that may have contributed to an increase in DIY automotive projects. In addition, we believe the execution of prioritized internal initiatives, including our new marketing campaign and providing a variety of shopping choices for customers with our Advance Same Day® options, as well as improved store execution, all contributed to the improvement in demand. We have also continued to make progress on the development of our key supply
chain initiatives, including cross-banner replenishment and our single warehouse management system.
Despite the increase in Net sales during the sixteen weeks ended April 24, 2021, the COVID-19 pandemic remains an evolving situation. We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our Team Members, customers, suppliers and stockholders.
Management Overview
Net sales increased 23.4% in the first quarter of 2021 as compared to the same period in the prior year, primarily driven by an increase in comparable
store sales resulting from growth in our DIY omnichannel and Professional business. We experienced over 20% comparable store sales growth across every region, with the Midwest, Northeast and Southwest regions having the strongest growth. While all product categories showed solid performance, batteries were again one of the strongest.
We generated Diluted earnings per share (“Diluted EPS”) of $2.81 during our first quarter of 2021 compared to $0.63 for the comparable period of 2020. When adjusted for the non-operational items included in the table below, our Adjusted diluted earnings per share (“Adjusted EPS”) for the sixteen weeks ended April 24, 2021 and April 18, 2020 were $3.34 and $1.00.
General
Parts International, Inc. (“GPI”) amortization of acquired intangible assets
0.10
0.09
LIFO impacts
0.03
0.09
Refer
to “Reconciliation of Non-GAAP Financial Measures”for further details of our comparable adjustments and the usefulness of such measures to investors.
A high-level summary of our financial results for the first quarter of 2021 includes:
•Net sales during the first quarter of 2021 were $3.3 billion, an
increase of 23.4% as compared to the first quarter of 2020, primarily driven by an increase in comparable store sales of 24.7%, led by growth in both our DIY omnichannel and Professional business.
•Gross profit margin for the first quarter of 2021 was 44.6% of Net sales, an increase of 112 basis points as compared to the first quarter of 2020. This increase was primarily driven by an increase in net sales, as well as due to improvements in material costs, supply chain leverage, channel mix and favorable pricing actions. These improvements were slightly offset by unfavorable product mix and headwinds associated with shrink and defectives.
•SG&A expenses for the first quarter of 2021 were 37.0% of Net sales, a favorable impact of 354 basis points as compared to the first quarter of 2020. This favorable impact was driven by fixed cost
leverage, primarily related to payroll, as well as lower insurance and claims related expenses attributable to our continued focus on safety. The savings were partially offset by an increase in field bonus, marketing investments and an increase in third-party and service contracts related to our information technology transformational plans.
Business and Risks Update
We continue to make progress on the various elements of our strategic business plan, which is focused on improving the customer experience and driving consistent execution for both Professional and DIY customers. To achieve these improvements, we have undertaken
planned strategic initiatives to help build a foundation for long-term success across the organization, which include:
•Continued development of a demand-based assortment, leveraging purchase and search history from our common catalog, versus our existing push-down supply approach.
•Advancement towards optimizing our footprint by market, including consolidating our Worldpac and Autopart International businesses, to drive share, repurpose our in-market store and asset base and streamline our distribution network.
•Continued evolution of our marketing campaigns, which focus on our customers and how we serve them every day with care and speed and the launch of the iconic DieHard® brand.
•Progress
in the implementation of a more efficient end-to-end supply chain to deliver our broad assortment.
•Ongoing enhancement of Advance Same Day® Curbside Pick Up, Advance Same Day Home Delivery and our mobile application and e-commerce performance.
•Actively pursuing new store openings in 2021, including through lease acquisition opportunities as available and appropriate, in existing markets and new markets, as well as expansion of our independent Carquest network.
Industry Update
Operating within the automotive aftermarket industry, we are influenced by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry. Refer to our 2020 Form
10-K, as updated by our subsequent filings with the SEC, and the “Impact of COVID-19 on Our Business” section included within this Form 10-Q for further discussion of these factors.
Stores and Branches
Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, number and strength of competitors’ stores and the cost of real estate. During the sixteen weeks ended April 24, 2021, 9 stores and branches were opened and 14 were closed or consolidated, resulting in a total of 4,971 stores and branches as of April 24,
2021, compared to a total of 4,976 stores and branches as of January 2, 2021.
Net
sales for the sixteen weeks ended April 24, 2021 increased 23.4% as compared to the same period of 2020, primarily driven by an increase in comparable store sales resulting from growth in both our DIY omnichannel and Professional business. We experienced over 20% comparable store sales growth across every region, with the Midwest, Northeast and Southwest regions having the strongest growth. While all product categories showed solid performance, batteries were again one of the strongest.
We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store
sales once the stores have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores in comparable store sales from the original date of opening.
Gross Profit
Gross profit for the sixteen weeks ended April 24, 2021 was $1.5 billion, or 44.6%, of Net sales, as compared to $1.2 billion, or 43.5%, of Net sales for the sixteen weeks ended April 18, 2020. This increase in Gross profit as a percentage of Net sales was primarily driven by an increase in net sales, as well as due to improvements in material costs, supply chain leverage, channel mix and favorable pricing actions. These improvements were slightly offset by unfavorable product mix and headwinds associated with shrink
and defectives.
As a result of changes in our LIFO reserve, an expense of $3.1 million and $8.8 million was included in the sixteen weeks ended April 24, 2021 and April 18, 2020.
Selling, general and administrative expenses
SG&A expenses for the sixteen weeks ended April 24, 2021 were $1.2 billion, or 37.0% of Net sales, as compared to $1.1 billion, or 40.6% of Net sales, for the sixteen weeks ended April 18, 2020. This decrease in SG&A expenses as a percentage of Net sales was driven by fixed cost leverage, primarily related to payroll,
as well as lower insurance and claims related expenses attributable to our continued focus on safety. The savings were partially offset by an increase in field bonus, marketing investments and an increase in third-party and service contracts related to our information technology transformational plans.
Provision for income taxes
Our Provision for income taxes for the sixteen weeks ended April 24, 2021 was $59.8 million, as compared to $16.6 million for the sixteen weeks ended April 18, 2020. Our effective tax rate was 24.3% and 27.6% for the sixteen weeks ended April 24, 2021
and April 18, 2020.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes certain financial measures not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures,
including Adjusted net income and Adjusted EPS, should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. We have presented these non-GAAP financial measures as we believe that the presentation of our financial results that exclude (1) LIFO impacts; (2) transformation expenses under our strategic business plan; (3) non-cash amortization related to the acquired GPI intangible assets; and (4) other non-recurring adjustments are useful and indicative of our base operations because the expenses vary from period to period in terms of size, nature and significance and/or relate to store closure and consolidation activity in excess of historical levels. These measures assist in comparing our current operating results with past periods and with the operational performance of other companies in our industry. The disclosure of these measures allows investors
to evaluate our performance using the same measures management uses in developing internal budgets and forecasts and in evaluating management’s compensation. Included below is a description of the expenses we have determined are not normal, recurring cash operating expenses necessary to operate our business and the rationale for why providing these measures is useful to investors as a supplement to the GAAP measures.
LIFO impacts — Beginning the first quarter of 2021, to assist in comparing our current operating results with the operational performance of other companies in our industry, the impact of LIFO on our results of operations is a reconciling item to arrive at non-GAAP financial measures.
Transformation expenses — Costs incurred in connection with
our business plan that focuses on specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise, that we do not view to be normal cash operating expenses. These expenses include, but not be limited to the following:
•Restructuring costs - Costs primarily relating to the early termination of lease obligations, asset impairment charges, other facility closure costs and Team Member severance in connection with our voluntary retirement program and continued optimization of our organization.
•Third-party professional services - Costs primarily relating to services rendered by vendors for assisting us with the development of various information technology and supply chain projects in connection with our enterprise integration initiatives.
•Other
significant costs - Costs primarily relating to accelerated depreciation of various legacy information technology and supply chain systems in connection with our enterprise integration initiatives and temporary off-site workspace for project teams who are primarily working on the development of specific transformative activities that relate to the integration and streamlining of our operating structure across the enterprise.
GPI amortization of acquired intangible assets — As part of our acquisition of GPI, we obtained various intangible assets, including customer relationships, non-compete contracts and favorable lease agreements, which we expect to be subject to amortization through 2025.
(1)The
sixteen weeks ended April 18, 2020 non-GAAP expenses have been adjusted for the $8.8 million LIFO reserve to be comparable with our 2021 presentation.
(2)The income tax impact of non-GAAP adjustments is calculated using the estimated tax rate in effect for the respective non-GAAP adjustments.
Our
primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of initiatives under our strategic business plan and other operational priorities. Historically, we have used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our stock repurchase program, to pay our quarterly cash dividends and for acquisitions; however, given uncertainties related to the COVID-19 pandemic, our future uses of cash may differ if our relative priorities, including the weight we place on the preservation of cash and liquidity, change. Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations,
available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year.
Share Repurchase Program
On April 19, 2021, our Board of Directors authorized an additional $1.0 billion to our current share repurchase program. This authorization was incremental to the $700.0 million that was authorized previously by our Board of Directors in November 2019.
During the sixteen weeks ended April 24, 2021, we repurchased 1.1 million shares of our common stock at an aggregate cost of $170.4 million, or an average price of $157.84 per share, in connection with our share
repurchase program. During the sixteen weeks ended April 18, 2020, we repurchased 0.2 million shares of our common stock under the share repurchase program at an aggregate cost of $29.0 million, or an average price of $128.36 per share. We had $1.3 billion remaining under our share repurchase program as of April 24, 2021.
Analysis of Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
Cash
flows (used in) provided by financing activities
(216,689)
936,858
Effect of exchange rate changes on cash
2,292
(3,461)
Net increase in Cash and cash equivalents
$
45,241
$
861,173
Operating
Activities
For the sixteen weeks ended April 24, 2021, net cash provided by operating activities increased by $319.0 million to $329.9 million compared to the same period of the prior year. The net increase in cash flows provided by operating activities compared to the prior year was primarily driven by the increased cash generated from operations and improvements in working capital. In the current year, working capital included an increase in cash provided by Accounts payable and Inventories, partially offset by a decrease in cash provided by Accrued expenses and Receivables, net.
Investing Activities
For the sixteen weeks ended April 24, 2021, net cash used in investing
activities decreased by $12.8 million to $70.3 million compared to the same period of the prior year. Cash used in investing activities for the sixteen weeks ended April 24, 2021 consisted primarily of purchases of property and equipment, which was $12.1 million lower than the comparable period of 2020. Investments in 2021 included supply chain and e-commerce, as well as information technology as we remain focused on the complete back office integration throughout the enterprise.
For
the sixteen weeks ended April 24, 2021, net cash used in financing activities was $216.7 million, a decrease of $1.2 billion as compared to the same period of the prior year. The net cash used in financing activities during the sixteen weeks ended April 24, 2021 was primarily the result of the repurchase of $170.4 million of common stock under our share repurchase program and dividends paid of $33.1 million. The decrease compared to the first quarter of 2020 was primarily due to the issuance of $500.0 million aggregate principal amount of senior unsecured notes and borrowing $500.0 million under the Credit Agreement during the sixteen weeks ended April 18, 2020.
Our Board of Directors has declared a quarterly cash dividend since 2006. Any
payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors. On April 19, 2021, our Board of Directors declared a regular cash dividend of $1.00 per share to be paid on July 2, 2021 to all common stockholders of record as of June 18, 2021.
Long-Term Debt
As of April 24, 2021, we had a credit rating from Standard & Poor’s of BBB-
and from Moody’s Investor Service of Baa2. The current outlooks by Standard & Poor’s and Moody’s are both stable. The current pricing grid used to determine our borrowing rate under the Credit Agreement is based on our credit ratings. If these credit ratings decline, our interest rate on outstanding balances may increase and our access to additional financing on favorable terms may be limited. In addition, declines could reduce the attractiveness of certain vendor payment programs whereby third-party institutions finance arrangements to our vendors based on our credit rating, which could result in increased working capital requirements. Conversely, if these credit ratings improve, our interest rate may decrease.
For additional information on transactions entered into relating to Long-term debt during the sixteen weeks ended April 24, 2021,
refer to Note 6, Long-term Debt and Fair Value of Financial Instrumentsof the Notes to the Condensed Consolidated Financial Statements included herein.
Critical Accounting Policies and Estimates
Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.
During
the sixteen weeks ended April 24, 2021, there were no changes to the critical accounting policies discussed in our 2020 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2020 Form 10-K.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee.
Certain 100% wholly owned domestic subsidiaries
of the Issuer, including our Material Subsidiaries (as defined in the Credit Agreement) serve as guarantors (“Guarantor Subsidiaries”) of our senior unsecured notes. The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiaries. Certain of our wholly owned subsidiaries, including all of our foreign subsidiaries and captive insurance subsidiary, do not serve
as guarantors of our senior unsecured notes (“Non-Guarantor Subsidiaries”).
The following tables present summarized financial information for the Issuer and Guarantor Subsidiaries on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the Guarantor Subsidiaries and (ii) equity in earnings from and investments in any subsidiaries that are a Non-Guarantor Subsidiary.
ITEM
3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our exposure to market risk since January 2, 2021. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our 2020 Form 10-K.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of our internal
controls may vary over time.
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of April 24, 2021. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our quarter ended April 24, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On February 6, 2018, a putative class action on behalf of purchasers of our securities who purchased or otherwise acquired their securities between November 14, 2016 and August 15, 2017, inclusive (the “Class Period”), was commenced against us and certain of our current and former officers in the U.S. District Court for the District of Delaware. The plaintiff alleges that the defendants failed to disclose material adverse facts about our financial well-being, business relationships, and prospects during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On February 7, 2020
the court granted in part and denied in part our motion to dismiss. The surviving claims are subject to discovery. On November 6, 2020 the court granted plaintiff’s motion for class certification. We strongly dispute the allegations of the complaint and will continue to defend the case vigorously. On March 15, 2021, we moved for reconsideration of the order denying in part our motion to dismiss. This motion is pending before the court. On February 17, 2021, a derivative complaint filed on April 29, 2020 in the U.S. District Court for the District of Delaware was dismissed with prejudice. A second derivative claim filed on August 13, 2020 in the Delaware Court of Chancery was voluntarily dismissed on March
30, 2021.
ITEM 1A.RISK FACTORS
Please refer to “Item 1A. Risk Factors.” found in our 2020 Form 10-K filed for the year ended January 2, 2021 for risks that, if they were to occur, could materially adversely affect our business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of our common stock.
ITEM
2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the information with respect to repurchases of our common stock for the quarter ended April 24, 2021:
Total
Number of Shares Purchased (1)
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) (in thousands)
(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 $13.3 million, or an average price of $165.32 per share, during the sixteen weeks ended April 24, 2021.
(2)On April 19, 2021, our Board of Directors authorized a $1.0 billion share repurchase program. This new authorization was in addition to the $700.0 million share repurchase program that was authorized by our Board of Directors in November 2019.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
