UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 11, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission file number 001-16797

________________________

ADVANCE AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

________________________

Delaware	54-2049910
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2635 East Millbrook Road, Raleigh, North Carolina 27604

(Address of principal executive offices) (Zip Code)

(540) 362-4911

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	AAP	New York Stock Exchange

Not Applicable

(Former name, former address and former fiscal year, if changed since last report).

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Registration S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 13, 2020, the number of shares of the registrant’s common stock outstanding was 69,138,763 shares.

			Page
NOTE REGARDING FORWARD LOOKING STATEMENTS			1
PART I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements of Advance Auto Parts, Inc. and Subsidiaries (unaudited):	2
		Condensed Consolidated Balance Sheets	2
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Changes in Stockholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	6
		Notes to the Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
	Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	25
SIGNATURE			26

NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain statements herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are usually identifiable by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “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, as updated by our subsequent filings with the SEC, for a description of these and other risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statements.

1

PART I.  FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Advance Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data) (Unaudited)

	July 11, 2020		December 28, 2019
Assets
Current assets:
Cash and cash equivalents	$	1,141,502	$	418,665
Receivables, net	742,346		689,469
Inventories	4,358,489		4,432,168
Other current assets	153,188		155,241
Total current assets	6,395,525		5,695,543
Property and equipment, net of accumulated depreciation of $2,096,439 and $2,037,849	1,436,485		1,433,213
Operating lease right-of-use assets	2,367,527		2,365,325
Goodwill	990,396		992,240
Intangible assets, net	692,482		709,756
Other assets	48,250		52,448
	$	11,930,665	$	11,248,525
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,310,073	$	3,421,987
Accrued expenses	659,642		535,863
Other current liabilities	467,844		519,852
Total current liabilities	4,437,559		4,477,702
Long-term debt	1,240,340		747,320
Noncurrent operating lease liabilities	2,041,400		2,017,159
Deferred income taxes	338,086		334,013
Other long-term liabilities	146,761		123,250
Commitments and contingencies
Stockholders’ equity:
Preferred stock, nonvoting, $0.0001 par value	—		—
Common stock, voting, $0.0001 par value	8		8
Additional paid-in capital	760,535		735,183
Treasury stock, at cost	(961,592)		(924,389)
Accumulated other comprehensive loss	(43,939)		(34,569)
Retained earnings	3,971,507		3,772,848
Total stockholders’ equity	3,726,519		3,549,081
	$	11,930,665	$	11,248,525

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

2

Advance Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data) (Unaudited)

	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Net sales	$	2,501,380	$	2,332,246	$	5,199,262	$	5,284,283
Cost of sales, including purchasing and warehousing costs	1,404,666		1,322,808		2,929,815		2,970,233
Gross profit	1,096,714		1,009,438		2,269,447		2,314,050
Selling, general and administrative expenses	833,869		838,666		1,928,177		1,935,338
Operating income	262,845		170,772		341,270		378,712
Other, net:
Interest expense	(13,422)		(8,675)		(25,665)		(23,619)
Other income (expense), net	3,117		4,113		(2,872)		1,874
Total other, net	(10,305)		(4,562)		(28,537)		(21,745)
Income before provision for income taxes	252,540		166,210		312,733		356,967
Provision for income taxes	62,580		41,390		79,185		89,647
Net income	$	189,960	$	124,820	$	233,548	$	267,320
Basic earnings per common share	$	2.75	$	1.74	$	3.38	$	3.73
Weighted average common shares outstanding	69,118		71,738		69,154		71,767
Diluted earnings per common share	$	2.74	$	1.73	$	3.37	$	3.71
Weighted average common shares outstanding	69,294		72,008		69,350		72,063

Condensed Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)

	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Net income	$	189,960	$	124,820	$	233,548	$	267,320
Other comprehensive income (loss):
Changes in net unrecognized other postretirement benefit (costs) income, net of tax of $26, $25, $3 and $8	(73)		(69)		(7)		26
Currency translation adjustments	7,669		6,626		(9,363)		10,686
Total other comprehensive income (loss)	7,596		6,557		(9,370)		10,712
Comprehensive income	$	197,556	$	131,377	$	224,178	$	278,032

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

3

Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except per share data) (Unaudited)
	Twelve Weeks Ended July 11, 2020
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance, April 18, 2020	69,101	$	8	$	749,723	$	(960,150)	$	(51,535)	$	3,798,983	$	3,537,029
Net income	—	—		—		—		—		189,960		189,960
Total other comprehensive income	—	—		—		—		7,596		—		7,596
Restricted stock units and deferred stock units vested	42	—		—		—		—		—		—
Share-based compensation	—	—		10,029		—		—		—		10,029
Stock issued under employee stock purchase plan	6	—		783		—		—		—		783
Repurchases of common stock	(10)	—		—		(1,442)		—		—		(1,442)
Cash dividends declared ($0.25 per common share)	—	—		—		—		—		(17,436)		(17,436)
Balance, July 11, 2020	69,139	$	8	$	760,535	$	(961,592)	$	(43,939)	$	3,971,507	$	3,726,519
	Twelve Weeks Ended July 13, 2019
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance, April 20, 2019	71,737	$	8	$	706,360	$	(560,245)	$	(40,038)	$	3,441,138	$	3,547,223
Net income	—	—		—		—		—		124,820		124,820
Total other comprehensive loss	—	—		—		—		6,557		—		6,557
Restricted stock units and deferred stock units vested	34	—		—		—		—		—		—
Share-based compensation	—	—		8,441		—		—		—		8,441
Stock issued under employee stock purchase plan	6	—		970		—		—		—		970
Repurchases of common stock	(81)	—		—		(12,347)		—		—		(12,347)
Cash dividends declared ($0.06 per common share)	—	—		—		—		—		(4,338)		(4,338)
Other	1	—		(24)		—		—		—		(24)
Balance, July 13, 2019	71,697	$	8	$	715,747	$	(572,592)	$	(33,481)	$	3,561,620	$	3,671,302

4

Advance Auto Parts, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except per share data) (Unaudited)
	Twenty-Eight Weeks Ended July 11, 2020
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance, December 28, 2019	69,232	$	8	$	735,183	$	(924,389)	$	(34,569)	$	3,772,848	$	3,549,081
Net income	—	—		—		—		—		233,548		233,548
Total other comprehensive loss	—	—		—		—		(9,370)		—		(9,370)
Restricted stock units and deferred stock units vested	179	—		—		—		—		—		—
Share-based compensation	—	—		23,838		—		—		—		23,838
Stock issued under employee stock purchase plan	15	—		1,518		—		—		—		1,518
Repurchases of common stock	(287)	—		—		(37,203)		—		—		(37,203)
Cash dividends declared ($0.50 per common share)	—	—		—		—		—		(34,889)		(34,889)
Other	—	—		(4)		—		—		—		(4)
Balance, July 11, 2020	69,139	$	8	$	760,535	$	(961,592)	$	(43,939)	$	3,971,507	$	3,726,519
	Twenty-Eight Weeks Ended July 13, 2019
	Common Stock			Additional Paid-in Capital		Treasury Stock, at Cost		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance, December 29, 2018	72,460	$	8	$	694,797	$	(425,954)	$	(44,193)	$	3,326,155	$	3,550,813
Net income	—	—		—		—		—		267,320		267,320
Cumulative effect of accounting change from adoption of ASU 2016-02, net of tax										(23,165)		(23,165)
Total other comprehensive loss	—	—		—		—		10,712				10,712
Restricted stock units and deferred stock units vested	145	—		—		—		—		—		—
Share-based compensation	—	—		19,425		—		—		—		19,425
Stock issued under employee stock purchase plan	11	—		1,648		—		—		—		1,648
Repurchases of common stock	(921)	—		—		(146,638)		—		—		(146,638)
Cash dividends declared ($0.12 per common share)	—	—		—		—		—		(8,690)		(8,690)
Other	2	—		(123)		—		—		—		(123)
Balance, July 13, 2019	71,697	$	8	$	715,747	$	(572,592)	$	(33,481)	$	3,561,620	$	3,671,302

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

5

Advance Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019
Cash flows from operating activities:
Net income	$	233,548	$	267,320
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	135,221		123,257
Share-based compensation	23,838		19,425
Loss and impairment of long-lived assets	1,801		2,297
Provision for deferred income taxes	4,581		2,930
Other	940		11,719
Net change in:
Receivables, net	(55,055)		(85,941)
Inventories	67,894		(5,685)
Accounts payable	(108,860)		142,002
Accrued expenses	145,228		(21,272)
Other assets and liabilities, net	(926)		36,109
Net cash provided by operating activities	448,210		492,161
Cash flows from investing activities:
Purchases of property and equipment	(140,105)		(111,425)
Purchase of an indefinite-lived intangible asset	(230)		—
Proceeds from sales of property and equipment	305		8,566
Net cash used in investing activities	(140,030)		(102,859)
Cash flows from financing activities:
Decrease in bank overdrafts	—		(70,265)
Proceeds from borrowings on revolving credit facility	500,000		—
Payment on revolving credit facility	(500,000)		—
Proceeds from issuance of senior unsecured notes	498,240		—
Redemption of senior unsecured notes	—		(310,047)
Dividends paid	(39,017)		(13,028)
Proceeds from the issuance of common stock	1,518		1,648
Repurchases of common stock	(37,203)		(146,638)
Other, net	(5,815)		(236)
Net cash provided by (used in) financing activities	417,723		(538,566)
Effect of exchange rate changes on cash	(3,066)		456
Net increase (decrease) in cash and cash equivalents	722,837		(148,808)
Cash and cash equivalents, beginning of period	418,665		896,527
Cash and cash equivalents, end of period	$	1,141,502	$	747,719
Non-cash transactions:
Accrued purchases of property and equipment	$	9,594	$	30,068

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

6

Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Nature 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 July 11, 2020, we operated a total of 4,819 stores and 167 branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of July 11, 2020, we served 1,262 independently owned Carquest branded stores across the same geographic locations served by our stores and branches in addition to Mexico, the Bahamas, Turks and Caicos and the British Virgin Islands.

In March 2020, the World Health Organization categorized the COVID-19 outbreak as a pandemic (“the pandemic”). As a majority of our stores and facilities have remained open, we have taken additional measures to help protect the health and safety of our Team Members and customers. Such measures, among others, include the implementation of other labor-related benefits for Team Members and increased sanitation practices across Advance. Since the assumptions underpinning our long-term revenue and cash flow growth rates, operating models and business strategies have not been significantly impacted, there was no material impairment of our various assets during the twelve and twenty-eight weeks ended July 11, 2020.

The COVID-19 pandemic remains an evolving situation. If a period of decreased demand were to reoccur, it may lead to increased asset recovery and valuation risks in the future, such as impairment of goodwill, intangible assets and store and other assets. We will continue to assess the impact of the pandemic on our financial position. The extent to which the COVID-19 pandemic will impact our operations, liquidity, compliance with debt covenants or financial results in subsequent periods is uncertain, but such impact could be material.

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 guidance. 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 2019 as filed with the SEC on February 18, 2020.

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 second and third quarter of 2020 consist of twelve weeks, while our fourth quarter of 2020 contains thirteen weeks due to the 53-week fiscal year in 2020.

2. Significant Accounting Policies

Revenues

The following table summarizes disaggregated revenue from contracts with customers by product group:

	Twelve Weeks Ended				Twenty-Eight Weeks Ended
	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Percentage of Net sales, by product group:
Parts and batteries	66	%	67	%	66	%	66	%
Accessories and chemicals	22		21		21		21
Engine maintenance	11		11		12		12
Other	1		1		1		1
Total	100	%	100	%	100	%	100	%

7

Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Recently Issued Accounting Pronouncements

During the sixteen weeks ended April 18, 2020, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which required us to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements.

During the twelve weeks ended July 11, 2020, we early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

3. Inventories

Inventories are stated at the lower of cost or market. We used the last in, first out (“LIFO”) method of accounting for approximately 88% and 89% of inventories as of July 11, 2020 and December 28, 2019. 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 twenty-eight weeks ended July 11, 2020 and prior years. We recorded an increase to Cost of sales of $3.1 million and $16.5 million for the twelve weeks ended July 11, 2020 and July 13, 2019, an increase to Cost of sales of $11.9 million and $42.9 million for the twenty-eights weeks ended July 11, 2020 and July 13, 2019 to state inventories at LIFO.

An actual valuation of inventory under the LIFO method is performed by us at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected inventory levels and costs at the end of the year.

Inventory balances were as follows:

(in thousands)	July 11, 2020		December 28, 2019
Inventories at first in, first out (“FIFO”)	$	4,228,833	$	4,290,565
Adjustments to state inventories at LIFO	129,656		141,603
Inventories at LIFO	$	4,358,489	$	4,432,168

4. Intangible Assets

Our definite-lived intangible assets include customer relationships and non-compete agreements. Amortization expense was $7.3 million for the twelve weeks ended July 11, 2020 and July 13, 2019 and $17.0 million for the twenty-eight weeks ended July 11, 2020 and July 13, 2019.

8

Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

5. Receivables, net

Receivables consist of the following:

(in thousands)	July 11, 2020		December 28, 2019
Trade	$	519,614	$	422,403
Vendor	202,031		249,009
Other	31,177		32,306
Total receivables	752,822		703,718
Less: allowance for doubtful accounts	(10,476)		(14,249)
Receivables, net	$	742,346	$	689,469

6. Long-term Debt and Fair Value of Financial Instruments

Long-term debt consists of the following:

(in thousands)	July 11, 2020		December 28, 2019
4.50% Senior Unsecured Notes due January 15, 2022	$	299,581	$	299,441
4.50% Senior Unsecured Notes due December 1, 2023	448,095		447,879
3.90% Senior Unsecured Notes due April 15, 2030	492,664		—
Total long-term debt	$	1,240,340	$	747,320
Fair value of long-term debt	$	1,352,000	$	795,000

Fair Value of Financial Assets and Liabilities

The fair value of our senior unsecured notes was determined using Level 2 inputs based on quoted market prices. The carrying amounts of our cash and cash equivalents, receivables, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.

Senior Unsecured Notes

Our 4.50% senior unsecured notes due January 15, 2022 (the “2022 Notes”) were issued in January 2012 at 99.97% of the principal amount of $300.0 million. The 2022 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on January 15 and July 15 of each year. Our 4.50% senior unsecured notes due December 1, 2023 (the “2023 Notes”) were issued in December 2013 at 99.69% of the principal amount of $450.0 million. The 2023 Notes bear interest at a rate of 4.50% per year payable semi-annually in arrears on June 1 and December 1 of each year.

On April 16, 2020, we issued $500.0 million aggregate principal amount of senior unsecured notes (the “Original Notes”). The Original Notes were issued at 99.65% of the principal amount of $500.0 million, are due April 15, 2030 and bear interest at 3.90% per year payable semi-annually in arrears on April 15 and October 15 of each year (collectively with the 2023 Notes and 2022 Notes, referred to as our “senior unsecured notes”).

During the twelve weeks ended July 11, 2020, the Company commenced an exchange offer to exchange the Original Notes in the aggregate principal amount of $500.0 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 3.90% senior unsecured notes due 2030 (the “Exchange Notes”), which have been registered under the Securities Act. The Original Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Original Notes. On July 28, 2020, the Original Notes were successfully exchanged for the Exchange Notes.

9

Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

On August 17, 2020, we notified the trustee of our intent to redeem the $300 million aggregate principal of our 2022 Notes.

Bank Debt

During the twelve weeks ended July 11, 2020, we elected to repay the $500.0 million outstanding under our revolving credit facility that we borrowed during the first quarter of 2020. As of July 11, 2020, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under the unsecured revolving credit facility (the “2017 Credit Agreement”). As of December 28, 2019, we had no outstanding borrowings, $1.0 billion of borrowing availability and no letters of credit outstanding under our unsecured revolving credit facility.

As of July 11, 2020 and December 28, 2019, we had $100.1 million and $111.6 million of bilateral letters of credit issued separately from the 2017 Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term of one year or less and primarily serve as collateral for our self-insurance policies.

We were in compliance with financial covenants required by our debt arrangements as of July 11, 2020.

Debt Guarantees

We are a guarantor of loans made by banks to various independently owned Carquest-branded stores that are our customers totaling $54.3 million and $26.4 million as of July 11, 2020 and December 28, 2019. 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 $65.7 million and $50.3 million as of July 11, 2020 and December 28, 2019. We believe that the likelihood of performance under these guarantees is remote.

7. Leases

Substantially all of our leases are for facilities and vehicles. The initial term for facilities are typically 5 years to 10 years, with renewal options at 5 year intervals, with the exercise of lease renewal options at our sole discretion. Our vehicle and equipment leases are typically 3 years to 5 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease liabilities consist of the following:

(in thousands)	July 11, 2020		December 28, 2019
Total operating lease liabilities	$	2,472,467	$	2,495,141
Less: Current portion of operating lease liabilities	(431,067)		(477,982)
Noncurrent operating lease liabilities	$	2,041,400	$	2,017,159

The current portion of operating lease liabilities is included in Other current liabilities in the accompanying condensed consolidated balance sheets.

10

Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

Total lease cost is included in Cost of sales and selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. Total lease cost is comprised of the following:

	Twelve Weeks Ended				Twenty-Eight Weeks Ended
(in thousands)	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Operating lease cost	$	119,707	$	124,765	$	281,512	$	284,811
Variable lease cost	30,856		32,856		74,392		82,546
Total lease cost	$	150,563	$	157,621	$	355,904	$	367,357

The future maturity of lease liabilities are as follows:

(in thousands)	July 11, 2020
Remainder of 2020	$	262,725
2021	503,068
2022	424,431
2023	387,012
2024	308,440
Thereafter	973,223
Total lease payments	2,858,899
Less: Imputed interest	(386,432)
Total operating lease liabilities	$	2,472,467

As of July 11, 2020, our operating lease payments include $86.2 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $56.9 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 7.1 years and 3.9% as of July 11, 2020. We calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that we would pay to borrow funds on a fully collateralized basis over a similar term.

Other information relating to our lease liabilities is as follows:

	Twenty-Eight Weeks Ended
(in thousands)	July 11, 2020		July 13, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	305,079	$	278,323
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	219,954	$	201,856

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Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

8. Warranty Liabilities

The following table presents changes in our warranty reserves:

	Twenty-Eight Weeks Ended		Fifty-Two Weeks Ended
(in thousands)	July 11, 2020		December 28, 2019
Warranty reserve, beginning of period	$	36,820	$	45,280
Additions to warranty reserves	9,341		34,117
Reduction and utilization of reserve	(20,445)		(42,577)
Warranty reserve, end of period	$	25,716	$	36,820

9. Share Repurchase Program

On November 8, 2019, our Board of Directors authorized a $700.0 million share repurchase program. This new authorization was in addition to the $400.0 million share repurchase program that was authorized by our Board of Directors in August 2019. Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time.

During the twelve weeks ended July 11, 2020, we purchased no shares of our common stock under the share repurchase program. During the twelve weeks ended July 13, 2019, we purchased 0.1 million shares of our common stock under the share repurchase program at an aggregate cost of $10.9 million, or an average price of $151.58 per share. During the twenty-eight weeks ended July 11, 2020 and July 13, 2019, we repurchased 0.2 million and 0.9 million shares of our common stock under our share repurchase program. The shares repurchased in connection with our share repurchase program during the twenty-eight weeks ended July 11, 2020 and July 13, 2019 were at an aggregate cost of $29.0 million and $138.1 million, or an average price of $128.36 and $158.98 per share. We had $861.7 million remaining under our share repurchase program as of July 11, 2020.

10. Earnings per Share

The computation of basic and diluted earnings per share are as follows:  

	Twelve Weeks Ended				Twenty-Eight Weeks Ended
(in thousands, except per share data)	July 11, 2020		July 13, 2019		July 11, 2020		July 13, 2019
Numerator
Net income applicable to common shares	$	189,960	$	124,820	$	233,548	$	267,320
Denominator
Basic weighted average common shares	69,118		71,738		69,154		71,767
Dilutive impact of share-based awards	176		270		196		296
Diluted weighted average common shares (1)	69,294		72,008		69,350		72,063
Basic earnings per common share	$	2.75	$	1.74	$	3.38	$	3.73
Diluted earnings per common share	$	2.74	$	1.73	$	3.37	$	3.71

⁽¹⁾For the twelve and twenty-eight weeks ended July 11, 2020, 159 thousand and 326 thousand restricted stock units (“RSUs”) were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For the twelve and twenty-eight weeks ended July 13, 2019, these anti-dilutive RSUs were insignificant.

12

Advance Auto Parts, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

11. Share-Based Compensation

During the twenty-eight weeks ended July 11, 2020, we granted 284 thousand time-based RSUs, 74 thousand performance-based RSUs and 37 thousand market-based RSUs. The general terms of the time-based, performance-based and market-based RSUs are similar to awards previously granted by us.

The weighted average fair values of the time-based, performance-based and market-based RSUs granted during the twenty-eight weeks ended July 11, 2020 were $134.04, $130.03 and $145.04 per share. For time-based and performance-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.

Total income tax benefit related to share-based compensation expense for the twelve and twenty-eight weeks ended July 11, 2020 was $2.5 million and $6.0 million Total income tax benefit related to share-based compensation expense for the twelve and twenty-eight weeks ended July 13, 2019 was $2.3 million and $5.0 million As of July 11, 2020, there was $84.6 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.7 years.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 28, 2019 (filed with the SEC on February 18, 2020), which we refer to as our 2019 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 when the current period of crisis passes, our team will emerge even stronger.

In response to the COVID-19 pandemic, we have continued to take additional measures to help ensure the health and safety of our Team Members and customers. Such measures include retro-fitting our stores with plexigl