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EX-32.1 - EXHIBIT 32.1 - ADVANCE AUTO PARTS INCaap_exhibit321x1072017.htm
EX-31.2 - EXHIBIT 31.2 - ADVANCE AUTO PARTS INCaap_exhibit312x1072017.htm
EX-31.1 - EXHIBIT 31.1 - ADVANCE AUTO PARTS INCaap_exhibit311x1072017.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 7, 2017
OR
o 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
________________________

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ADVANCE AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
________________________

 Delaware
(State or other jurisdiction of
incorporation or organization)
   54-2049910
(I.R.S. Employer
Identification No.)
 
5008 Airport Road, Roanoke, Virginia 24012
(Address of Principal Executive Offices)
(Zip Code)
 
(540) 362-4911
(Registrant’s telephone number, including area code)
 
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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company o
 
Emerging growth company o

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 10, 2017, the registrant had outstanding 73,898,043 shares of Common Stock, par value $0.0001 per share (the only class of common stock of the registrant outstanding).
 




 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


PART I.  FINANCIAL INFORMATION
 
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
ADVANCE AUTO PARTS, INC. AND SUBSIDIARIES 

Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data) (Unaudited)

 
October 7,
2017
 
December 31,
2016
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
363,302

 
$
135,178

 
Receivables, net
679,359

 
641,252

 
Inventories
4,219,321

 
4,325,868

 
Other current assets
105,970

 
70,466

 
Total current assets
5,367,952

 
5,172,764

 
Property and equipment, net of accumulated depreciation of $1,755,749 and $1,660,648
1,418,486

 
1,446,340

 
Goodwill
994,408

 
990,877

 
Intangible assets, net
608,520

 
640,903

 
Other assets, net
78,858

 
64,149

 
 
$
8,468,224

 
$
8,315,033

 
Liabilities and Stockholders’ Equity
 

 
 

 
Current liabilities:
 

 
 

 
Accounts payable
2,921,653

 
3,086,177

 
Accrued expenses
572,360

 
554,397

 
Other current liabilities
43,396

 
35,472

 
Total current liabilities
3,537,409

 
3,676,046

 
Long-term debt
1,044,008

 
1,042,949

 
Deferred income taxes
429,194

 
454,282

 
Other long-term liabilities
226,826

 
225,564

 
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
656,718

 
631,052

 
Treasury stock, at cost
(141,482
)
 
(138,102
)
 
Accumulated other comprehensive loss
(24,503
)
 
(39,701
)
 
Retained earnings
2,740,046

 
2,462,935

 
Total stockholders’ equity
3,230,787

 
2,916,192

 
 
$
8,468,224

 
$
8,315,033

 



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

1


Advance Auto Parts, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 7,
2017
 
October 8,
2016
 
October 7,
2017
 
October 8,
2016
Net sales
$
2,182,233

 
$
2,248,855

 
$
7,336,798

 
$
7,484,788

Cost of sales, including purchasing and warehousing costs
1,234,525

 
1,260,650

 
4,125,318

 
4,136,437

Gross profit
947,708

 
988,205

 
3,211,480

 
3,348,351

Selling, general and administrative expenses
791,139

 
794,437

 
2,728,420

 
2,666,900

Operating income
156,569

 
193,768

 
483,060

 
681,451

Other, net:
 

 
 

 
 
 
 
Interest expense
(13,314
)
 
(13,581
)
 
(45,665
)
 
(46,545
)
Other income (expense), net
745

 
(2,349
)
 
8,727

 
7,018

Total other, net
(12,569
)
 
(15,930
)
 
(36,938
)
 
(39,527
)
Income before provision for income taxes
144,000

 
177,838

 
446,122

 
641,924

Provision for income taxes
48,004

 
63,994

 
155,117

 
244,667

Net income
$
95,996

 
$
113,844

 
$
291,005

 
$
397,257

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.30

 
$
1.54

 
$
3.94

 
$
5.38

Weighted average shares outstanding
73,866

 
73,638

 
73,827

 
73,524

 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.30

 
$
1.53

 
$
3.93

 
$
5.36

Weighted average shares outstanding - assuming dilution
74,106

 
73,860

 
74,097

 
73,847

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.06

 
$
0.06

 
$
0.18

 
$
0.18



Condensed Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
 
Twelve Week Periods Ended
 
Forty Week Periods Ended
 
October 7,
2017
 
October 8,
2016
 
October 7,
2017
 
October 8,
2016
Net income
$
95,996

 
$
113,844

 
$
291,005

 
$
397,257

Other comprehensive income (loss):
 
 
 
 
 
 
 
Changes in net unrecognized other postretirement benefit costs, net of tax of $41, $88, $137 and $295
(63
)
 
(136
)
 
(211
)
 
(455
)
Currency translation adjustments
2,225

 
(4,939
)
 
15,409

 
7,018

Total other comprehensive income (loss)
2,162

 
(5,075
)
 
15,198

 
6,563

Comprehensive income
$
98,158

 
$
108,769

 
$
306,203

 
$
403,820






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 Cash Flows
(In thousands) (Unaudited)
 
Forty Week Periods Ended
 
October 7, 2017
 
October 8, 2016
Cash flows from operating activities:
 
 
 
Net income
$
291,005

 
$
397,257

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
192,753

 
199,262

Share-based compensation
28,156

 
11,664

Loss on property and equipment, net
4,692

 
4,602

(Benefit) provision for deferred income taxes
(25,712
)
 
21,130

Other, net
2,262

 
(2,657
)
Net change in:
 
 
 
Receivables, net
(35,760
)
 
(87,488
)
Inventories
116,957

 
(175,678
)
Accounts payable
(170,227
)
 
(9,222
)
Accrued expenses
36,564

 
84,897

Other assets and liabilities
(39,685
)
 
(16,735
)
Net cash provided by operating activities
401,005

 
427,032

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(160,960
)
 
(204,213
)
Proceeds from sales of property and equipment
6,120

 
1,483

Other, net
20

 
(2,672
)
Net cash used in investing activities
(154,820
)
 
(205,402
)
Cash flows from financing activities:
 

 
 

Increase in bank overdrafts
4,676

 
8,765

Borrowings under credit facilities
534,400

 
686,100

Payments on credit facilities
(534,400
)
 
(846,100
)
Dividends paid
(17,828
)
 
(17,734
)
Proceeds from the issuance of common stock
3,142

 
3,438

Tax withholdings related to the exercise of stock appreciation rights
(6,414
)
 
(15,764
)
Repurchase of common stock
(3,380
)
 
(12,300
)
Other, net
(2,095
)
 
(323
)
Net cash used in financing activities
(21,899
)
 
(193,918
)
Effect of exchange rate changes on cash
3,838

 
1,000

Net increase in cash and cash equivalents
228,124

 
28,712

Cash and cash equivalents, beginning of period
135,178

 
90,782

Cash and cash equivalents, end of period
$
363,302

 
$
119,494

 
 
 
 
Non-cash transactions:
 
 
 
Accrued purchases of property and equipment
$
7,860

 
$
20,300





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

3


Advance Auto Parts, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)




1. Description of Business and Basis of Presentation

Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both “do-it-for-me”, or Professional, and “do-it-yourself”, or DIY customers. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company and include the accounts of Advance Auto Parts, Inc. (“Advance”), its wholly owned subsidiary, Advance Stores Company, Incorporated (“Advance Stores”), and its subsidiaries (collectively referred to as “Advance”, “we”, “us”, “our” or “the Company”).

As of October 7, 2017, the Company operated a total of 5,074 stores and 129 distribution branches primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. The Company’s stores operate primarily under the trade names “Advance Auto Parts,” “Carquest” and “Autopart International,” and our distribution branches operate under the “Worldpac” trade name. In addition, as of October 7, 2017, the Company served approximately 1,250 independently-owned Carquest branded stores (“independent stores”) across the same geographic locations served by the Company’s stores in addition to Mexico, the Bahamas, Turks and Caicos, the British Virgin Islands and the Pacific Islands.

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted based upon the Securities and Exchange Commission (“SEC”) interim reporting guidance. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for 2016 as filed with the SEC on February 28, 2017.

The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full fiscal year. The first quarter of each of the Company’s fiscal years contains sixteen weeks. The Company’s remaining three quarters consist of twelve weeks.

Segment and Related Information

Effective in the third quarter of 2017, the Company realigned its three geographic divisions, which included the operations of the stores operating under the Advance Auto Parts, Carquest and Autopart International trade names, into two US geographic divisions. As a result of this realignment and change in the operating structure of its Carquest Independent and Carquest Canada businesses, the Company has increased its number of operating segments from four to five. As a result, goodwill was reassigned to the affected reporting units using a relative fair value approach. The Company continues to aggregate its operating segments into one reportable segment.

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” aimed at simplifying certain aspects of accounting for share-based payment transactions. The areas for simplification include the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter of 2017 and recorded a cumulative effect reduction to beginning retained earnings of $490 thousand related to the Company’s election to record forfeitures as they occur. In addition, the Company elected to retrospectively adopt the provision regarding the presentation of excess tax benefits in the statement of cash flows, which resulted in an increase in our net cash provided by operating activities and a decrease in our net cash provided by financing activities of $17.6 million for the forty weeks ended October 8, 2016. The provision requiring the inclusion of excess tax benefits (deficits) as a component of the provision for income taxes in the consolidated results of operations is being applied prospectively. The Company recorded excess tax benefits of $4.5 million as a reduction in Provision for income taxes during the forty weeks ended October 7, 2017. The impact of excess tax benefits was immaterial during the twelve weeks ended October 7, 2017.


4


Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It will require lessees to recognize lease assets and lease liabilities for all leases, including those leases previously classified as operating leases under current GAAP. The ASU is effective for annual periods beginning after December 15, 2018 with early adoption permitted. From a balance sheet perspective, the Company expects adoption of the new standard to have a material effect on its Total assets and Total liabilities as a result of recording the required right of use asset and associated lease liability. However, the Company has not completed its analysis and is unable to quantify the impact at this time. Currently, the Company does not expect adoption of ASU 2016-02 to have a material impact on its consolidated statements of operations as the majority of its leases will remain operating in nature. As such, the expense recognition will be similar to previously required straight-line expense treatment. The Company is also in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard in 2019.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” This ASU, along with subsequent ASU’s issued to clarify certain provisions of ASU 2014-09, is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company plans to adopt the new standard effective December 31, 2017 and will apply the modified retrospective method. The Company has analyzed the impact of ASU 2014-09, as amended, on its revenue contracts, comparing the Company’s current accounting policies and practices to the requirements of the new standard and identified differences that would result from applying the new standard to its contracts. The Company has determined the adoption of the new standard will not have a material impact on its consolidated financial condition, results of operations or cash flows. Additionally, the Company does not anticipate any significant changes to business processes, controls or systems as a result of adopting the new standard.

2. Inventories

Inventories are stated at the lower of cost or market. The Company used the LIFO method of accounting for approximately 88% and 89% of inventories at October 7, 2017 and December 31, 2016. Under the LIFO method, the Company’s cost of sales reflects the costs of the most recently purchased inventories, while the inventory carrying balance represents the costs for inventories purchased in 2017 and prior years. As a result of changes in the LIFO reserve, the Company recorded a reduction to cost of sales of $6.5 million and $48.7 million for the forty weeks ended October 7, 2017 and October 8, 2016.

An actual valuation of inventory under the LIFO method is performed by the Company at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs.

Inventory balances were as follows:
(in thousands)
October 7,
2017
 
December 31, 2016
Inventories at FIFO
$
4,006,968

 
$
4,120,030

Adjustments to state inventories at LIFO
212,353

 
205,838

Inventories at LIFO
$
4,219,321

 
$
4,325,868



5


3. Exit Activities

Integration of Carquest stores

The Company is in the process of a multi-year integration, which includes the consolidation and conversion of its Carquest stores acquired with General Parts International, Inc. (“GPI”) on January 2, 2014. As of October 7, 2017, 345 Carquest stores acquired with GPI had been consolidated into existing Advance Auto Parts stores and 414 stores had been converted to the Advance Auto Parts format. During the twelve weeks ended October 7, 2017, a total of three Carquest stores were consolidated and 37 Carquest stores were converted. During the forty weeks ended October 7, 2017, a total of 12 Carquest stores were consolidated and 132 Carquest stores were converted. We expect to consolidate or convert the remaining U.S. Carquest stores over the next few years. As of October 7, 2017, the Company had 463 stores still operating under the Carquest name.

The Company incurred $2.2 million of exit costs related to the consolidations during the twelve weeks ended October 8, 2016, primarily related to closed store lease obligations. Exit costs were immaterial during the twelve weeks ended October 7, 2017. The Company incurred $1.0 million and $17.6 million of exit costs related to the consolidations during the forty weeks ended October 7, 2017 and October 8, 2016 primarily related to closed store lease obligations. These costs are included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

2017 Field and Support Center Restructuring

In June 2017, the Company restructured its field organization and streamlined its operating structure. The restructuring activity was substantially complete as of October 7, 2017 and resulted in the recognition of $7.7 million of expenses related to severance. These costs are included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Total Exit Liabilities

The Company’s total exit liabilities include liabilities recorded in connection with the consolidation of Carquest stores and restructuring activities described above, along with liabilities associated with facility closures that have occurred as part of our normal market evaluation process. Cash payments on the closed facility lease obligations are expected to be made through 2028 and the remaining severance payments are expected to be made in 2017. Of the Company’s total exit liabilities as of October 7, 2017, $21.8 million is included in Other long-term liabilities and the remainder is included in Accrued expenses in the accompanying condensed consolidated balance sheets. A summary of the Company’s exit liabilities are presented in the following table:
(in thousands)
 
Closed Facility Lease Obligations
 
Severance
 
Total
Balance, December 31, 2016
 
$
44,265

 
$
959

 
$
45,224

Reserves established
 
5,098

 
7,715

 
12,813

Change in estimates
 
177

 
(156
)
 
21

Cash payments
 
(14,723
)
 
(5,739
)
 
(20,462
)
Balance, October 7, 2017
 
$
34,817

 
$
2,779

 
$
37,596

 
 
 
 
 
 
 
Balance, January 2, 2016
 
$
42,490

 
$
6,255

 
$
48,745

Reserves established
 
23,252

 
988

 
24,240

Change in estimates
 
(3,073
)
 
(410
)
 
(3,483
)
Cash payments
 
(18,404
)
 
(5,874
)
 
(24,278
)
Balance, December 31, 2016
 
$
44,265

 
$
959

 
$
45,224



6


4. Intangible Assets

The Company’s definite-lived intangible assets include customer relationships, favorable leases and non-compete agreements. Amortization expense was $10.7 million and $11.3 million for the twelve weeks ended October 7, 2017 and October 8, 2016 and $36.3 million and $37.1 million for the forty weeks ended October 7, 2017 and October 8, 2016.

5. Receivables, net

Receivables consist of the following:
(in thousands)
 
October 7,
2017
 
December 31, 2016
Trade
 
$
444,561

 
$
407,301

Vendor
 
244,322

 
239,770

Other
 
13,690

 
23,345

Total receivables
 
702,573

 
670,416

Less: Allowance for doubtful accounts
 
(23,214
)
 
(29,164
)
Receivables, net
 
$
679,359

 
$
641,252


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

Long-term debt consists of the following:
(in thousands)
October 7,
2017
 
December 31,
2016
Total long-term debt
$
1,044,358

 
$
1,043,255

Less: Current portion of long-term debt (included in Other current liabilities)
(350
)
 
(306
)
Long-term debt, excluding current portion
$
1,044,008

 
$
1,042,949

 
 
 
 
Fair value of long-term debt
$
1,129,000

 
$
1,118,000


Fair Value of Financial Assets and Liabilities

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

Bank Debt

On January 31, 2017, the Company entered into a new credit agreement which provides a $1.0 billion unsecured revolving credit facility (the “2017 Credit Agreement”) with Advance Stores, as Borrower, the lenders party thereto, and Bank of America, N.A., as the administrative agent. This new revolver under the 2017 Credit Agreement replaced the revolver under the 2013 Credit Agreement. The 2017 Credit Agreement provides for the issuance of letters of credit with a sublimit of $200.0 million. The Company may request that the total revolving commitment be increased by an amount not exceeding $250.0 million during the term of the 2017 Credit Agreement. Voluntary prepayments and voluntary reductions of the revolving loan balance, if any, are permitted in whole or in part, at the Company’s option, in minimum principal amounts as specified in the 2017 Credit Agreement. The 2017 Credit Agreement terminates in January 2022; however, the Company may request one or two one-year extensions of the termination date prior to the first or second anniversary of the closing date.

As of October 7, 2017, the Company had no outstanding borrowings under the revolver and borrowing availability was $576.1 million based on applicable covenant restrictions under the Company’s leverage ratio. As of October 7, 2017, the Company had letters of credit outstanding of $99.7 million, which generally have a term of one year or less and primarily serve as collateral for the Company’s self-insurance policies.


7


The interest rates on outstanding amounts, if any, on the revolving facility under the 2017 Credit Agreement will be based, at the Company’s option, on an adjusted LIBOR, plus a margin, or an alternate base rate, plus a margin. After an initial interest period, the Company may elect to convert a particular borrowing to a different type. The initial margins per annum for the revolving loan are 1.10% for the adjusted LIBOR and 0.10% for alternate base rate borrowings. A facility fee of 0.15% per annum will be charged on the total revolving facility commitment, payable quarterly in arrears. Under the terms of the 2017 Credit Agreement, the interest rate spread, facility fee and commitment fee will be based on the Company’s credit rating. The interest rate spread ranges from 1.00% to 1.85% for adjusted LIBOR borrowings and 0.00% to 0.85% for alternate base rate borrowings.

The 2017 Credit Agreement contains customary covenants restricting the ability of: (a) Advance Stores and its subsidiaries to, among other things, (i) create, incur or assume additional debt (only with respect to subsidiaries of Advance Stores), (ii) incur liens, (iii) guarantee obligations, and (iv) change the nature of its business conducted by itself and its subsidiaries; (b) Advance, Advance Stores and their subsidiaries to, among other things (i) enter into certain hedging arrangements, (ii) enter into restrictive agreements limiting their ability to incur liens on any of their property or assets, pay distributions, repay loans, or guarantee indebtedness of their subsidiaries; and (c) Advance, among other things, to change the holding company status of Advance. Advance Stores is required to comply with financial covenants with respect to a maximum leverage ratio and a minimum coverage ratio. The 2017 Credit Agreement also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults of Advance Stores’ other material indebtedness. The Company was in compliance with its financial covenants with respect to the 2017 Credit Agreement as of October 7, 2017.

Debt Guarantees

The Company is a guarantor of loans made by banks to various independently owned Carquest branded stores that are customers of the Company totaling $25.7 million as of October 7, 2017. 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 $62.0 million as of October 7, 2017. The Company believes that the likelihood of performance under these guarantees is remote.

7. Earnings per Share

Diluted earnings per share are calculated by including the effect of dilutive securities. Share-based awards to purchase approximately 176 thousand and 22 thousand shares of common stock during the twelve week periods ended October 7, 2017 and October 8, 2016 were not included in the calculation of diluted earnings per share because they were anti-dilutive. Share-based awards to purchase approximately 142 thousand and 22 thousand shares of common stock during the forty week periods ended October 7, 2017 and October 8, 2016 were not included in the calculation of diluted earnings per share because they were anti-dilutive.

The following table illustrates the computation of basic and diluted earnings per share: 
 
Twelve Weeks Ended
 
Forty Weeks Ended
(in thousands, except per share data)
October 7,
2017
 
October 8,
2016
 
October 7,
2017
 
October 8,
2016
Numerator
 
 
 
 
 
 
 
Net income
$
95,996

 
$
113,844

 
$
291,005

 
$
397,257

Denominator
 
 
 
 
 

 
 
Basic weighted average shares
73,866

 
73,638

 
73,827

 
73,524

Dilutive impact of share-based awards
240

 
222

 
270

 
323

Diluted weighted average shares
74,106

 
73,860

 
74,097

 
73,847

 
 

 
 

 
 
 
 
Basic earnings per share
$
1.30

 
$
1.54

 
$
3.94

 
$
5.38

 
 

 
 

 
 
 
 
Diluted earnings per share
$
1.30

 
$
1.53

 
$
3.93

 
$
5.36



8


8. Share-Based Compensation

During the forty week period ended October 7, 2017, the Company granted 228 thousand time-based restricted stock units (“RSUs”), 51 thousand performance-based RSUs and 25 thousand market-based RSUs. The general terms of the time-based and performance-based RSUs are similar to awards previously granted by the Company. The market-based RSUs will vest based on the Company’s 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 weighted average fair values of the time-based, performance-based and market-based RSUs granted during the forty week period ended October 7, 2017 were $97.34, $151.35 and $111.65 per share. For time-based and performance-based RSUs, the fair value of each award was determined based on the market price of the Company’s 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 share-based compensation expense included in the Company’s condensed consolidated statements of operations was $8.2 million for the twelve week period ended October 7, 2017 and the related income tax benefit recognized was $3.1 million. Total share-based compensation expense included in the Company’s condensed consolidated statements of operations was $28.2 million for the forty week period ended October 7, 2017 and the related income tax benefit recognized was $10.5 million. As of October 7, 2017, there was $47.5 million of unrecognized compensation expense related to all share-based awards that is expected to be recognized over a weighted average period of 1.7 years.

9. Warranty Liabilities

The following table presents changes in the Company’s warranty reserves, which are included in Accrued expenses in its condensed consolidated balance sheets.
 
Forty Weeks Ended
 
Fifty-Two Weeks Ended
(in thousands)
October 7,
2017
 
December 31, 2016
Warranty reserve, beginning of period
$
47,243

 
$
44,479

Additions to warranty reserves
39,777

 
46,903

Reserves utilized
(37,516
)
 
(44,139
)
Warranty reserve, end of period
$
49,504

 
$
47,243

  

10. Condensed Consolidating Financial Statements


Certain 100% wholly owned domestic subsidiaries of Advance, including its Material Subsidiaries (as defined in the 2017 Credit Agreement) serve as guarantors of Advance’s senior unsecured notes (“Guarantor Subsidiaries”). The subsidiary guarantees related to Advance’s senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of Advance to obtain funds from its Guarantor Subsidiaries. Certain of Advance’s wholly owned subsidiaries, including all of its foreign subsidiaries, do not serve as guarantors of Advance’s senior unsecured notes (“Non-Guarantor Subsidiaries”).

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, and cash flows of (i) Advance, (ii) the Guarantor Subsidiaries, (iii) the Non-Guarantor Subsidiaries, and (iv) the eliminations necessary to arrive at consolidated information for the Company. Investments in subsidiaries of the Company are presented under the equity method. The statement of operations eliminations relate primarily to the sale of inventory from a Non-Guarantor Subsidiary to a Guarantor Subsidiary. The balance sheet eliminations relate primarily to the elimination of intercompany receivables and payables and subsidiary investment accounts.


9


Condensed Consolidating Balance Sheets (Unaudited)
As of October 7, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23

 
$
312,193

 
$
51,109

 
$
(23
)
 
$
363,302

Receivables, net

 
635,964

 
43,395

 

 
679,359

Inventories

 
4,030,391

 
188,930

 

 
4,219,321

Other current assets

 
105,047

 
1,057

 
(134
)
 
105,970

Total current assets
23

 
5,083,595

 
284,491

 
(157
)
 
5,367,952

Property and equipment, net of accumulated depreciation
108

 
1,408,580

 
9,798

 

 
1,418,486

Goodwill

 
943,358

 
51,050

 

 
994,408

Intangible assets, net

 
561,921

 
46,599

 

 
608,520

Other assets, net
4,391

 
78,248

 
610

 
(4,391
)
 
78,858

Investment in subsidiaries
3,330,214

 
439,076

 

 
(3,769,290
)
 

Intercompany note receivable
1,048,636

 

 

 
(1,048,636
)
 

Due from intercompany, net

 

 
336,163

 
(336,163
)
 

 
$
4,383,372

 
$
8,514,778

 
$
728,711

 
$
(5,158,637
)
 
$
8,468,224

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
2,673,704

 
$
247,949

 
$

 
$
2,921,653

Accrued expenses
3,026

 
549,953

 
19,515

 
(134
)
 
572,360

Other current liabilities

 
43,130

 
289

 
(23
)
 
43,396

Total current liabilities
3,026

 
3,266,787

 
267,753

 
(157
)
 
3,537,409

Long-term debt
1,044,008

 

 

 

 
1,044,008

Deferred income taxes

 
413,787

 
19,797

 
(4,390
)
 
429,194

Other long-term liabilities

 
224,741

 
2,085

 

 
226,826

Intercompany note payable

 
1,048,636

 

 
(1,048,636
)
 

Due to intercompany, net
105,551

 
230,612

 

 
(336,163
)
 

Commitments and contingencies

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Stockholders' equity
3,230,787

 
3,330,215

 
439,076

 
(3,769,291
)
 
3,230,787

 
$
4,383,372

 
$
8,514,778

 
$
728,711

 
$
(5,158,637
)
 
$
8,468,224



10


Condensed Consolidating Balance Sheets (Unaudited)
As of December 31, 2016
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
22

 
$
78,543

 
$
56,635

 
$
(22
)
 
$
135,178

Receivables, net

 
619,229

 
22,023

 

 
641,252

Inventories

 
4,126,465

 
199,403

 

 
4,325,868

Other current assets

 
69,385

 
1,153

 
(72
)
 
70,466

Total current assets
22

 
4,893,622

 
279,214

 
(94
)
 
5,172,764

Property and equipment, net of accumulated depreciation
128

 
1,436,459

 
9,753

 

 
1,446,340

Goodwill

 
943,359

 
47,518

 

 
990,877

Intangible assets, net

 
595,596

 
45,307

 

 
640,903

Other assets, net
4,634

 
63,376

 
773

 
(4,634
)
 
64,149

Investment in subsidiaries
3,008,856

 
375,420

 

 
(3,384,276
)
 

Intercompany note receivable
1,048,424

 

 

 
(1,048,424
)
 

Due from intercompany, net

 

 
316,109

 
(316,109
)
 

 
$
4,062,064

 
$
8,307,832

 
$
698,674

 
$
(4,753,537
)
 
$
8,315,033

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
2,813,937

 
$
272,240

 
$

 
$
3,086,177

Accrued expenses
1,505

 
526,652

 
26,312

 
(72
)
 
554,397

Other current liabilities

 
32,508

 
2,986

 
(22
)
 
35,472

Total current liabilities
1,505

 
3,373,097

 
301,538

 
(94
)
 
3,676,046

Long-term debt
1,042,949

 

 

 

 
1,042,949

Deferred income taxes

 
439,283

 
19,633

 
(4,634
)
 
454,282

Other long-term liabilities

 
223,481

 
2,083

 

 
225,564

Intercompany note payable

 
1,048,424

 

 
(1,048,424
)
 

Due to intercompany, net
101,418

 
214,691

 

 
(316,109
)
 

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity
2,916,192

 
3,008,856

 
375,420

 
(3,384,276
)
 
2,916,192

 
$
4,062,064

 
$
8,307,832

 
$
698,674

 
$
(4,753,537
)
 
$
8,315,033



11


Condensed Consolidating Statements of Operations (Unaudited)
For the Twelve Weeks ended October 7, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,098,475

 
$
122,495

 
$
(38,737
)
 
$
2,182,233

Cost of sales, including purchasing and warehousing costs

 
1,185,654

 
87,608

 
(38,737
)
 
1,234,525

Gross profit

 
912,821

 
34,887

 

 
947,708

Selling, general and administrative expenses
5,806

 
777,201

 
19,751

 
(11,619
)
 
791,139

Operating (loss) income
(5,806
)
 
135,620

 
15,136

 
11,619

 
156,569

Other, net:
 
 
 
 
 
 
 
 
 
Interest (expense) income
(11,874
)
 
(1,401
)
 
(39
)
 

 
(13,314
)
Other income (expense), net
17,832

 
(4,665
)
 
(803
)
 
(11,619
)
 
745

Total other, net
5,958

 
(6,066
)
 
(842
)
 
(11,619
)
 
(12,569
)
Income before provision for income taxes
152

 
129,554

 
14,294

 

 
144,000

Provision for income taxes
(136
)
 
45,626

 
2,514

 

 
48,004

Income before equity in earnings of subsidiaries
288

 
83,928

 
11,780

 

 
95,996

Equity in earnings of subsidiaries
95,708

 
11,781

 

 
(107,489
)
 

Net income
$
95,996

 
$
95,709

 
$
11,780

 
$
(107,489
)
 
$
95,996


Condensed Consolidating Statements of Operations (Unaudited)
For the Twelve Weeks ended October 8, 2016
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
2,174,483

 
$
112,072

 
$
(37,700
)
 
$
2,248,855

Cost of sales, including purchasing and warehousing costs

 
1,219,636

 
78,714

 
(37,700
)
 
1,260,650

Gross profit

 
954,847

 
33,358

 

 
988,205

Selling, general and administrative expenses
6,665

 
778,643

 
20,807

 
(11,678
)
 
794,437

Operating (loss) income
(6,665
)
 
176,204

 
12,551

 
11,678

 
193,768

Other, net:
 
 
 
 
 
 
 
 
 
Interest (expense) income
(11,932
)
 
(1,669
)
 
20

 

 
(13,581
)
Other income (expense), net
18,809

 
(4,791
)
 
(4,689
)
 
(11,678
)
 
(2,349
)
Total other, net
6,877

 
(6,460
)
 
(4,669
)
 
(11,678
)
 
(15,930
)
Income before provision for income taxes
212

 
169,744

 
7,882

 

 
177,838

Provision for income taxes
361

 
62,252

 
1,381

 

 
63,994

(Loss) income before equity in earnings of subsidiaries
(149
)
 
107,492

 
6,501

 

 
113,844

Equity in earnings of subsidiaries
113,993

 
6,501

 

 
(120,494
)
 

Net income
$
113,844

 
$
113,993

 
$
6,501

 
$
(120,494
)
 
$
113,844



12


Condensed Consolidating Statements of Operations (Unaudited)
For the Forty Weeks ended October 7, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
7,075,603

 
$
432,790

 
$
(171,595
)
 
$
7,336,798

Cost of sales, including purchasing and warehousing costs

 
3,987,575

 
309,338

 
(171,595
)
 
4,125,318

Gross profit

 
3,088,028

 
123,452

 

 
3,211,480

Selling, general and administrative expenses
25,973

 
2,678,822

 
63,017

 
(39,392
)
 
2,728,420

Operating (loss) income
(25,973
)
 
409,206

 
60,435

 
39,392

 
483,060

Other, net:
 
 
 
 
 
 
 
 
 
Interest (expense) income
(40,240
)
 
(5,424
)
 
(1
)
 

 
(45,665
)
Other income (expense), net
67,183

 
(17,430
)
 
(1,634
)
 
(39,392
)
 
8,727

Total other, net
26,943

 
(22,854
)
 
(1,635
)
 
(39,392
)
 
(36,938
)
Income before provision for income taxes
970

 
386,352

 
58,800

 

 
446,122

(Benefit) provision for income taxes
(1,752
)
 
145,923

 
10,946

 

 
155,117

Income before equity in earnings of subsidiaries
2,722

 
240,429

 
47,854

 

 
291,005

Equity in earnings of subsidiaries
288,283

 
47,855

 

 
(336,138
)
 

Net income
$
291,005

 
$
288,284

 
$
47,854

 
$
(336,138
)
 
$
291,005


Condensed Consolidating Statements of Operations (Unaudited)
For the Forty Weeks ended October 8, 2016
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$

 
$
7,240,681

 
$
432,170

 
$
(188,063
)
 
$
7,484,788

Cost of sales, including purchasing and warehousing costs

 
4,023,979

 
300,521

 
(188,063
)
 
4,136,437

Gross profit

 
3,216,702

 
131,649

 

 
3,348,351

Selling, general and administrative expenses
17,965

 
2,620,217

 
72,028

 
(43,310
)
 
2,666,900

Operating (loss) income
(17,965
)
 
596,485

 
59,621

 
43,310

 
681,451

Other, net:
 
 
 
 
 
 
 
 
 
Interest (expense) income
(40,148
)
 
(6,457
)
 
60

 

 
(46,545
)
Other income (expense), net
58,524

 
(6,315
)
 
(1,881
)
 
(43,310
)
 
7,018

Total other, net
18,376

 
(12,772
)
 
(1,821
)
 
(43,310
)
 
(39,527
)
Income before provision for income taxes
411

 
583,713

 
57,800

 

 
641,924

Provision for income taxes
1,008

 
231,664

 
11,995

 

 
244,667

(Loss) income before equity in earnings of subsidiaries
(597
)
 
352,049

 
45,805

 

 
397,257

Equity in earnings of subsidiaries
397,854

 
45,805

 

 
(443,659
)
 

Net income
$
397,257

 
$
397,854

 
$
45,805

 
$
(443,659
)
 
$
397,257



13


Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Twelve Weeks ended October 7, 2017

(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
95,996

 
$
95,709

 
$
11,780

 
$
(107,489
)
 
$
95,996

Other comprehensive income
2,162

 
2,162

 
2,225

 
(4,387
)
 
2,162

Comprehensive income
$
98,158

 
$
97,871

 
$
14,005

 
$
(111,876
)
 
$
98,158



Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Twelve Weeks ended October 8, 2016
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
113,844

 
$
113,993

 
$
6,501

 
$
(120,494
)
 
$
113,844

Other comprehensive loss
(5,075
)
 
(5,075
)
 
(4,939
)
 
10,014

 
(5,075
)
Comprehensive income
$
108,769

 
$
108,918

 
$
1,562

 
$
(110,480
)
 
$
108,769



Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Forty Weeks ended October 7, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
291,005

 
$
288,284

 
$
47,854

 
$
(336,138
)
 
$
291,005

Other comprehensive income
15,198

 
15,198

 
15,409

 
(30,607
)
 
15,198

Comprehensive income
$
306,203

 
$
303,482

 
$
63,263

 
$
(366,745
)
 
$
306,203



Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Forty Weeks ended October 8, 2016
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
397,257

 
$
397,854

 
$
45,805

 
$
(443,659
)
 
$
397,257

Other comprehensive income
6,563

 
6,563

 
7,018

 
(13,581
)
 
6,563

Comprehensive income
$
403,820

 
$
404,417

 
$
52,823

 
$
(457,240
)
 
$
403,820




14


Condensed Consolidating Statements of Cash Flows (Unaudited)
For the Forty Weeks ended October 7, 2017
(in thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$

 
$
406,032

 
$
(5,027
)
 
$

 
$
401,005

 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(159,769
)
 
(1,191
)
 

 
(160,960
)
Proceeds from sales of property and equipment

 
6,108

 
12

 

 
6,120

Other, net

 
480

 
(460
)
 

 
20

Net cash used in investing activities

 
(153,181
)
 
(1,639
)
 

 
(154,820
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
(Decrease) increase in bank overdrafts

 
7,374

 
(2,698
)
 

 
4,676

Borrowings under credit facilities

 
534,400

 

 

 
534,400

Payments on credit facilities

 
(534,400
)
 

 

 
(534,400
)
Dividends paid

 
(17,828
)
 

 

 
(17,828
)
Proceeds from the issuance of common stock

 
3,142

 

 

 
3,142

Tax withholdings related to the exercise of stock appreciation rights

 
(6,414
)
 

 

 
(6,414
)
Repurchase of common stock

 
(3,380
)
 

 

 
(3,380
)
Other, net
1

 
(2,095
)
 

 
(1
)
 
(2,095
)
Net cash provided by (used in) financing activities
1

 
(19,201
)
 
(2,698
)
 
(1
)
 
(21,899
)
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash

 

 
3,838

 

 
3,838

 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
1

 
233,650

 
(5,526
)
 
(1
)
 
228,124

Cash and cash equivalents, beginning of period
22

 
78,543

 
56,635

 
(22
)
 
135,178

Cash and cash equivalents, end of period
$
23

 
$
312,193

 
$
51,109

 
$
(23
)
 
$
363,302



15


Condensed Consolidating Statements of Cash Flows (Unaudited)
For the Forty Weeks ended October 8, 2016

(In thousands)
Advance Auto Parts, Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating activities
$
14

 
$
415,649

 
$
11,369

 
$

 
$
427,032

 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment

 
(202,382
)
 
(1,831
)
 

 
(204,213
)
Proceeds from sales of property and equipment

 
1,481

 
2

 

 
1,483

Other, net

 
(2,672
)
 

 

 
(2,672
)
Net cash used in investing activities

 
(203,573
)
 
(1,829
)
 

 
(205,402
)
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities: