ADVANCE AUTO PARTS INC

1. Nature of Operations and Basis of Presentation

Description of Business

Advance Auto Parts, Inc. and subsidiaries is a leading automotive aftermarket parts provider in North America, serving both professional installers (“professional”) and “do-it-yourself” (“DIY”) customers. The accompanying unaudited condensed consolidated financial statements 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 “the Company”).

As of April 19, 2025, the Company operated a total of 4,285 stores primarily within the United States, with additional locations in Canada, Puerto Rico and the U.S. Virgin Islands. In addition, as of April 19, 2025, the Company served 881 independently owned Carquest branded stores across the same geographic locations served by the Company’s stores in addition to Mexico and various Caribbean islands. The Company’s stores operate primarily under the trade names “Advance Auto Parts” and “Carquest”.

The Company hasone reportable segment. As of December 28, 2024, the Company hadtwo operating segments, which were aggregated as a single reportable segment; however, following the stabilization of the Company’s new organizational structure in the first quarter of fiscal 2025, due to significant restructuring activities, the Company now operates under the single operating segment of “Advance Auto Parts/Carquest”. See Note 11. Segment Reporting and Note 3. Restructuring, of the notes to the condensed consolidated financial statements included herein for additional information on the Company’s segments and restructuring activities.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and unaudited notes to the condensed consolidated financial statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). 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 SEC interim reporting principles.

The accompanying condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. The accounting policies followed in the presentation of these condensed consolidated financial statements are consistent with those followed on an annual basis.

These condensed consolidated 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 fiscal year 2024 (“2024 Form 10-K”) as filed with the SEC on February 26, 2025. The results of operations for the interim periods are not necessarily indicative of the operating results to be expected for the full year. Consistent with prior years, the Company’s first quarter of the year contains sixteen weeks. The Company’s remaining three quarters each consist of twelve weeks.

Change in Presentation

Prior to fiscal 2025, the Company presented its condensed consolidated financial statements and notes to the condensed consolidated financial statements in thousands. Effective in fiscal 2025, such amounts are presented in millions, except par value share amounts and per share data, unless otherwise stated. Certain prior year amounts have been reclassified to conform to the current year presentation, including the separate disclosure of operating lease right of use assets, other assets, operating lease liabilities and other liabilities, on the condensed consolidated statements of cash flows. This change in presentation does not have a material impact on the condensed consolidated financial statements.

Further, consistent with the presentation in the Company’s 2024 Form 10-K, the Company has presented the sale of the Worldpac, Inc. business (“Worldpac”) as discontinued operations in its condensed consolidated financial statements. Comparative interim period amounts have been updated to reflect this presentation.

Recently Issued Accounting Pronouncements - Not Yet Adopted

Income Tax Disclosure Improvements

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes(“ASU 2023-09”), which requires a company to enhance its income tax disclosures. In each annual reporting period, the company should disclose the specific categories used in the rate reconciliation and additional information for reconciling items that meet a quantitative threshold, including disaggregation of taxes paid by jurisdiction. The related disclosures are effective for the fiscal year beginning after December 15, 2024. The Company is currently evaluating the impact of adopting ASU 2023-09 on the Company’s consolidated financial statements and related disclosures and believes that the adoption will result in additional disclosures, but will not have any other impact on its consolidated financial statements.

Disaggregation of Income Statement Expenses

In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation (“ASU 2024-03”), which requires public entities to disclose more detailed information about certain costs and expenses presented in the income statement, including (among other items) the amount of inventory purchases, employee compensation, selling expenses, depreciation and amortization of intangible assets. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2024-03 on the consolidated financial statements and related disclosures.

2. Revenues

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

There were no major customers individually accounting for 10% or more of consolidated net revenues.

3. Restructuring

2024 Restructuring Plan

On November 13, 2024, the Company’s Board of Directors approved a restructuring and asset optimization plan (“2024 Restructuring Plan”) designed to improve the Company’s profitability and growth potential and streamline its operations. This plan includes the closure of approximately 500 stores, approximately 200 independent locations andfour distribution centers by mid-2025, as well as headcount reductions. The Company completed the closure of all of these locations during the first quarter of 2025.

Expenses associated with the 2024 Restructuring Plan included: 1) noncash asset impairment and accelerated amortization and depreciation of operating lease Right-of-Use (“ROU”) assets and property and equipment, 2) personnel expenses related to severance and transition expenses, which were offered to certain employees who would provide services through key dates to ensure completion of closure activities and 3) other location closure-related activity, including nonrecurring services rendered by third-party vendors assisting with the turnaround initiatives and other related expenses, including incremental revisions to receivable collectability due to termination of contracts with independents associated with the 2024 Restructuring Plan.

Other Restructuring Initiatives

In November 2023, the Company announced a strategic and operational plan with anticipated savings of $150 million of which $50 million would be reinvested into frontline team members. In addition to a reduction in workforce, this plan streamlines the Company’s supply chain by configuring a multi-echelon supply chain by leveraging current asset and operating fewer, more productive distribution centers that focus on replenishment and move more parts closer to the customer. In achieving this plan, the Company is in process of converting certain distribution centers and stores into market hubs. In addition to providing replenishment to near-by stores, market hubs support retail operations. In addition to the distribution network optimization costs, other restructuring expenses included certain other items as further detailed in the table below.

The Company has recorded all restructuring and related expenses as a component of selling, general and administrative expenses in the condensed consolidated statement of operations, with the exception of inventory related expenses that are recorded as a component of cost of sales on the condensed consolidated statement of operations. No inventory related expenses were incurred during the first quarter of fiscal 2025 related to restructuring and related activities. No restructuring and related activities were incurred during the first quarter of fiscal 2024.

(1)Other location closure related activity includes $30 million of nonrecurring services rendered by third-party vendors assisting with the 2024 Restructuring Plan, $7 million related to incremental reserves on loan guarantees and the remaining other related expenses are associated with closures, including the transfer of assets.

(2)Other restructuring expenses primarily consists of severance and other personnel expenses.

The following table shows the change in the restructuring liability in the period, which excludes operating lease liabilities and associated expenses. The restructuring liabilities are classified within accounts payable, accrued liabilities and other current liabilities in the condensed consolidated balance sheets.

As of April 19, 2025, the cumulative amount incurred to date for active restructuring plans totaled $858 million, consisting of write-down of inventory to net realizable value in the fourth quarter of fiscal 2024, lease termination impacts, other exit-related expenses related to ceased use buildings and certain employee termination benefits. The Company estimates that it will incur additional expenses of approximately $75 million to $100 million These expenses primarily relate to lease terminations, professional services, and other exit costs to be incurred by the end of fiscal year 2025.

4. Inventories, net

The Company used the last in, first out (“LIFO”) method of accounting for approximately 92% of inventories as of April 19, 2025 and December 28, 2024. An actual valuation of inventory under the LIFO method is performed at the end of each fiscal year based on inventory levels and carrying costs at that time. Accordingly, interim LIFO calculations are based on the Company’s estimates of expected inventory levels and costs at the end of the year. The Company’s LIFO debit/(credit) reserve balance was $3 million and $(11) million as of April 19, 2025 and December 28, 2024, respectively, to state inventories at LIFO. Increases to the Company’s LIFO credit reserve balance are recorded as a noncash charge to cost of sales and decreases are recorded as a non-cash benefit to cost of sales. The non-cash (benefit) expense recorded to cost of sales related to the change in the LIFO credit reserve for the periods presented was as follows:

As of April 19, 2025, the effect of LIFO liquidations was a decrease to cost of sales of $4 million and an increase to net earnings of $3 million ($0.05) per diluted share.

Purchasing and warehousing costs included in inventories as of April 19, 2025 and December 28, 2024 were $382 million and $368 million, respectively.

5. Receivables, net

Receivables, net, consisted of the following:

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

Long-term debt net of unamortized discount and debt issuance costs consisted of the following:

Fair Value of Financial Assets and Liabilities

As of April 19, 2025 and December 28, 2024, the fair value of the Company’s long-term debt, which includes the current portion of long-term debt, was approximately $1,640 million and $1,649 million, respectively. The fair value of the Company’s long-term debt was determined using Level 2 inputs based on quoted market prices. The carrying amounts of the Company’s cash and cash equivalents, receivables, net, accounts payable and accrued expenses approximate their fair values due to the relatively short-term nature of these instruments.

Credit Facilities

As of April 19, 2025 and December 28, 2024, the Company hadno outstanding borrowings under the 2021 Credit Agreement. As of April 19, 2025 the Company had $885 million of borrowing availability and $115 million letters of credit outstanding under the 2021 Credit Agreement. As of December 28, 2024, the Company had $1 billion of borrowing availability and no letters of credit outstanding under the 2021 Credit Agreement. The Company is required to maintain certain financial covenants related to the 2021 Credit Agreement. On February 25, 2025, the Company entered into Amendment No. 6 (“Amendment No. 6”) to the 2021 Credit Agreement to, among other things, (i) expand the scope of domestic subsidiaries that would be required to grant security interests and guarantee the Company’s obligations under the 2021 Credit Agreement upon the occurrence of a Springing Lien Trigger Event (as defined therein) to include all of the Company’s subsidiaries other than the Company’s Insignificant Subsidiaries (as defined in Amendment No. 6), (ii) revise the definition of Consolidated Coverage Ratio to exclude up to $175 million of accelerated rent charges related to lease buyouts and to permit the minimum Consolidated Coverage Ratio to remain at 1.50 to 1.00 for one additional quarter before increasing to 1.75 to 1.00 on and after the fiscal quarter ending on January 3, 2026, (iii) revise the definition of Consolidated EBITDA to increase the threshold for Identified Restructuring Charges (as defined therein) from $575 million to $625 million, and (iv) expand the scope of the guaranteed obligations to include bank product obligations and cash management obligations. As of April 19, 2025, the Company was in compliance with its financial covenants under the 2021 Credit Agreement.

As of April 19, 2025 and December 28, 2024, the Company had $90 million and $91 million, respectively, of bilateral letters of credit issued separately from the 2021 Credit Agreement, none of which were drawn upon. These bilateral letters of credit generally have a term ofone year or less and primarily serve as collateral for the Company’s self-insurance policies.

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$89 million and $98 million as of April 19, 2025 and December 28, 2024, respectively. These loans are collateralized by security agreements on merchandise inventory and other assets of the borrowers. The approximate value of the inventory collateralized by these agreements was$161 millionand $181 million as of April 19, 2025 and December 28, 2024, respectively. The Company continuously assesses the likelihood of performance under these guarantees and believes that performance is remote as of April 19, 2025.

7. Leases

Substantially all of the Company’s leases are for facilities, vehicles, and equipment. The initial term for facilities is typically five toten years, with renewal options typically atfive-year intervals, with the exercise of lease renewal options at the Company’s sole discretion. The Company’s vehicle and equipment lease terms are typically three tosix years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Total lease cost is included in cost of sales and total selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and is recorded net of immaterial sublease income. Total lease costs are comprised of the following:

During the first quarter of fiscal 2025, the Company recorded $29 million primarily related to accelerated amortization on leases the Company expects to exit before the end of the contractual term, and non-cash asset impairment net of gains on lease modifications and terminations. These amounts are recorded in restructuring and related expenses within the accompanying condensed consolidated statements of operations. See Note 3. Restructuring, of the notes to the condensed consolidated financial statements included herein.

Other information relating to the Company’s lease liabilities was as follows:

During the first quarter of 2024, the Company entered into a sale-leaseback transaction where the Company sold a building and land and entered into athree-year lease of the property upon the sale. This transaction resulted in a gain of $21 million and is included in selling, general and administrative expenses on the condensed consolidated statement of operations for the sixteen weeks ended April 20, 2024.

8. Earnings per Share

The computations of basic and diluted earnings per share were as follows:

(1) For the sixteen weeks ended April 19, 2025 and April 20, 2024, $0.9 million and$0.4 million, respectively, ofrestricted stock units (“RSUs”) were excluded from the diluted weighted-average common share count calculation as their inclusion would have been anti-dilutive.

9. Supplier Finance Programs

The Company maintains supply chain financing agreements with third-party financial institutions to provide the Company’s suppliers with enhanced receivables options. Through these agreements, the Company’s suppliers, at their sole discretion, may elect to sell their receivables due from the Company to the third-party financial institution at terms negotiated between the supplier and the third-party financial institution. The Company does not provide any guarantees to any third party in connection with these financing arrangements. The Company’s obligations to suppliers, including amounts due and scheduled payment terms, are not impacted, and no assets are pledged under the agreements. All outstanding amounts due to third-party financial institutions related to suppliers participating in such financing arrangements are recorded within accounts payable and represent obligations outstanding under these supplier finance programs for invoices that were confirmed as valid and owed to the third-party financial institutions in the Company’s condensed consolidated balance sheets. As of both April 19, 2025, and December 28, 2024, the confirmed obligations outstanding under these supplier finance programs to third-party financial institutions were $3.2 billion. As of April 19, 2025, and December 28, 2024, $0.2 billion and $0.4 billion, respectively, is excluded from the Company’s accounts payable balance on the Company’s condensed consolidated balance sheets, as such amounts represent liabilities of Worldpac transferred with the sale of the business in fiscal 2024. Under the provisions of the sale, the Company will provide certain letters of credit to the buyer to support supply chain financing for the buyer. See Note 12. Discontinued Operations, of the notes to the condensed consolidated financial statements included herein.

10. Commitments and Contingencies

On October 9, 2023, and October 27, 2023, two putative class actions on behalf of purchasers of the Company’s securities who purchased or otherwise acquired their securities between November 16, 2022, and May 30, 2023, inclusive (the “Class Period”), were commenced against the Company and certain of the Company’s former officers in the United States District Court for the Eastern District of North Carolina. The plaintiffs allege that the defendants made certain false and materially misleading statements during the alleged Class Period in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. These cases were consolidated on February 9, 2024, and the court-appointed lead plaintiff filed a consolidated and amended complaint on April 22, 2024. The consolidated and amended complaint proposes a Class Period of November 16, 2022 to November 15, 2023, and alleges that defendants made false and misleading statements in connection with (a) the Company’s 2023 guidance and (b) certain accounting issues previously disclosed by the Company. On June 21, 2024, defendants filed a motion to dismiss the consolidated and amended complaint. On January 23, 2025, the motion to dismiss was granted by the United States District Court for the Eastern District of North Carolina. On February 21, 2025, plaintiffs filed an appeal to the 4th Circuit Court of Appeals. The Company strongly disputes the allegations and intends to defend the case vigorously.

On January 17, 2024, February 20, 2024, and February 26, 2024, derivative shareholder complaints were commenced against the Company’s directors and certain former officers alleging derivative liability for the allegations made in the securities class action complaints noted above. On April 9, 2024, the court consolidated these actions and appointed co-lead counsel. On June 10, 2024, the court issued a stay order on the consolidated derivative complaint pending resolution of the motion to dismiss for the underlying securities class action complaint.

11. Segment Reporting

The Company hasone operating segment andone reportable segment, effective during the first quarter of fiscal year 2025, resulting from the stabilization of the Company’s new organizational structure due to the significant restructuring activities announced in fiscal year 2024 as further described in Note 3. Restructuring, of the notes to the condensed consolidated financial statements included herein. Following this restructuring, the Company no longer hastwo operating segments, which were previously aggregated into a single reportable segment. The Company conducts its operations principally in the geographical areas of the U.S. and Canada through its Advance Auto Parts and Carquest trade brands. The products sold by the Company, across all geographic areas, have similar economic characteristics, are sourced from the Company’s suppliers in a similar manner, and are available for sale to all of the Company’s customers through the Company’s stores and self-service e-commerce sites. All of the Company’s stores have similar characteristics, including the nature of the products and services, the type and class of customers, and the methods used to distribute products and provide service to its customers. Due to these reasons, the Company hasone operating segment, referred to as Advance Auto Parts/Carquest. As geographic information is not a key component of how the chief operating decision maker (“CODM”) reviews performance and allocates resources, such entity-wide information is not disclosed on a quarterly basis.

The Company’s CODM is the Chief Executive Officer, who regularly reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance for the Company’s single reportable segment. Discrete information is not regularly provided to and/or reviewed by the Company’s CODM at a lower level than the consolidated level, inclusive of segment asset level detail. The CODM primarily focuses on net income to evaluate its reportable segment. The CODM also uses net income for evaluating pricing strategy and to assess the performance for determining the compensation of certain employees. Significant segment expenses regularly provided to the CODM, which represent the difference between segment revenue and segment net income, consisted of the following:

(1)Selling, general and administrative expenses, excludes restructuring and related expenses and depreciation and amortization.

(2)Excludes depreciation and amortization related to restructuring which is included in restructuring and related expenses.

(3)Other segment items relates to interest income included in total other, net, in the accompanying condensed consolidated statements of operations.

12. Discontinued Operations

In fiscal 2024, the Company completed the sale of Worldpac for $1.5 billion, with customary purchase price adjustments for working capital and other items as well as the provision of letters of credit in an aggregate amount of up to $200 million for up to 12 months following the closing of the transaction, which letter of credit exposure will reduce tozero no later than 24 months after the closing, to support supply chain financing for the buyer. The transaction closed on November 1, 2024. Net proceeds from the transaction after paying expenses and excluding the impact of taxes were approximately $1.47 billion. The Company’s sale of Worldpac was progress towards changing the landscape of the business with increased focus on the Advance blended-box model. As a result, the Company classified the results of operations and cash flows of Worldpac as discontinued operations in its condensed consolidated statements of operations and condensed consolidated statements of cash flows for prior periods presented.

The following table presents the major components of discontinued operations in the Company's condensed consolidated statements of operations:

13. Income Taxes

The Company’s effective tax rate for the first quarter of fiscal 2025 was lower than the estimated annual effective tax rate, primarily due to a net discrete tax benefit of $126 million realized in the first quarter of fiscal 2025 related to certain tax benefits associated with capital loss deductions.