# Advance Auto Parts Inc: Form 10-Q for the period ended Oct 7, 2023

- Company: [Advance Auto Parts Inc](/companies/aap.md) (CIK 1158449)
- Form: 10-Q
- Filed: 2023-11-21
- Accepted by EDGAR: Nov 21, 2023, 16:18 ET
- Period: 2023-10-07
- Accession: 0001158449-23-000243
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1158449/000115844923000243/aap-20231007.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1158449/000115844923000243/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-07.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-16 to 2023-10-07 | $2.72bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-10-07 | $8.82bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-16 to 2023-10-07 | $1.73bn | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-10-07 | $5.22bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-16 to 2023-10-07 | $986.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-10-07 | $3.60bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-16 to 2023-10-07 | $1.03bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-10-07 | $3.41bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-16 to 2023-10-07 | −$43.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-10-07 | $195.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-16 to 2023-10-07 | −$15.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-10-07 | $34.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-16 to 2023-10-07 | −$48.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-10-07 | $90.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-16 to 2023-10-07 | −$0.82 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-10-07 | $1.51 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-16 to 2023-10-07 | −$0.82 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-10-07 | $1.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-16 to 2023-10-07 | 59,630,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-10-07 | 59,588,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-10-07 | $30.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-10-07 | $187.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-10-07 | $194.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-10-07 | $14.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-10-07 | $317.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-07 | $6.32bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-07 | $12.25bn | us-gaap:Assets |
| Current liabilities | at 2023-10-07 | $5.14bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-10-07 | $9.60bn | us-gaap:Liabilities |
| Long-term debt | at 2023-10-07 | $1.79bn | us-gaap:LongTermDebt |
| Current portion of debt | at 2023-10-07 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-10-07 | $2.65bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,637 characters.

*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 31, 2022 (filed with the SEC on February 28, 2023), which we refer to as our 2022 Form 10-K, and our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this report.*

### Management Overview

A high-level summary of our financial results for the third quarter of 2023 included:

- Net sales during the third quarter of 2023 was $2.72 billion, an increase of 2.9% compared with the third quarter of 2022. Comparable store sales increased 1.2% compared with the third quarter of 2022, primarily driven by an increase in demand within our professional business, and partially offset by a decrease in our DIY omnichannel business.
- Gross profit margin for the third quarter of 2023 was 36.3% of Net sales, a decrease of 836 basis points compared with the third quarter of 2022. Gross profit margin was negatively impacted by higher product costs, a change in estimate for reserves that resulted in a $119.0 million reduction of inventory and associated charges and supply chain deleverage. This was offset by a reduction in LIFO expense.
- Selling, General & Administrative (“SG&A”) expenses for the third quarter of 2023 were 37.9% of Net sales, a twenty-eight-basis-point improvement compared with the third quarter of 2022.
- Diluted loss per share was $0.82 in the third quarter of 2023, compared with Diluted earnings per share of $1.92 in the third quarter of 2022.

### Business Update

We have been executing various initiatives to improve the customer experience, expand margins and drive consistent execution for both professional and DIY customers, including:

- Continued refinement of a demand-based assortment, leveraging purchase and search history from our common catalog.
- Advancement towards optimizing our footprint by market to drive share, repurpose our in-market store and asset base and streamline our distribution network.
- Progress in the implementation of a more efficient and optimized end-to-end supply chain to deliver our broad assortment of inventory.
- Continued negotiations with vendors on strategic sourcing and pricing to help mitigate inflationary pressures.
- Rationalization of product assortment.

As previously disclosed, in the third quarter of 2023, we initiated a comprehensive operational and strategic review of our business to help improve execution and position Advance for long-term success and increased shareholder value. We have identified and are pursuing cost reductions that we expect will generate at least $150 million in savings on an annualized basis, of which, we intend to invest approximately $50 million in employee compensation and training with a clear focus on improving the retention of our frontline team members. We have also announced that we are initiating separate sale processes for Worldpac and the Canadian Carquest portions of our business. Our operational and strategic review progress is ongoing.

### Industry Update

Operating within the automotive aftermarket industry, we are impacted by a number of general macroeconomic factors, many of which are similar to those affecting the overall retail industry, and include but are not limited to:

- Inflationary pressures, including logistics and labor
- Global supply chain disruptions
- Rising fuel costs
- Miles driven
- Unemployment rates
- Consumer confidence and purchasing power
- Competition
- Changes in new car sales
- Economic and geopolitical uncertainty
- Increased foreign currency exchange volatility

### Stores and Branches

Key factors in selecting sites and market locations in which we operate include population, demographics, traffic count, vehicle profile, competitive landscape and the cost of real estate. During the forty weeks ended October 7, 2023, 51 stores and branches were opened and 32 were closed, resulting in a total of 5,105 stores and branches compared with a total of 5,086 stores and branches as of December 31, 2022.

### Results of Operations

*($ in millions)*

|  | Twelve Weeks Ended October 7, 2023 |  | October 8, 2022 (1) |  | $ Favorable/ (Unfavorable) | Basis Points |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $2,719.1 | 100.0% | $2,641.3 | 100.0% | $77.8 | — |
| Cost of sales | 1,732.4 | 63.7 | 1,462.1 | 55.4 | (270.3) | (836) |
| Gross profit | 986.7 | 36.3 | 1,179.2 | 44.6 | (192.5) | (836) |
| SG&A | 1,030.4 | 37.9 | 1,008.2 | 38.2 | (22.2) | 28 |
| Operating (loss) income | (43.7) | (1.6) | 171.0 | 6.5 | (214.7) | (808) |
| Interest expense | (19.4) | (0.7) | (12.0) | (0.5) | (7.4) | (26) |
| Other expense, net | (1.2) | 0.0 | (5.1) | (0.2) | 3.9 | 15 |
| Provision for income taxes | (15.7) | (0.6) | 38.0 | 1.4 | 53.7 | 202 |
| Net (loss) income | $(48.6) | (1.8)% | $115.9 | 4.4% | $(164.5) | (617) |

26

*($ in millions)*

|  | Forty Weeks Ended October 7, 2023 |  | October 8, 2022 (1) |  | $ Favorable/ (Unfavorable) | Basis Points |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $8,822.7 | 100.0% | $8,681.0 | 100.0% | $141.7 | — |
| Cost of sales | 5,220.2 | 59.2 | 4,821.0 | 55.5 | (399.2) | (363) |
| Gross profit | 3,602.5 | 40.8 | 3,860.0 | 44.5 | (257.5) | (363) |
| SG&A | 3,407.4 | 38.6 | 3,302.0 | 38.0 | (105.4) | (58) |
| Operating income | 195.1 | 2.2 | 558.0 | 6.4 | (362.9) | (422) |
| Interest expense | (70.0) | (0.8) | (35.1) | (0.4) | (34.9) | (39) |
| Loss on early redemptions of senior unsecured notes | — | 0.0 | (7.4) | (0.1) | 7.4 | 9 |
| Other expense, net | (0.2) | 0.0 | (5.3) | (0.1) | 5.1 | 6 |
| Provision for income taxes | 34.6 | 0.4 | 123.4 | 1.4 | 88.8 | 103 |
| Net income | $90.2 | 1.0% | $386.8 | 4.5% | $(296.5) | (343) |

#### Note: Table amounts may not foot due to rounding.

*(1) We revised prior Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income to correct certain errors impacting cost of sales and SG&A costs. For additional information, refer to Notes 1 and 12 of the Notes to the Condensed Consolidated Financial Statements included herein.*

### Net Sales

Net sales for the twelve weeks ended October 7, 2023 increased 2.9% compared with the same period in 2022, driven predominately by product mix and strength in the professional business. Comparable store sales increased 1.2% for the twelve weeks ended October 7, 2023 compared with the twelve weeks ended October 8, 2022, primarily driven by an increase in demand within our professional business, and partially offset by a decrease in our DIY omnichannel business. From a category perspective, we saw strength in filters, engine management, motor oil and batteries.

Net sales for the forty weeks ended October 7, 2023 increased 1.6% compared with the same period in 2022, driven predominately by new store openings and favorable product mix. Comparable store sales was flat for the forty weeks ended October 7, 2023 compared with the forty weeks ended October 8, 2022. Category growth was led by motor oil and brakes.

We calculate comparable store sales based on the change in store or branch sales starting once a location has been open for 13 complete accounting periods (approximately one year) and by including e-commerce sales. Sales to independently owned Carquest stores are excluded from our comparable store sales. Acquired stores are included in our comparable store sales once the stores have completed 13 complete accounting periods following the acquisition date. We include sales from relocated stores in comparable store sales from the original date of opening.

### Gross Profit

Gross profit for the twelve weeks ended October 7, 2023 was $986.7 million, or 36.3% of Net sales, compared with $1.18 billion, or 44.6% of Net sales, for the twelve weeks ended October 8, 2022. For the forty weeks ended October 7, 2023 and October 8, 2022, Gross profit was $3.6 billion, or 40.8% of Net sales, and $3.86 billion, or 44.5% of Net sales.

During the twelve and forty weeks ended October 7, 2023, Gross profit margin was negatively impacted by a change in estimate associated with inventory reserves of $119 million. Higher product costs were not fully covered by pricing actions and elevated supply chain costs contributed to gross profit margin decline. This was partially offset by a reduction in LIFO-related expenses.

### Selling, General and Administrative Expenses

SG&A expenses for the twelve weeks ended October 7, 2023 were $1.03 billion, or 37.9% of Net sales, compared with $1.01 billion, or 38.2% of Net sales, for the twelve weeks ended October 8, 2022.

SG&A expenses for the forty weeks ended October 7, 2023 were $3.41 billion, or 38.6% of Net sales, compared with $3.30 billion, or 38.0% of Net sales, for the forty weeks ended October 8, 2022. The increase in SG&A as a percentage of Net sales was primarily driven by inflation within labor and benefits partially offset by a decrease in new store start-up costs.

### Provision for Income Taxes

Our Provision for income taxes for the twelve weeks ended October 7, 2023 was a benefit of $15.7 million compared with an expense of $38.0 million for the twelve weeks ended October 8, 2022. For the forty weeks ended October 7, 2023 and October 8, 2022, our Provision for income taxes was an expense of $34.6 million and $123.4 million. The decrease in tax expense primarily resulted from lower Income before provision for income taxes compared with the prior year.

Our effective tax rate was 24.4% and 24.7% for the twelve weeks ended October 7, 2023 and October 8, 2022. Our effective tax rate was 27.7% and 24.2% for the forty weeks ended October 7, 2023 and October 8, 2022. The higher effective income tax rate for the twelve weeks ended and forty weeks ended October 7, 2023 compared with October 8, 2022 reflected a discrete charge related to share based compensation.

### Liquidity and Capital Resources

### Overview

Our primary cash requirements necessary to maintain our current operations include payroll and benefits, inventory purchases, contractual obligations, capital expenditures, payment of income taxes, funding of our strategic and operational priorities and payment of interest on our long-term debt. Historically, we have also used available funds to repay borrowings under our credit facility, to periodically repurchase shares of our common stock under our share repurchase program, to pay our quarterly cash dividend and for acquisitions. However, our future uses of cash may differ, including with respect to the weight we place on the preservation of cash and liquidity, degree of investment in our business and other capital allocation factors.

Typically, we have funded our cash requirements primarily through cash generated from operations, supplemented by borrowings under our credit facilities and notes offerings as needed. We believe funds generated from our expected results of operations, available cash and cash equivalents, and available borrowings under our credit facility will be sufficient to fund our obligations for the next year. We also believe such funds, cash and available borrowings, together with our ability to generate cash through credit facilities and notes offerings, as needed, will be sufficient to fund our ongoing obligations.

Our supplier finance programs did not have a material impact on our liquidity or capital resources in the periods presented nor do we expect such arrangements to have a material impact on our liquidity or capital resources for the foreseeable future. However, as further described below, if we experience meaningfully lower supplier or bank participation in our supplier finance programs as a result of a decline in our credit ratings, it may have a material negative impact on our liquidity or capital resources.

On March 9, 2023, we issued our 5.90% senior unsecured notes due 2026 (the “2026 Notes”) and our 5.95% senior unsecured notes due 2028 (the “2028 Notes”). Refer to *Note 6. Long-term Debt and Fair Value of Financial Instruments* of the Notes to the Condensed Consolidated Financial Statements included herein for further details. Proceeds from our 2026 Notes and 2028 Notes were utilized to make repayments on our revolving facility and supplement operational and capital expenditures.

On February 27, 2023, we entered into Amendment No. 1 (the “Amendment No. 1”) to the Credit Agreement, dated November 9, 2021, with Advance Auto Parts, Inc., as Borrower, Advance Stores Company, Incorporated, as a Guarantor, the lenders party thereto, and Bank of America, N.A., as administrative agent (the “2021 Credit Agreement”). Amendment No. 1 extends the maturity date of the 2021 Credit Agreement by one year from November 9, 2026, to November 9, 2027. Amendment No. 1 also replaces an adjusted LIBOR benchmark rate with a Term Secured Overnight Financing Rate benchmark rate, as adjusted by an increase of ten basis points, plus the applicable margin under 2021 Credit Agreement. Amendment No. 1 made no other material changes to the terms of the 2021 Credit Agreement. On August 21, 2023, we entered into Amendment No. 2 (“Amendment No. 2”) to the 2021 Credit Agreement in order to amend certain financial covenants related to the Consolidated Coverage Ratio (as defined therein), and on November 20, 2023, we entered into Amendment No. 3 (“Amendment No. 3”) to the 2021 Credit Agreement in order to further amend financial covenants related to the Consolidated Coverage Ratio. Pursuant to Amendment No. 2 and Amendment No. 3, we will not permit the Consolidated Coverage Ratio to be less than (a) 1.75 to 1.00 for each period of four fiscal quarters ending on October 7, 2023 through and including the period of four fiscal quarters ending on October 5, 2024, (b) 2.00 to 1.00 for each period of four fiscal quarters ending on December 28, 2024 through and including the period of four fiscal quarters ending on October 4, 2025 and (c) 2.25 to 1.00 for each period of four fiscal quarters ending after October 4, 2025. Amendment No. 2. and Amendment No. 3 made no other material changes to the terms of the 2021 Credit Agreement.

As of October 7, 2023, we were in compliance with the financial covenants required by our 2021 Credit Agreement. To provide further leverage cushion, we amended the Consolidated Coverage Ratio on November 20, 2023 to a minimum of 1.75 to 1.00 through fiscal quarter ending October 5, 2024. In addition, we are required to maintain a maximum leverage ratio of 3.75 to 1.00. Our compliance with these covenants will depend upon achieving our financial targets including improvements in operating income. Based on management’s current financial projections, we currently expect to be in compliance with these financial covenants for the next 12 months. However, risk of noncompliance increases if our financial performance worsens or we are required to increase borrowings to fund operations. If we are not in compliance with the financial covenants required by our 2021 Credit Agreement, and cannot timely secure an amendment or waiver thereof, we would be in default of our 2021 Credit Agreement and our outstanding senior unsecured notes, which would have a material adverse impact on our financial condition.

### Share Repurchase Program

Our share repurchase program permits the repurchase of our common stock on the open market and in privately negotiated transactions from time to time. We will continue our pause on repurchases under our existing share repurchase program for the remainder of 2023 and will continue to evaluate current and expected business conditions with respect to possible resumption of share repurchase activity in 2024.

During the twelve weeks ended and forty weeks ended October 7, 2023, we purchased no shares of our common stock under our share repurchase program. During the twelve weeks ended October 8, 2022, we repurchased 0.4 million shares at an aggregate cost of $75.0 million, or an average price of $168.93 per share. During the forty weeks ended October 8, 2022, we repurchased 2.5 million shares of our common stock under our share repurchase program at an aggregate cost of $523.2 million, or an average price of $207.50 per share. We had $947.3 million remaining under our share repurchase program as of October 7, 2023.

### Analysis of Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities:

*(in thousands)*

|  | Forty Weeks Ended October 7, 2023 | October 8, 2022(1) |
| --- | ---: | ---: |
| Cash flows provided by operating activities | $30,404 | $483,094 |
| Cash flows used in investing activities | (185,200) | (331,818) |
| Cash flows provided by (used in) financing activities | 204,984 | (545,838) |
| Effect of exchange rate changes on cash | (1,942) | (15,662) |
| Net increase (decrease) in cash and cash equivalents | $48,246 | $(410,224) |

*(1) We revised prior Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income to correct certain errors impacting cost of sales and selling, general and administrative costs. For additional information, refer to Notes 1 and 12 of the Notes to the Condensed Consolidated Financial Statements included herein.*

#### Operating Activities

For the forty weeks ended October 7, 2023, Cash flows provided by operating activities decreased by $452.7 million to $30.4 million compared with the same period of prior year. The net decrease in cash flows provided by operating activities was driven by lower Net income and an increase in cash used in working capital, primarily in Accounts payable.

#### Investing Activities

For the forty weeks ended October 7, 2023, Cash flows used in investing activities were $185.2 million, a decrease of $146.6 million compared with the same period of prior year. The decrease in cash used in investing activities was primarily attributable to lower capital spend compared with the prior year.

#### Financing Activities

For the forty weeks ended October 7, 2023, Cash flows provided by financing activities was $205.0 million, an increase of $750.8 million compared with the same period of prior year. The increase in cash provided by financing activities was attributable to net proceeds received from the issuance of the 2026 Notes and 2028 Notes, a decrease in share repurchases of our common stock and a decrease in dividends paid during the forty weeks ended October 7, 2023.

Our Board of Directors has declared a cash dividend every quarter since 2006. Any payments of dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, cash flows, capital requirements and other factors deemed relevant by our Board of Directors.

### Long-Term Debt

On March 9, 2023, we issued $300.0 million aggregate principal amount of our 2026 Notes and $300.0 million aggregate principal amount of our 2028 Notes. The 2026 Notes were issued at 99.94% of the principal amount of $300.0 million, are due March 9, 2026 and bear interest at 5.90% per year payable semi-annually in arrears on March 9 and September 9 of each year. The 2028 Notes were issued at 99.92% of the principal amount of $300.0 million, are due March 9, 2028 and bear interest at 5.95% per year payable semi-annually in arrears on March 9 and September 9 of each year.

For additional information, refer to *Note 6. Long-term Debt and Fair Value of Financial Instruments* of the Notes to the Condensed Consolidated Financial Statements included herein.

As of October 7, 2023, we had a credit rating from Standard & Poor’s of BB+ and from Moody’s Investor Service of Baa2. As of October 7, 2023, the outlooks by Standard & Poor’s and Moody’s on our credit rating were stable and negative, respectively. The current pricing grid used to determine our borrowing rate under the 2021 Credit Agreement is based on our credit ratings. If our credit ratings improve, our interest rate on future borrowings under the Credit Agreement may decrease. However, if our credit ratings further decline, it would negatively impact our interest rate, and our access to additional financing on favorable terms may be limited. In addition, further decline in our credit ratings would likely reduce the attractiveness of our supplier finance programs, whereby our suppliers are provided financing arrangements based on our credit rating. This could result in significantly lower supplier or bank participation in those programs. Following the downgrade in our credit rating from Standard & Poor’s, certain banks reduced participation in our programs. However, this capacity has been substantially replaced with new participating banks as well as existing participating banks providing increased capacity. Meaningfully lower participation in our supplier payment programs would shorten our payable terms, resulting in an increase in our working capital requirements, and may have a material negative impact on our liquidity or capital resources.

With respect to all senior unsecured notes for which Advance Auto Parts, Inc. (“Issuer”) is an issuer or provides full and unconditional guarantee, Advance Stores, a wholly owned subsidiary of the Issuer, serves as the guarantor (“Guarantor Subsidiary”). The subsidiary guarantees related to our senior unsecured notes are full and unconditional and joint and several, and there are no restrictions on the ability of the Issuer to obtain funds from its Guarantor Subsidiary. Our captive insurance subsidiary, an insignificant wholly owned subsidiary of the Issuer, does not serve as guarantor of our senior unsecured notes.

### Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates.

During the forty weeks ended October 7, 2023, there were no changes to the critical accounting policies discussed in our 2022 Form 10-K. For a complete discussion of our critical accounting policies, refer to the 2022 Form 10-K.

## Market risk

As filed, 198 characters.

There have been no significant changes in our exposure to market risk since December 31, 2022. Refer to “*Item 7A. Quantitative and Qualitative Disclosures about Market Risk”* in our 2022 Form 10-K.

## Controls and procedures

As filed, 5,286 characters.

### Disclosure Controls and Procedures

Disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the override of controls. Therefore, even those systems determined to be effective can provide only “reasonable assurance” with respect to the reliability of financial reporting and financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of our internal controls may vary over time.

Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of October 7, 2023. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to accomplish their objectives at the reasonable assurance level solely due to the material weakness described below.

#### Control Environment

As previously disclosed in our Form 10-Q for the period ended April 22, 2023, management identified a material weakness in our internal control over financial reporting that existed due to turnover of key accounting positions during the first quarter of 2023. The Company was unable to attract, develop and retain sufficient resources to fulfill internal control responsibilities during the first quarter.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Management believes that the Condensed Consolidated Financial Statements and related financial information included in this Form 10-Q present fairly, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.

#### Remediation Efforts to Address the Previously Disclosed Material Weakness

The Company has devoted, and will continue to devote, significant time and resources to execute our plan to remediate the aforementioned material weakness and enable us to conclude full remediation once these steps have been completed and are operating effectively. The following components of the remediation plan, among others, have been executed:

- Hired experienced personnel (both permanent employees and contract labor) with the requisite accounting and internal controls knowledge and experience to sufficiently complement the existing global controllership organization;
- Engaged a third-party consultant to review the organizational structure of the global controllership function;
- Assessed our methodologies, policies and procedures to ensure adequate design and effectiveness of processes supporting internal control over financial reporting;
- Assessed the specific training needs for newly hired and existing personnel and developed and delivered training programs, designed to uphold our internal controls standards; and
- Following the departure of the Company’s Chief Financial Officer during the third fiscal quarter, hired a new Chief Financial Officer who will begin employment with the Company on November 27, 2023.

The Company is continuing to implement its remediation plan, including its determination if additional updates are appropriate in the enumerated points above. As previously disclosed, the Company’s Chief Accounting Officer resigned from the Company effective October 18, 2023. The Company is actively searching for a new Chief Accounting Officer. In accordance with the Company’s defined internal controls policies, the material weakness will not be considered fully remediated until the remediation actions, including those bulleted above and any other determined to be appropriate, have been completed and have operated effectively for a sufficient period of time. The Company is committed to validating that the changes implemented are operating as intended within our remediation plan.

### Changes in Internal Control Over Financial Reporting

Except for the changes described above, there has been no change in the Company’s internal control over financial reporting during the third quarter ended October 7, 2023 that has materially affected or is reasonably likely to materially affect its internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

## Risk factors

As filed, 1,478 characters.

***We are exposed to risks associated with our potential divestitures, which may impact our ability to fully realize the anticipated benefits of those transactions.***

We recently announced our intention to divest our Worldpac business and Carquest Canada business in separate sales processes as part of our strategic review. There can be no assurance that we will be able to complete these transactions. Divestitures are complex transactions involving inherent risks, including the potential for distractions of management from the core remaining business of the Company and the occurrence of events that may impact our ability to fully realize the anticipated benefits of the divestitures. We have not yet set a timetable for the sale processes, but transactions of this nature carry risks associated to variation from expectations with respect to expense, timing and post-closing claims for liability. If any of these risks materialize, the benefits of such divestitures may not be fully realized, if at all, which could adversely affect our business, financial condition, results of operations and cash flows.

Please refer to “*Item 1A. Risk Factors”* found in our 2022 Form 10-K filed for the year ended December 31, 2022 for other risks identified that, if they were to occur, could materially adversely affect our business, financial condition, results of operations, cash flows and future prospects, which could in turn materially affect the price of our common stock.

Filed Nov 21, 2023.
Source: SEC EDGAR, the filing index for accession 0001158449-23-000243. Last ingested by Listed: Nov 5, 2026, 16:27 ET. No prices; not investment advice.