Advance Auto Parts, Inc. — Form 10-Q Summary
Business context and period: Quarterly report for the 12 and 40 weeks ended October 4, 2014. The company operated 5,305 stores and 109 distribution branches across the U.S., Canada, Puerto Rico and the U.S. Virgin Islands. Results include General Parts International (GPI), acquired January 2, 2014; year-over-year comparisons are therefore substantially affected by the acquisition.
Financial performance
| Metric | 12 weeks ended Oct. 4, 2014 | Comparable 2013 period | 40 weeks ended Oct. 4, 2014 | Comparable 2013 period |
|---|---|---|---|---|
| Net sales | $2,289.5 million | $1,520.1 million | $7,606.7 million | $5,085.0 million |
| Operating income | $209.2 million | $170.7 million | $705.6 million | $569.5 million |
| Net income | $122.2 million | $103.8 million | $409.4 million | $342.5 million |
| Diluted EPS | $1.66 | $1.42 | $5.56 | $4.65 |
| Operating margin | 9.1% | 11.2% | 9.3% | 11.2% |
| Net margin | 5.3% | 6.8% | 5.4% | 6.7% |
- Third-quarter sales rose 50.6%; comparable-store sales increased 1.5%. Forty-week comparable-store sales increased 2.2%.
- Third-quarter gross profit was $1,034.4 million, or 45.2% of sales, down from 50.2% a year earlier. The company attributed the lower rate chiefly to GPI’s higher Commercial-sales mix and higher supply-chain costs, partly offset by integration synergies. Commercial sales were 58% of third-quarter sales versus 41% in 2013.
- SG&A was 36.0% of third-quarter sales versus 39.0% in 2013, reflecting GPI’s lower SG&A profile, partly offset by integration costs and acquired-intangible amortization. Operating margin nevertheless declined 210 basis points.
- Third-quarter diluted EPS increased to $1.66 from $1.42, primarily due to GPI. Reported results included $16.3 million of GPI integration costs, $9.9 million of GPI intangible amortization and $1.5 million of BWP integration costs. For the 40-week period, the corresponding amounts were $37.2 million, $32.8 million and $8.3 million.
- Interest expense was $15.9 million for the quarter and $56.4 million year to date, up from $7.9 million and $26.6 million, respectively, primarily due to acquisition-related borrowing.
Cash flow, debt and liquidity
- For the 40 weeks, operating cash flow was $540.3 million, compared with $398.5 million in 2013. Capital expenditures were $161.5 million. Investing cash outflow was $2,221.6 million, including $2,060.8 million for acquisitions, net of cash acquired.
- Financing cash inflow was $662.9 million, including net borrowing associated with GPI. Cash declined $1,022.8 million from fiscal year-end to $89.7 million.
- At October 4, total debt was $1,735.7 million, up $682.1 million from December 28, 2013. Long-term debt excluding current maturities was $1,730.2 million. The balance included a $600 million term loan, $82.3 million drawn on the revolver and senior notes.
- Revolver availability was $762.3 million after $155.4 million of letters of credit. The company reported compliance with credit-agreement covenants and said expected operating cash generation, cash and available borrowing should fund primary obligations for the next fiscal year.
- Variable-rate borrowings expose the company to interest-rate changes; no derivative instruments were outstanding. The company reported investment-grade ratings of BBB- from S&P and Baa3 from Moody’s, both with stable outlooks.
Material changes, outlook and risks
- GPI was acquired for approximately $2.08 billion in an all-cash transaction. It contributed $728.9 million of third-quarter sales and $19.3 million of net income; year-to-date contributions were $2,345.9 million and $58.9 million. Management cited expansion of geographic reach, Commercial capabilities and scale as strategic benefits.
- Management said GPI integration was progressing and synergies were being realized, while integration is expected to continue through fiscal 2016. Plans include integrating Carquest stores and operations, consolidating approximately 100 Carquest stores during 2014, and consolidating or converting Florida Autopart International stores by the end of 2015.
- Restructuring plans include office relocations and store consolidations. Estimated costs are approximately $38.6 million over two years, substantially all expected to be cash expenditures; $20.4 million of restructuring liabilities had been recorded at October 4. The company also recorded $1.0 million of impairment charges for the 40-week period related to the plans.
- Fiscal 2014 outlook included approximately $275–$300 million of capital expenditures and 120–140 new stores and branches. The fourth quarter contains 13 weeks because fiscal 2014 is a 53-week year. The board declared a $0.06-per-share dividend payable January 9, 2015.
- Management highlighted uneven DIY demand, including softer seasonal-category sales associated with a cooler summer, while Commercial sales showed strength. Risks include failure to realize GPI synergies, integration disruption or costs, additional debt and reduced flexibility, competitive pressure, demand and macroeconomic changes, supplier and employee risks, cybersecurity incidents, weather and legal or regulatory matters.
Key facts for investors to verify
- Whether GPI integration delivers the anticipated synergies and whether the planned integration milestones and store consolidations remain on schedule.
- How Commercial-sales mix, supply-chain costs and inventory growth affect gross margin; year-end inventory valuation also depends partly on estimated interim LIFO calculations.
- Debt reduction, interest expense, variable-rate exposure, liquidity and covenant headroom following the GPI acquisition.
- Actual restructuring and integration cash costs compared with management’s estimates, and any further impairments or acquisition-related accounting adjustments.
- Comparable-store sales trends by Commercial and DIY customers, given the acquisition’s significant effect on reported revenue growth.