SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
Annual Report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended August 30, 2003, or | ||
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 1-10714
AUTOZONE, INC.
Nevada | 62-1482048 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
123 South Front Street, Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange | ||
Title of each class | ||
Common Stock ($.01 par value) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
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[X] No o[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K § 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x[X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the 71,488,267 shares of voting stock of the registrantand non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the registrant (excluding, for this purpose, shares held by officers, directors, or 10% stockholders) was $5,969,270,295 based on the last sales pricebusiness day of the Common Stock on October 15, 2002, as reported on the New York Stock Exchange. registrant’s most recently completed second fiscal quarter was $4,277,626,348.
The number of shares of Common Stock outstanding as of October 15, 2002,14, 2003, was 98,549,013.88,760,885.
Documents Incorporated By Reference
Portions of the definitive Proxy Statement to be filed within 120 days of August 31, 2002,30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 for the Annual Meeting of Stockholders to be held December 12, 2002,11, 2003, are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I | 5 | |||||
Item 1. Business | 5 | |||||
Introduction | 5 | |||||
Marketing and Merchandising Strategy | ||||||
AZ Commercial | ||||||
Store Operations | ||||||
Store Development | 10 | |||||
Purchasing and Supply Chain | ||||||
Competition | 11 | |||||
Trademarks and Patents | ||||||
Employees | ||||||
AutoZone Website | 12 | |||||
Executive Officers of the Registrant | ||||||
Item 2. Properties | ||||||
Item 3. Legal Proceedings | ||||||
Item 4. Submission of Matters to a Vote of Security Holders | ||||||
PART II | ||||||
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters | ||||||
Item 6. Selected Financial Data | ||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||
Risk Factors | ||||||
Reconciliation of Non-GAAP Financial Measures | 33 | |||||
Item 7A. Quantitative and Qualitative Disclosures About Market Risk | ||||||
Item 8. Financial Statements and Supplementary Data | ||||||
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | ||||||
Item 9A. Controls and Procedures | 69 | |||||
PART III | ||||||
Item 10. Directors and Officers of the Registrant | ||||||
Item 11. Executive Compensation | ||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management | ||||||
Item 13. Certain Relationships and Related Transactions | ||||||
Item 14. | ||||||
PART IV | ||||||
Item 15. Exhibits, Financial Statement Schedules, and Reports On Form 8-K |
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Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements typically use words such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” and similar expressions. These are based on our assumptions and assessments made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors our management believesthat we believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including without limitation, competition,competition; product demand,demand; the economy,economy; the ability to hire and retain qualified employees,employees; consumer debt levels, inflation,levels; inflation; gasoline prices,prices; war and the prospect of war, including terrorist activity, andactivity; availability of commercial transportation.transportation; and outcome of pending litigation. Forward-looking statements are not guarantees of future performance and actual results,results; developments and business decisions may differ from those contemplated by such forward-looking statements, and such events could materially and adversely affect our business. Forward-looking statements speak only as of the date made. Except as required by applicable law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Actual results may materially differ from anticipated results. Please refer to the Risk Factors section contained in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for more details.
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PART I
Item 1. Business
Introduction
We are the nation’s leading specialty retailer of automotive parts and accessories, with most of our sales to do-it-yourself (DIY) customers. We began operations in 1979 and at August 31, 2002,30, 2003, operated 3,0683,219 auto parts stores in the United States and 3949 in Mexico. We also sell parts and accessories online atautozone.com.autozone.com. Each auto parts storeof our stores carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items and accessories. We also have a commercial sales program in the United States (AZ Commercial) that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers and service stations. We do not derive revenue from automotive repair or installation.
In addition, we sell the ALLDATA automotive diagnostic and repair software which is also available through ALLDATA alldatapro.comand throughalldatadiy.com.
At August 31, 2002,30, 2003, our stores were in the following locations:
Alabama | 83 | Maine | 5 | |||||||||||
Arizona | 76 | Maryland | 30 | Oregon | 16 | |||||||||
Arkansas | 50 | Massachusetts | 53 | Pennsylvania | 80 | |||||||||
California | 383 | Michigan | 120 | Rhode Island | 14 | |||||||||
Colorado | 41 | Minnesota | 9 | South Carolina | 53 | |||||||||
Connecticut | 21 | Mississippi | 67 | Tennessee | 113 | |||||||||
Delaware | 8 | Missouri | 80 | Texas | 361 | |||||||||
Florida | 149 | Nebraska | 9 | Utah | 25 | |||||||||
Georgia | 101 | Nevada | 32 | Virginia | 62 | |||||||||
Idaho | 6 | New Hampshire | 12 | Washington | 1 | |||||||||
Illinois | 145 | New Jersey | 15 | Washington, DC | 6 | |||||||||
Indiana | 102 | New Mexico | 30 | West Virginia | 18 | |||||||||
Iowa | 22 | New York | 87 | Wisconsin | 41 | |||||||||
Kansas | 37 | North Carolina | 104 | Wyoming | 5 | |||||||||
Kentucky | 59 | Ohio | 186 | Mexico | 39 | |||||||||
Louisiana | 89 | Oklahoma | 62 | |||||||||||
TOTAL | 3,107 |
Alabama | 84 | |||
Arizona | 81 | |||
Arkansas | 52 | |||
California | 387 | |||
Colorado | 45 | |||
Connecticut | 24 | |||
Delaware | 8 | |||
Florida | 154 | |||
Georgia | 106 | |||
Idaho | 10 | |||
Illinois | 155 | |||
Indiana | 105 | |||
Iowa | 22 | |||
Kansas | 37 | |||
Kentucky | 59 | |||
Louisiana | 90 | |||
Maine | 6 | |||
Maryland | 32 | |||
Massachusetts | 55 | |||
Michigan | 124 | |||
Minnesota | 18 | |||
Mississippi | 67 | |||
Missouri | 79 | |||
Montana | 1 | |||
Nebraska | 9 | |||
Nevada | 32 | |||
New Hampshire | 14 | |||
New Jersey | 22 | |||
New Mexico | 31 | |||
New York | 98 | |||
North Carolina | 108 | |||
North Dakota | 2 | |||
Ohio | 191 | |||
Oklahoma | 66 | |||
Oregon | 18 | |||
Pennsylvania | 84 | |||
Rhode Island | 15 | |||
South Carolina | 53 | |||
South Dakota | 1 | |||
Tennessee | 120 | |||
Texas | 374 | |||
Utah | 25 | |||
Vermont | 1 | |||
Virginia | 70 | |||
Washington | 9 | |||
West Virginia | 21 | |||
Wisconsin | 43 | |||
Wyoming | 5 | |||
Washington, DC | 6 | |||
Domestic Total | 3,219 | |||
Mexico | 49 | |||
TOTAL | 3,268 | |||
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Marketing and Merchandising Strategy
We are dedicated to providing customers with superior service, value and quality automotive parts and products at conveniently located, well-designed stores. Key elements of this strategy are:
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Customer Service
We believe that our customers value customer service; therefore, customer service is the most important element in our marketing and merchandising strategy. We emphasize that our AutoZoners (employees) should always put customers first by providing prompt, courteous service and trustworthy advice. Our electronic parts catalogs assistcatalog assists in the selection of parts and we offer lifetime warranties are offered on many of the parts we sell. Our satellite system in our domestic auto parts stores helps us to speed upexpedite credit or debit card and check approval processes and locate parts at neighboring AutoZone stores.
Our stores generally open at 8 a.m. and close between 8 and 10 p.m. (with some open 24 hours) Monday through Saturday and typically open at 9 a.m. and close between 6 and 8 p.m. on Sunday. Some stores are open 24 hours, and some have extended hours of 7 a.m. until midnight seven days a week.
AutoZoneWe also providesprovide specialty tools inthrough our Loan-A-Tool program. Customers can borrow a specialty tool, such as a steering wheel puller, thatfor which a DIY customer or a small repair shop would have little or no use for other than for a single job. AutoZoners also provide other free services, including check engine light readings; battery charging and installation;installation assistance; oil recycling; and testing of starters, alternators, batteries, sensors and actuators.
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Merchandising
ThisThe following table shows some of the types of products that we sell in our stores:sell:
Hard Parts | Maintenance Items | Accessories | ||
Antifreeze | Air Fresheners | |||
Belts and Hoses | Cell Phone Accessories | |||
Brake Fluid | Decorative Lighting | |||
Dent Filler | ||||
Shoes and Pads | Fuses | Floor Mats | ||
Carburetors | Lighting | Neon | ||
Clutches | Oil | Mirrors | ||
CV Axles | Oil and Fuel Additives | |||
Engines | Oil, Air and Fuel Filters | |||
Power Steering Fluid | ||||
Spark Plugs | ||||
Transmission Fluid | ||||
Struts | Wash and Wax | |||
Water Pumps | Windshield Wipers | |||
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We believe that the satisfaction of DIY customers and professional technician customerstechnicians often is impacted by our ability to provide specific automotive products as requested. Our stores generally offer between 20,00021,000 and 22,00023,000 stock keeping units (“SKUs”), covering a broad range of vehicle types. Each store carries the same basic product line, but we tailor our parts inventory to the makes and models of the automobiles in each store’s trade area. Our hub stores carry a larger assortment of products that can be delivered to AZ Commercial customers or local satellite stores. Slower-selling products are alsogenerally available through our vendor direct program (VDP) which offers overnight delivery.
We are constantly updating the products that we offer to assure that our inventory matches to the products that our customers want, when they want them.
Pricing
We want to be perceived by our customers as the value leader in our industry by consistently providing quality merchandise at a good price, withbacked by a good warranty and backed by outstanding customer service. On many of our products we will offer multiple value choices in a good/better/best assortment, with value pricing offered and appropriate price and quality increases from the “good” products to the “better” and “best” products. We believe that our overall prices overall compare favorably to those of our competitors.
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Marketing
We believe that targeted advertising and marketing play important roles in succeeding in today’s environment. We are constantly working to understand our customers’ changing wants and needs so that we can build long lasting,long-lasting, loyal relationships. We utilize marketing and advertising primarily to educate customers about the overall importance of vehicle maintenance. We also seek to convey the message that AutoZone is THE brand that can provide “the most exciting Zone for vehicle solutions!” Broadcast and print media are designed primarily to increase store traffic. In-store signage and creative product placement help to educate customers about products they need as a means to increase average sales dollars per transaction.
Store Design and Visual Merchandising
We design and build stores for a high visual impact. The typical AutoZone store has an industrial “high tech” appearance by utilizing colorful exterior and interior signage, exposed beams and ductwork and brightly lighted interiors. Maintenance products, accessories and miscellaneous items are attractively displayed for easy browsing by customers. In-store signage and special displays promote products in floor displays, endcaps and on the shelf. Store managers are able to customize areas of the store to prominently display products that are in demand in the local community.
AZ Commercial
We believe we are the third largest aftermarket seller of automotive parts and products to repair shops in the United States. AZ Commercial is the brand of our program that sells parts and other products and services to local, regional and national repair garages, dealers and service stations. As a part of the program we offer credit and delivery to some of our commercial customers. The program operated out of 2,0091,941 stores as of August 31, 2002. We have opened30, 2003. Through our hub stores, thatwe offer a greater range of parts and products desired by commercial customersprofessional technicians and that can also be used as additiveadditional available inventory for local stores. In addition, some of our commercial customers receive shipments directly from our distribution centers. AZ Commercial has a national sales team focused on national and regional commercial accounts, as well as an outside sales force for customers located immediately around our commercial stores.
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Store Operations
Store Formats
As of August 31, 2002,30, 2003, we had domestic auto parts stores in the following square footage ranges:
Square Footage | Number of Stores | |||
Less than 4,000 | ||||
4,000 to 7,000 | ||||
More than 7,000 |
Substantially all AutoZone stores are based on standard store formats resulting in generally consistent appearance, merchandising and product mix. Approximately 85% to 90% of each store’s square footage is selling space, of which approximately 40% to 45% is dedicated to hard parts inventory. The hard parts inventory area is generally fronted by a counter or pods that runsrun the depth or length of the store, dividing the hard parts area from the remainder of the store. The remaining selling space contains displays of accessories and maintenance items.
We have knowledgeable AutoZoners available to assist customers with their parts needs utilizing our proprietary electronic parts catalog with a videodisplay screen that is visible to both the AutoZoner and the customer. In addition to helping ensure fast, accurate parts lookup, the parts catalog will suggest additional items that a customer should purchase in order to properly install the merchandise being purchased.
We believe that our stores are “destination stores,” generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity.adjacent stores. Therefore, we situate most stores on major thoroughfares with easy access and good parking. Approximately 2,4002,600 of our auto parts stores are freestanding, with the balance principally located within strip shopping centers. Freestanding large format stores typically have parking for approximately 40 to 45 cars on a lot of approximately 3/4 to one acre. Our smaller auto parts stores typically have parking for approximately 20 to 30 cars and are usually located on a lot of approximately 1/2 to 3/4 acre.
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Store Personnel and Training
Each auto parts store typically employs from ten10 to 16 AutoZoners, including a manager and, in some cases, an assistant manager. AutoZoners typically have prior automotive experience. All AutoZoners are encouraged to complete courses resulting in certification by the National Institute for Automotive Service Excellence (ASE), which is broadly recognized for training certification in the automotive industry. Although we do on-the-job training, we also provide formal training programs, including regular store meetings on specific sales and product issues, standardized training manuals and a specialist program that trains AutoZoners in several areas of technical expertise from both the companyCompany and from independent certification agencies. Training is supplemented with frequent store visits by management.
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Store managers getreceive financial incentives through performance-based bonuses. In addition, our growth has provided opportunities for the promotion of qualified AutoZoners. We believe these opportunities are important to attract, motivate and retain quality AutoZoners.
Our domestic auto parts stores are primarily supervised through district managers who oversee approximately ten10 to 12 stores each and who report to regional managers. Regional managers with approximately 80 to 90 stores each, in turn, report to five Vice Presidents of Operations.
All store support functions are centralized in our store support center in Memphis, Tennessee. We believe that this centralization enhances consistent execution of our merchandising and marketing strategystrategies at the store level, and reduceswhile reducing expenses and cost of sales.
Store Automation
All of our stores have a proprietary electronic parts catalogscatalog that provideprovides parts information based on the make, model and year of an automobile. The catalog display screens are placed on the hard parts counter or pods where both AutoZoners and customers can view the screen. In addition, our satellite system enables the stores to speed upexpedite credit or debit card and check approval processes, immediately access national warranty data, implement real-time inventory controlcontrols and locate and hold parts at neighboring AutoZone stores.
Our domestic auto parts stores utilize our computerized Store Management System, which includes bar code scanning and point-of-sale data collection terminals. The Store Management System provides administrative assistance and improved personnel scheduling at the store level, as well as enhanced merchandising information and improved inventory control. We believe the Store Management System also enhances customer service through faster processing of transactions and simplified warranty and product return procedures.
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Store Development
ThisThe following table showsreflects domestic auto parts store development during the past five fiscal years:
Fiscal Year | Fiscal Year | |||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||
Beginning Stores | 1,728 | 2,657 | 2,711 | 2,915 | 3,019 | 3,068 | 3,019 | 2,915 | 2,711 | 2,657 | ||||||||||||||||||||||||||||||
New Stores1 | 952 | 245 | 208 | 107 | 102 | |||||||||||||||||||||||||||||||||||
New Stores | 160 | 102 | 107 | 208 | 245 | |||||||||||||||||||||||||||||||||||
Replaced Stores | 12 | 59 | 30 | 16 | 15 | 6 | 15 | 16 | 30 | 59 | ||||||||||||||||||||||||||||||
Closed Stores | 23 | 191 | 4 | 3 | 53 | 9 | 53 | 3 | 4 | 191 | ||||||||||||||||||||||||||||||
Net New Stores | 929 | 54 | 204 | 104 | 49 | 151 | 49 | 104 | 204 | 54 | ||||||||||||||||||||||||||||||
Ending Stores | 2,657 | 2,711 | 2,915 | 3,019 | 3,068 | 3,219 | 3,068 | 3,019 | 2,915 | 2,711 |
We believe that expansion opportunities exist both in markets that we do not currently serve, and in markets where we can achieve a larger presence. We attempt to obtain high visibility sites in high traffic locations and undertake substantial research prior to entering new markets. The most important criteria for opening a new store are its projected future profitability and its ability to achieve our required investment hurdle rate. Key factors in selecting new site and market locations include population, demographics, vehicle profile, number and strength of competitors’ stores and the cost of real estate. WeIn reviewing the vehicle profile, we also consider the number of vehicles that are seven years old and older, “our kind of vehicles” (OKVs), as these vehicles are no longer under the original manufacturers’ warranty and will require more maintenance and repair than younger vehicles. We generally seek to open new stores within or contiguous to existing market areas and attempt to cluster development in new urban markets in a relatively short period of time in order to achieve economies of scale in distribution and marketing costs. In addition to continuing to lease or develop our own stores, we may occasionally evaluate potential acquisition candidates in new as well as in existing markets.candidates.
Purchasing and Supply Chain
Merchandise is selected and purchased for all stores atthrough our store support center in Memphis.Memphis, Tennessee. No one class of product accounts for as much as ten10 percent of our total sales. In fiscal 2002,2003, no single supplier accounted for more than ten10 percent of our total purchases. We generally have few long-term contracts for the purchase of merchandise. We believe that we have excellent relationships with suppliers. We also believe that alternative sources of supply exist, at similar cost, for substantially all types of product sold.
Our vendors ship substantially all of our merchandise to our distribution centers. Stores typically place orders on a weekly basis with merchandise shipped from the warehouse generally within 24 hours of receipt of the order.
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Our hub stores have increased our ability to distribute products on a timely basis to each store. A hub store is able to provide replenishment of sold products and deliver special order products to a store in its coverage area generally within 24 hours. Hub stores are replenished from distribution centers multiple times per week.
Competition
The sale of automotive parts, accessories and maintenance items is highly competitive in many areas, including name recognition, product availability, customer service, store location and price, with many competitors.price. AutoZone competes in both the DIYretail (DIY) and commercial (do it for me, “DIFM”) auto parts and accessories markets.
Competitors include national and regional auto parts chains, independently owned parts stores, wholesalers and jobbers, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores, supermarkets, drugstores and home
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stores that sell aftermarket vehicle parts and supplies, chemicals, accessories, tools and maintenance parts. AutoZone competes on the basis of customer service, including the knowledge and expertisetrustworthy advice of our AutoZoners, merchandise selection and availability, price, product warranty, store layouts and location.
Trademarks and Patents
We have registered several service marks and trademarks in the United States Patent and Trademark office as well as in other countries, including our service markmarks, “AutoZone” and “Get in the Zone,” and trademarks, “AutoZone,” “Duralast”“Duralast,” “Duralast Gold,” “Valucraft,” and “ALLDATA.” We believe that the “AutoZone” service markmarks and trademarks are important components inof our merchandising and marketing strategy.
Employees
As of August 31, 2002,30, 2003, we employed 44,179approximately 48,000 persons in the U.S., approximately 27,00060 percent of whom were employed full-time. Approximately 91About 90 percent of our AutoZoners were employed in stores or in direct field supervision, approximately six7 percent in distribution centers and approximately three3 percent in store support functions. We employed approximately 700 persons in our Mexico operations.
We have never experienced any material labor disruption and believe that relations with our labor relationsAutoZoners are generally good.
AutoZone Website
AutoZone’s primary website is at http://www.autozone.com. We make available, free of charge, at our corporate website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
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Executive Officers of the Registrant
The following table lists our executive officers. The title of each executive officer includes the words “Customer Satisfaction” which reflects our commitment to customer service as part of our marketing and merchandising strategy.service. Officers are elected by and serve at the discretion of the Board of Directors.
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Steve Odland, 44—45—Chairman, President, Chief Executive Officer and Director
Michael Archbold, 42—43—Senior Vice President and Chief Financial Officer
Bruce G. Clark, 57—58—Senior Vice President and Chief Information Officer
Brett D. Easley, 44—45—Senior Vice President–Merchandising
Harry L. Goldsmith, 51—52—Senior Vice President, Secretary and General Counsel
Lisa R. Kranc, 49—50—Senior Vice President–Marketing
Michael E. Longo, 41—42—Senior Vice President–Operations, AZ Commercial and ALLDATA
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2001, Senior Vice President–Supply Chain since 1998 and Vice President–Distribution since 1996. Mr. Longo has been employed by AutoZone since 1992.
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Robert D. Olsen, 49—50—Senior Vice President–Mexico and Store Development
William C. Rhodes, III, 3738—Senior Vice President–Supply Chain and Information Technology
Daisy L. Vanderlinde, 5152—Senior Vice President–Human Resources and Loss Prevention
Tricia K. Greenberger, 33—ViceCharlie Pleas, III, 38 —Vice President and Controller
Tricia K. Greenberger2000.January 2003. Prior to that, shehe was Vice President–Financial Planning and ControlAccounting since 1998.2000. Previously, shehe was Director of Process ImprovementGeneral Accounting since 1996. Prior to that, Ms. GreenbergerMr. Pleas was a managerDivision Controller with Ernst & Young LLP.Fleming Companies, Inc. where he served in various capacities from 1988.
Item 2. Properties
ThisThe following table showsreflects the square footage and number of leased and owned properties for our domestic stores as of August 31, 2002:30, 2003:
No. of Stores | Square Footage | No. of Stores | Square Footage | |||||||||||||
Leased | 1,239 | 7,338,437 | 1,329 | 7,819,718 | ||||||||||||
Owned | 1,829 | 12,344,820 | 1,890 | 12,680,741 | ||||||||||||
Total | 3,068 | 19,683,257 | 3,219 | 20,500,459 | ||||||||||||
We have 2,998,834 square feet in our distribution centers servicing our auto partsdomestic stores, allmost of which is owned, except for 998,237 square feet that is leased. The domestic distribution centers are located in Arizona, California, Georgia, Illinois, Louisiana, Ohio, Tennessee and Texas.
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Our store support center, which we own, is located in Memphis, Tennessee, and consists of 260,000 square feet. We also own and lease other properties that are not material in the aggregate.
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Item 3. Legal Proceedings
We are a defendantAutoZone, Inc., was one of multiple defendants in a lawsuit entitled “Coalition for a Level Playing Field, L.L.C.,et al.,v. AutoZone, Inc., Wal-mart Stores, Inc., Advance Auto Parts, Inc., O’Reilly Automotive, Inc., and Keystone Automotive Operations, Inc.,et al.” filed in the U.S. District Court for the Eastern District of New York in February 2000. The case was filedbrought by over 100approximately 225 plaintiffs, which are principally automotive aftermarket warehouse distributors and jobbers. The plaintiffs claimclaimed that the defendants have knowingly received volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers’ profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. Plaintiffs’ third amended and corrected complaint seeksPlaintiffs sought unspecified damages suffered by each plaintiff (prior to statutory trebling), ranging from several million dollars to $35 million for each plaintiff, and a permanent injunction prohibiting defendants from committing further violations of the Robinson-Patman Act and from opening any further stores to compete with plaintiffs as long as defendants continue to violate the Act. The litigation is currentlyclaims of 22 of the original plaintiffs were tried to a jury verdict in favor of AutoZone in January 2003. On February 26, 2003, the plaintiffs, involved in the early stagestrial, filed a notice to appeal. The U.S. Circuit Court of discovery. We do not know howAppeals for the Second Circuit will hear oral argument on the appeal on November 5, 2003. On July 22, 2003, approximately 200 plaintiffs have calculatedin the original lawsuit, whose cases had been dismissed without prejudice and with leave to reinstate their alleged damages. We intendclaims, filed a notice to be reactivated as parties in the lawsuit and for their claims against the defendants to be reinstated. While the outcome of this matter cannot be predicted, AutoZone intends to vigorously defend against this action and believe that we have substantive defensesit. On September 19, 2003, the previously dismissed plaintiffs filed a “Motion for a Preliminary Injunction (and Related Temporary Restraining Order) Against the AutoZone Defendants as to allPayment On Scan Transactions with the Auto Parts Manufacturers.” AutoZone is currently unable to determine the merits of the motion or the claims inof the complaint.plaintiffs. However, AutoZone intends to vigorously defend against the motion.
We areAutoZone is also involved in various other legal proceedings incidental to the conduct of our business. Although the amount of liability that may result from these other proceedings cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our financial condition, or results of operations.operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters
AutoZone’s common stock is listed on the New York Stock Exchange under the symbol “AZO.” On October 15, 2002,14, 2003, there were 2,9563,212 stockholders of record, which does not include the number of beneficial owners whose shares were represented by security position listings.
We currently do not pay a cash dividend on our common stock. Any payment of dividends in the future iswould be dependent upon our financial condition, capital requirements, earnings, cash flow and other factors.
The following table sets forth the high and low sales prices per share of common stock, as reported by the New York Stock Exchange, for the periods indicated:
Price Range of Common Stock | ||||||||||||||||||
High | Low | |||||||||||||||||
Fiscal Year Ended August 30, 2003: | Fiscal Year Ended August 30, 2003: | |||||||||||||||||
Price Range of Common Stock | Fourth quarter | $ | 92.29 | $ | 73.80 | |||||||||||||
Third quarter | $ | 87.00 | $ | 61.11 | ||||||||||||||
High | Low | Second quarter | $ | 86.45 | $ | 58.21 | ||||||||||||
First quarter | $ | 89.34 | $ | 68.55 | ||||||||||||||
Fiscal Year Ended August 31, 2002: | Fiscal Year Ended August 31, 2002: | Fiscal Year Ended August 31, 2002: | ||||||||||||||||
Fourth quarter | $ | 84.50 | $ | 59.20 | Fourth quarter | $ | 84.50 | $ | 59.20 | |||||||||
Third quarter | $ | 80.00 | $ | 61.23 | Third quarter | $ | 80.00 | $ | 61.23 | |||||||||
Second quarter | $ | 80.00 | $ | 61.35 | Second quarter | $ | 80.00 | $ | 61.35 | |||||||||
First quarter | $ | 68.00 | $ | 38.07 | First quarter | $ | 68.00 | $ | 38.07 | |||||||||
Fiscal Year Ended August 25, 2001: | ||||||||||||||||||
Fourth quarter | $ | 49.20 | $ | 30.32 | ||||||||||||||
Third quarter | $ | 31.98 | $ | 24.37 | ||||||||||||||
Second quarter | $ | 29.75 | $ | 24.60 | ||||||||||||||
First quarter | $ | 28.00 | $ | 21.00 |
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Item 6. Selected Financial Data
Fiscal Year Ended August | |||||||||||||||||||||||||||||||||||||||||||
Fiscal Year Ended August | |||||||||||||||||||||||||||||||||||||||||||
(in thousands, except per share data and selected operating data) | (in thousands, except per share data and selected operating data) | 2002(1) | 2001(2) | 2000 | 1999 | 1998 | (in thousands, except per share data and selected operating data) | 2003(1) | 2002(2) | 2001(3) | 2000 | 1999 | |||||||||||||||||||||||||||||||
Income Statement Data | Income Statement Data | Income Statement Data | |||||||||||||||||||||||||||||||||||||||||
Net sales | Net sales | $ | 5,325,510 | $ | 4,818,185 | $ | 4,482,696 | $ | 4,116,392 | $ | 3,242,922 | Net sales | $ | 5,457,123 | $ | 5,325,510 | $ | 4,818,185 | $ | 4,482,696 | $ | 4,116,392 | |||||||||||||||||||||
Cost of sales, including warehouse and delivery expenses | Cost of sales, including warehouse and delivery expenses | 2,950,123 | 2,804,896 | 2,602,386 | 2,384,970 | 1,889,847 | Cost of sales, including warehouse and delivery expenses | 2,942,114 | 2,950,123 | 2,804,896 | 2,602,386 | 2,384,970 | |||||||||||||||||||||||||||||||
Operating, selling, general and administrative expenses | Operating, selling, general and administrative expenses | 1,604,379 | 1,625,598 | 1,368,290 | 1,298,327 | 970,768 | Operating, selling, general and administrative expenses | 1,597,212 | 1,604,379 | 1,625,598 | 1,368,290 | 1,298,327 | |||||||||||||||||||||||||||||||
Operating profit (EBIT) | 771,008 | 387,691 | 512,020 | 433,095 | 382,307 | ||||||||||||||||||||||||||||||||||||||
Operating profit | Operating profit | 917,797 | 771,008 | 387,691 | 512,020 | 433,095 | |||||||||||||||||||||||||||||||||||||
Interest expense – net | Interest expense – net | (79,860 | ) | (100,665 | ) | (76,830 | ) | (45,312 | ) | (18,204 | ) | Interest expense – net | 84,790 | 79,860 | 100,665 | 76,830 | 45,312 | ||||||||||||||||||||||||||
Income before income taxes | Income before income taxes | 691,148 | 287,026 | 435,190 | 387,783 | 364,103 | Income before income taxes | 833,007 | 691,148 | 287,026 | 435,190 | 387,783 | |||||||||||||||||||||||||||||||
Income taxes | Income taxes | 263,000 | 111,500 | 167,600 | 143,000 | 136,200 | Income taxes | 315,403 | 263,000 | 111,500 | 167,600 | 143,000 | |||||||||||||||||||||||||||||||
Net income | Net income | $ | 428,148 | $ | 175,526 | $ | 267,590 | $ | 244,783 | $ | 227,903 | Net income | $ | 517,604 | $ | 428,148 | $ | 175,526 | $ | 267,590 | $ | 244,783 | |||||||||||||||||||||
Diluted earnings per share | Diluted earnings per share | $ | 4.00 | $ | 1.54 | $ | 2.00 | $ | 1.63 | $ | 1.48 | Diluted earnings per share | $ | 5.34 | $ | 4.00 | $ | 1.54 | $ | 2.00 | $ | 1.63 | |||||||||||||||||||||
Adjusted weighted average shares for diluted earnings per share | Adjusted weighted average shares for diluted earnings per share | 107,111 | 113,801 | 133,869 | 150,257 | 154,070 | Adjusted weighted average shares for diluted earnings per share | 96,963 | 107,111 | 113,801 | 133,869 | 150,257 | |||||||||||||||||||||||||||||||
Balance Sheet Data | Balance Sheet Data | Balance Sheet Data | |||||||||||||||||||||||||||||||||||||||||
Current assets | Current assets | $ | 1,450,128 | $ | 1,328,511 | $ | 1,186,780 | $ | 1,225,084 | $ | 1,117,090 | Current assets | $ | 1,584,994 | $ | 1,450,128 | $ | 1,328,511 | $ | 1,186,780 | $ | 1,225,084 | |||||||||||||||||||||
Working capital | Working capital | (83,443 | ) | 61,857 | 152,236 | 224,530 | 257,261 | Working capital | (90,572 | ) | (83,443 | ) | 61,857 | 152,236 | 224,530 | ||||||||||||||||||||||||||||
Total assets | Total assets | 3,477,791 | 3,432,512 | 3,333,218 | 3,284,767 | 2,748,113 | Total assets | 3,680,466 | 3,477,791 | 3,432,512 | 3,333,218 | 3,284,767 | |||||||||||||||||||||||||||||||
Current liabilities | Current liabilities | 1,533,571 | 1,266,654 | 1,034,544 | 1,000,554 | 859,829 | Current liabilities | 1,675,566 | 1,533,571 | 1,266,654 | 1,034,544 | 1,000,554 | |||||||||||||||||||||||||||||||
Debt | Debt | 1,194,517 | 1,225,402 | 1,249,937 | 888,340 | 545,067 | Debt | 1,546,845 | 1,194,517 | 1,225,402 | 1,249,937 | 888,340 | |||||||||||||||||||||||||||||||
Stockholders’ equity | Stockholders’ equity | 689,127 | 866,213 | 992,179 | 1,323,801 | 1,302,057 | Stockholders’ equity | 373,758 | 689,127 | 866,213 | 992,179 | 1,323,801 | |||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||
Selected Operating Data | Selected Operating Data | Selected Operating Data | |||||||||||||||||||||||||||||||||||||||||
Number of domestic auto parts stores at beginning of year | Number of domestic auto parts stores at beginning of year | 3,019 | 2,915 | 2,711 | 2,657 | 1,728 | Number of domestic auto parts stores at beginning of year | 3,068 | 3,019 | 2,915 | 2,711 | 2,657 | |||||||||||||||||||||||||||||||
New stores | 102 | 107 | 208 | 245 | 952 | ||||||||||||||||||||||||||||||||||||||
Replacement stores | 15 | 16 | 30 | 59 | 12 | New stores | 160 | 102 | 107 | 208 | 245 | ||||||||||||||||||||||||||||||||
Closed stores | 53 | 3 | 4 | 191 | 23 | Replacement stores | 6 | 15 | 16 | 30 | 59 | ||||||||||||||||||||||||||||||||
Net new stores | 49 | 104 | 204 | 54 | 929 | Closed stores | 9 | 53 | 3 | 4 | 191 | ||||||||||||||||||||||||||||||||
Net new stores | 151 | 49 | 104 | 204 | 54 | ||||||||||||||||||||||||||||||||||||||
Number of domestic auto parts stores at end of year | Number of domestic auto parts stores at end of year | 3,068 | 3,019 | 2,915 | 2,711 | 2,657 | Number of domestic auto parts stores at end of year | 3,219 | 3,068 | 3,019 | 2,915 | 2,711 | |||||||||||||||||||||||||||||||
Number of Mexico auto parts stores at end of year | Number of Mexico auto parts stores at end of year | 39 | 21 | 13 | 6 | — | Number of Mexico auto parts stores at end of year | 49 | 39 | 21 | 13 | 6 | |||||||||||||||||||||||||||||||
Number of total auto parts stores at end of year | Number of total auto parts stores at end of year | 3,268 | 3,107 | 3,040 | 2,928 | 2,717 | |||||||||||||||||||||||||||||||||||||
Total domestic auto parts store square footage (000s) | Total domestic auto parts store square footage (000s) | 19,683 | 19,377 | 18,719 | 17,405 | 16,499 | Total domestic auto parts store square footage (000s) | 20,500 | 19,683 | 19,377 | 18,719 | 17,405 | |||||||||||||||||||||||||||||||
Average square footage per domestic auto parts store | Average square footage per domestic auto parts store | 6,416 | 6,418 | 6,422 | 6,420 | 6,210 | Average square footage per domestic auto parts store | 6,368 | 6,416 | 6,418 | 6,422 | 6,420 | |||||||||||||||||||||||||||||||
Percentage increase in domestic auto parts store square footage | 2 | % | 4 | % | 8 | % | 5 | % | 42 | % | |||||||||||||||||||||||||||||||||
Percentage increase in domestic auto parts comparable store net sales | 9 | % | 4 | % | 5 | % | 5 | % | 3 | % | |||||||||||||||||||||||||||||||||
Increase in domestic auto parts store square footage | Increase in domestic auto parts store square footage | 4 | % | 2 | % | 4 | % | 8 | % | 5 | % | ||||||||||||||||||||||||||||||||
Increase in domestic auto parts comparable store net sales | Increase in domestic auto parts comparable store net sales | 3 | % | 9 | % | 4 | % | 5 | % | 5 | % | ||||||||||||||||||||||||||||||||
Average net sales per domestic auto parts store (000s) | Average net sales per domestic auto parts store (000s) | $ | 1,658 | $ | 1,543 | $ | 1,517 | $ | 1,465 | $ | 1,568 | Average net sales per domestic auto parts store (000s) | $ | 1,689 | $ | 1,658 | $ | 1,543 | $ | 1,517 | $ | 1,465 | |||||||||||||||||||||
Average net sales per domestic auto parts store square foot | Average net sales per domestic auto parts store square foot | $ | 258 | $ | 240 | $ | 236 | $ | 232 | $ | 238 | Average net sales per domestic auto parts store square foot | $ | 264 | $ | 258 | $ | 240 | $ | 236 | $ | 232 | |||||||||||||||||||||
Total employment | 44,179 | 44,557 | 43,164 | 40,483 | 38,526 | ||||||||||||||||||||||||||||||||||||||
Inventory turnover | 2.25x | 2.39x | 2.32x | 2.28x | 2.26x | ||||||||||||||||||||||||||||||||||||||
Net inventory turnover(3) | 11.19x | 9.09x | 7.52x | 7.28x | 6.96x | ||||||||||||||||||||||||||||||||||||||
After-tax return on invested capital(4) | 19.8 | % | 14.3 | % | 13.3 | % | 12.8 | % | 14.5 | % | |||||||||||||||||||||||||||||||||
Adjusted debt to EBITDAR(5) | 1.81 | 2.35 | 2.48 | 2.23 | 1.65 | ||||||||||||||||||||||||||||||||||||||
Cash flow before share repurchases(6) | $ | 729,868 | $ | 390,632 | $ | 245,970 | $ | (108,671 | ) | $ | (317,921 | ) | |||||||||||||||||||||||||||||||
Return on average equity | 55 | % | 19 | % | 23 | % | 19 | % | 19 | % | |||||||||||||||||||||||||||||||||
Total domestic employees at end of year | Total domestic employees at end of year | 47,727 | 44,179 | 44,557 | 43,164 | 40,483 |
1617
Fiscal Year Ended August | |||||||||||||||||||||
(in thousands, except per share data and selected operating data) | 2003(1) | 2002(2) | 2001(3) | 2000 | 1999 | ||||||||||||||||
Inventory turnover | 2.04 | x | 2.25 | x | 2.39 | x | 2.32 | x | 2.28 | x | |||||||||||
Net inventory turnover(4) | 14.03 | x | 11.19 | x | 9.09 | x | 7.52 | x | 7.28 | x | |||||||||||
After-tax return on invested capital(5) | 23.4 | % | 19.8 | % | 10.1 | % | 12.9 | % | 12.4 | % | |||||||||||
After-tax return on invested capital, excluding restructuring and impairment charges(5) | 23.4 | % | 19.8 | % | 13.4 | % | 12.9 | % | 12.4 | % | |||||||||||
Net cash provided by operating activities | $ | 698,255 | $ | 739,091 | $ | 458,937 | $ | 512,960 | $ | 311,668 | |||||||||||
Cash flow before share repurchases(6) | $ | 538,767 | $ | 729,868 | $ | 390,632 | $ | 278,328 | $ | (108,671 | ) | ||||||||||
Return on average equity | 97 | % | 55 | % | 19 | % | 23 | % | 19 | % |
(1) | Fiscal 2003 operating results include a $10 million pre-tax negative impact and the reclassification of certain vendor funding to increase operating expenses by $53 million and decrease cost of goods sold by $43 million, both as a result of the adoption of Emerging Issues Task Force Issue No. 02-16 regarding vendor funding. | |
(2) | 53 weeks. Comparable store sales, average net sales per domestic auto parts store and average net sales per store square foot for fiscal | |
Fiscal | ||
Net inventory turnover is calculated as cost of sales divided by the average of beginning and ending merchandise inventories less accounts payable. | ||
After-tax return on invested capital is calculated as after-tax operating profit (excluding rent) divided by average invested capital (which includes a factor | ||
(6) | Cash flow before share repurchases is calculated as the change in debt plus |
18
Quarterly Summary
(unaudited)
Sixteen | ||||||||||||||||
Twelve Weeks Ended | Weeks Ended | |||||||||||||||
November 23, | February 15, | May 10, | August 30, | |||||||||||||
(in thousands, except per share data) | 2002 | 2003 | 2003 (1) | 2003 (2) | ||||||||||||
Net sales | $ | 1,218,635 | $ | 1,120,696 | $ | 1,288,445 | $ | 1,829,347 | ||||||||
Increase in comparable store sales | 5 | % | 2 | % | 3 | % | 3 | % | ||||||||
Gross profit | $ | 549,390 | $ | 495,999 | $ | 598,823 | $ | 870,797 | ||||||||
Operating profit | 188,326 | 147,498 | 221,883 | 360,090 | ||||||||||||
Income before income taxes | 169,221 | 127,865 | 202,530 | 333,391 | ||||||||||||
Net income | 104,911 | 79,275 | 125,977 | 207,441 | ||||||||||||
Basic earnings per share | 1.06 | 0.81 | 1.33 | 2.32 | ||||||||||||
Diluted earnings per share | 1.04 | 0.79 | 1.30 | 2.27 |
Seventeen | ||||||||||||||||
Twelve Weeks Ended | Weeks Ended | |||||||||||||||
November 17, | February 9, | May 4, | August 31, | |||||||||||||
(in thousands, except per share data) | 2001 | 2002 | 2002 | 2002 | ||||||||||||
Net sales | $ | 1,176,052 | $ | 1,081,311 | $ | 1,224,810 | $ | 1,843,337 | ||||||||
Increase in comparable store sales | 9 | % | 12 | % | 9 | % | 7 | % | ||||||||
Gross profit | $ | 516,136 | $ | 474,900 | $ | 541,984 | $ | 842,367 | ||||||||
Operating profit | 155,504 | 121,149 | 182,433 | 311,922 | ||||||||||||
Income before income taxes | 136,077 | 102,871 | 165,014 | 287,186 | ||||||||||||
Net income | 84,077 | 63,771 | 102,314 | 177,986 | ||||||||||||
Basic earnings per share | 0.78 | 0.60 | 0.98 | 1.77 | ||||||||||||
Diluted earnings per share | 0.76 | 0.58 | 0.96 | 1.73 |
(1) | The third quarter of fiscal 2003 includes a $4.7 million pre-tax gain associated with the settlement of certain liabilities and the repayment of a note associated with the sale of the TruckPro business in December 2001. The third quarter of fiscal 2003 also includes a $3 million pre-tax negative impact of the adoption of Emerging Task Force Issue No. 02-16 regarding vendor funding that resulted in an increase to operating expenses by $16 million and an increase to gross margin by $13 million. | |
(2) | The fourth quarter of fiscal 2003 includes a $4.6 million pre-tax gain as a result of the disposition of properties associated with the fiscal 2001 restructure and impairment charges. The fourth quarter of fiscal 2003 also includes a $7 million pre-tax negative impact of the adoption of Emerging Task Force Issue No. 02-16 regarding vendor funding that resulted in an increase to operating expenses by $37 million and an increase to gross margin by $30 million. |
19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
For an understanding of the significant factors that influenced our performance during the past three fiscal years, this financial review should be read in conjunction with the Consolidated Financial Statements presented in this Form 10-K.
Disclosure and Internal ControlsFiscal 2003 Compared with Fiscal 2002
AsFor the year ended August 30, 2003, AutoZone reported sales of $5.457 billion (52 weeks) compared with $5.326 billion (53 weeks) for the year ended August 31, 2002, an evaluation was performed under the supervisiona 2.5% increase from fiscal 2002. At August 30, 2003, we operated 3,219 domestic auto parts stores and 49 in Mexico, compared with the participation of AutoZone’s management, including the CEO3,068 domestic auto parts stores and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, AutoZone’s management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of39 in Mexico at August 31, 2002. No significant changesExcluding sales from the extra week included in AutoZone’s internal controlsthe prior year, sales were up 4.6% (see Reconciliation of Non-GAAP Financial Measures). Same store sales, or sales for domestic stores open at least one year, increased approximately 3% during the year, including flat retail same store sales and an increase for commercial sales in other factors have occurred that could significantly affect controls subsequentsame stores by approximately 27%. The improvement in same store sales was due more to August 31, 2002.
Critical Accounting Policies
Product Warranties
We provide our customers limited warranties on certain products that range from 30 days to lifetime warranties. We provide a reserve for warranty obligations atan increase in average dollars spent per transaction over the time of sale based on each product’s historical return rate. Certain product vendors pay all or a portion of our warranty expense. However, at times,amounts in the vendors may not cover allsame period of the warranty expense. If we materially underestimate our warranty expense on products that are not fully warranted to us by our vendors, we may experience a material adverse impact on our reported financial position or results of operations. If we incorrectly estimate our warranty expense, we will recognize any adjustmentprior year than an increase in income at the time it is determined.
Litigation and Other Contingent Liabilities
We have received claims related to and been notified that we are a defendant in a number of legal proceedings resulting from our business, such as employment matters, product liability, general liability related to our store premises and alleged violationcustomer count. The balance, of the Robinson-Patman Act (as specifically described in Note Mincrease of 4.6%, was due to new store sales for fiscal 2003 which contributed 1.9 percentage points of the Consolidated Financial Statements). We calculate contingent loss accruals using our best estimateincrease; ALLDATA and Mexico sales which contributed 0.5 percentage points of our probable and reasonably estimable contingent liabilities, such as lawsuits and our retained liability for insured claims. We do not believe that any of these contingent liabilities, individually orthe increase, while TruckPro sales in the aggregate, will have a material adverse effect upon our consolidated financial positionprior year of $47.6 million reduced the increase by 0.9 percentage points.
Gross profit for fiscal 2003 was $2.515 billion, or results46.1% of operations. However, if our estimates related to these contingent liabilities are incorrect, the future resultsnet sales, compared with $2.375 billion, or 44.6% of operationsnet sales for any particular fiscal quarter or year could be materially adversely affected. Some of our litigation is being conducted before juries in states where past jury awards have been significant, and we are unable to predict the results of any jury verdict. If we incorrectly estimate our contingent liabilities, we will recognize any adjustment in income at the time it is determined.
17
Vendor Allowances
We receive various payments and allowances from our vendors based on volume of purchases and in payment of services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and cooperative advertising funds. Typically these funds are determined periodically and are, at times, dependent on projected purchase volumes and advertising plans. Certain vendor allowances are used exclusively for promotions and other direct expenses and are recognized as a reduction to2002. Operating, selling, general and administrative expenses when earned. Rebates and other miscellaneous incentives are earned based on purchases and/for fiscal 2003 decreased to $1.597 billion, or product sales. These monies are treated29.3% of net sales, from $1.604 billion, or 30.1% of sales for fiscal 2002. For fiscal 2003, gross profit, as a reductionpercentage of inventories and are recognizedsales, improved by 1.5 percentage points, while operating expenses, as a reduction to costpercentage of sales, asdeclined by 0.8 percentage points. Operating profit for fiscal 2003 increased 19% over the inventories are sold. The amounts to be received are subject to changes in market conditions, vendor marketing strategiesprior year.
Gross profit, operating expenses and changes inoperating profit for fiscal years 2003 and 2002 were impacted by the profitabilityfollowing non-recurring or sell-through of the related merchandise for AutoZone.infrequent items:
Restructuring and Impairment Charges
• | For fiscal 2003, a $4.6 million pre-tax gain as a result of the disposition of properties associated with the fiscal 2001 restructuring and impairment charges | ||
• | For fiscal 2003, a $10.0 million pre-tax negative impact and the reclassification of certain vendor funding to increase operating expenses by $53 million and decrease cost of goods sold by $43 million, both as a result of the adoption of Emerging Issues Task Force Issue No. 02-16 regarding vendor funding | ||
• | For fiscal 2003, a $4.7 million pre-tax gain associated with the settlement of certain liabilities and the repayment of a note associated with the fiscal 2002 sale of the TruckPro business |
In fiscal 2001, AutoZone recorded restructuring and impairment charges of $156.8 million. The planned closure of 51 domestic auto parts stores and the disposal of real estate projects in process and excess properties accounted for the largest portion, or $56.1 million, of the charge. In fiscal 2002, these stores were closed, and sales of certain excess properties resulted in gains of approximately $2.6 million. Remaining excess properties are currently being marketed for sale. During the third quarter of fiscal 2002, all remaining excess properties were reevaluated. At that time, it was determined that several properties could be developed. This resulted in the reversal of accrued lease obligations totaling $6.4 million. It was also determined that additional writedowns were needed to state remaining excess properties at fair value. These writedowns totaled $9.0 million. Because fiscal 2002 adjustments offset, there was no impact on net income.
Another portion of the charge, $32.0 million, related to other asset writedowns and the accrual of lease obligations associated with the closure of a supply depot and for the unoccupied ALLDATA office building. During the fourth quarter of fiscal 2002, the ALLDATA office building was sold to a third party. The reserve previously established was adequate to cover the loss incurred on the sale. We continue to pursue the sale, sublease or early termination of the leases associated with the remaining leased facilities.
1820
We also reserved $30.1 million for inventory rationalization, including a provision for inventory losses in closed stores. All
For fiscal 2003, excluding the above items, gross profit, as a percentage of sales, improved by 0.7 percentage points while operating expenses, as a percentage of sales, declined by 1.9 percentage points. Comparable operating profit for fiscal 2003 increased by 23.9%, as operating margin improved 2.6 percentage points to 16.8% from 14.2% last year (see Reconciliation of Non-GAAP Financial Measures). The improvements in gross profit and disposalsgross margin reflect the additive impact of inventory took placenew merchandise, a reduction in our product warranty expense, and the benefit of more strategic and disciplined pricing derived from our category management system. Improvements, in operating profit and operating margin, reflect our relentless expense discipline, in particular, the leveraging of salaries and information technology spending during fiscal 2003.
Net interest expense for fiscal 2003 was $84.8 million compared with $79.9 million during fiscal 2002. The reserveincrease in interest expense for fiscal 2003 was adequateprimarily due to cover losses incurred.higher levels of debt compared with the 2002 fiscal year. Weighted-average borrowings for fiscal 2003 were $1.51 billion, compared with $1.33 billion for fiscal 2002; and, weighted-average borrowing rates, excluding the impact of debt amortization and facility fees, remained relatively flat at 4.4% for both fiscal years.
AutoZone’s effective income tax rate declined slightly to 37.9% of pretax income for fiscal 2003 as compared to 38.1% for fiscal 2002.
Asset writedowns and contractual obligations aggregating $29.9 million relatedNet income for fiscal 2003 increased by 20.9% to the planned sale of TruckPro, our heavy-duty truck parts subsidiary, were recorded. In December 2001, TruckPro was sold to a group of investors for cash proceeds of $25.7$517.6 million, and a promissory note. We have deferred a gain ondiluted earnings per share increased by 33.5% to $5.34 from $4.00 reported for the saleyear-ago period. Excluding the non-recurring, infrequent items listed above, comparable net income increased 26.4% and diluted earnings per share increased 39.4% (see Reconciliation of $3.6 million due to uncertainties associated with the realizationNon-GAAP Financial Measures). The impact of the gain. Refer to Note Kfiscal 2003 stock repurchases on diluted earnings per share in the Consolidated Financial Statements for further discussionfiscal 2003 was an increase of this transaction.
The remainder of the restructuring and impairment charges, $8.7 million, related to contractual obligations, severance and other charges. We did not reverse any reserves into income.
Total remaining accrued obligations for restructuring charges were $18.1 million at August 31, 2002. The following table presents a summary of the activity in accrued obligations for the restructuring charges:
Contract | ||||||||||||
Settlements/ | Severance | |||||||||||
(in thousands) | Lease Obligations | Terminations | & Other | |||||||||
Beginning balance | $ | 29,576 | $ | 6,713 | $ | 2,715 | ||||||
Cash outlays/adjustments | 11,436 | 6,713 | 2,715 | |||||||||
Balance at August 31, 2002 | $ | 18,140 | $ | — | $ | — | ||||||
Fiscal 2002 Compared with Fiscal 2001
Net sales for fiscal 2002 increased by $507.3 million, or 10.5%, over net sales for fiscal 2001. Excluding TruckPro, which was sold during the year, net sales increased 13%. The sales increases were attributable to a 9% increase in comparable store sales, or sales for domestic auto parts stores opened at least one year. New store sales in fiscal year 2002 contributed two percentage points and net sales from the 53rd week contributed approximately two percentage points of the increase. Comparable store sales increased as a result of an increase in customer count and an increase in average dollars spent per transaction over the amounts in the prior year.
At August 31, 2002, we operated 3,068 domestic auto parts stores and 39 in Mexico, compared with 3,019 domestic auto parts stores, 21 in Mexico and 49 TruckPro stores at August 25, 2001. Excluding sales from the extra week in fiscal 2002, net sales increased 8.3% (see Reconciliation of Non-GAAP Financial Measures). Same store sales, or sales for domestic stores open at least one year, increased approximately 9% during fiscal 2002, including an increase in retail same store sales of approximately 8% and an increase for commercial sales in same stores by approximately 17%. Comparable store sales increased in fiscal 2002 as a result of an increase in customer count and an increase in average dollars spent per transaction over the amounts in the 2001 fiscal year. New stores contributed approximately 2 percentage points to the increase during fiscal 2002; whereas, the overall sales increase was somewhat offset by the decrease in sales associated with TruckPro, which was sold in December 2001, of $47.6 million
1921
in fiscal 2002 and $148.5 million in fiscal 2001. ALLDATA and Mexico sales composed the remainder of the increase in sales during fiscal 2002.
Gross profit for fiscal 2002 was $2.4$2.375 billion, or 44.6 % of net sales, compared with $2.013 billion, or 41.8% of net sales for fiscal 2001. Excluding the impact of the extra week in fiscal 2002 and the nonrecurring charges in fiscal 2001, gross profit for fiscal 2002 was $2.325 billion, or 44.6% of net sales, compared with $2.0$2.043 billion, or 42.4% of net sales (excluding nonrecurring charges) for fiscal 2001.2001 (see Reconciliation of Non-GAAP Financial Measures). Gross margin improvement for fiscal 2002 reflected lower product costs, more efficient supply chain costs, reduced inventory shrinkage, the benefits of more strategic and disciplined pricing due to category management and the addition of more value-added, high-margin merchandise than in the prior2001 fiscal year.
Operating, selling, general and administrative expenses for fiscal 2002 increased by $105.5 million over such expenses for fiscal 2001 but declined as a percentage of net sales from 31.1% to 30.1% (excluding nonrecurring charges in the prior year). The improved ratio reflectsreflected the fact that revenues rose more rapidly than the growth of store-level expenses (a 1.1 percentage point improvement), combined with operating savings resulting from the restructuring in fiscal year 2001 related to controlling staffing, base salaries and technology spending of 0.4 percentage points. Additionally, the prior2001 fiscal year included other expenses related to strategic initiatives not included in the restructuring and impairment charges of 0.3 percentage points. The adoption of new accounting rules for goodwill reduced operating expenses in fiscal 2002 by approximately $8.6 million, or 0.2 percentage points. These improvements in the expense ratio were partially offset by additional bonus, legal, pension and insurance expenses incurred in the current2002 fiscal year of 1.1 percentage points.
Net interest expense for fiscal year 2002 was $79.9 million compared with $100.7 million during fiscal 2001. The decrease in interest expense for fiscal 2002 was primarily due to lower levels of debt compared with the prior2001 fiscal year and lower average interest rates on short term borrowings.borrowing rates. Weighted average borrowings for fiscal year 2002 were $1.33 billion, compared with $1.45 billion for fiscal 2001. Additionally, weighted average borrowing rates, excluding the impact of debt amortization and facility fees, were lower in the current2002 year compared with the prior2001 fiscal year at 4.41%4.4% compared with 6.24%6.2%.
AutoZone’s effective income tax rate was 38.1% of pretax income for fiscal 2002 and 38.8% for fiscal 2001. The decrease in the tax rate is due primarily to the change in goodwill accounting.
Fiscal 2001 Compared with Fiscal 2000
Net salesincome for fiscal 20012002 increased by $335.5to $428.1 million or 7.5% over net salesfrom $175.5 and diluted earnings per share increased to $4.00 from $1.54 reported for fiscal 2000. Same store sales, or sales for domestic auto parts stores opened at least one year, increased 4%. Additionally, new store sales2001. Excluding the positive impact of the extra week in fiscal 2001 contributed 3% of the sales increase. The remaining sales increase was due to increased sales in our Mexico stores, ALLDATA2002 and TruckPro. At August 25, 2001, we operated 3,019 domestic auto parts stores compared with 2,915 at August 26, 2000.
Gross profit for fiscal 2001 (excluding nonrecurring charges) was $2.0 billion, or 42.4% of net sales, compared with $1.9 billion, or 41.9% of net sales, for fiscal 2000. The increase in the gross profit percentage was primarily due to a shift in sales mix to higher gross margin products in the current year and higher warranty expense in the prior year.
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Operating, selling, general and administrative expenses for fiscal 2001 increased by $130.6 million over such expenses for fiscal 2000 (excluding nonrecurring charges) and increased as a percentage of net sales from 30.5% to 31.1%. The increase in the expense ratio was primarily due to an increase in group insurance expenses of 0.1 percentage points, an increase in risk management insurance expenses of 0.1 percentage points, an increase in other expenses related to strategic initiatives not included in the restructuring and impairment charges of 0.3 percentage pointsfrom fiscal 2001, comparable net income for fiscal 2002 increased to $409.9 million from $271.3 million for fiscal 2001; and higher levels of payroll of 0.1 percentage points, primarily in the first half of the year.
Net interest expensediluted earnings per share for fiscal 2002 increased to $3.83 from $2.38 for fiscal 2001 was $100.7 million compared with $76.8 million for fiscal 2000. The increase in interest expense is due to higher weighted average borrowings in fiscal 2001 compared with fiscal 2000. Weighted average borrowings were $1.45 billion in fiscal 2001 compared with $1.18 billion in fiscal 2000. Weighted average borrowing rates were slightly lower in fiscal 2001 compared with fiscal 2000 at 6.24% compared with 6.37%.
AutoZone’s effective income tax rate was 38.8%(see Reconciliation of pretax income for fiscal 2001 and 38.5% for fiscal 2000.
Liquidity and Capital Resources
Capital Requirements
AutoZone’s primary capital requirements have been the funding of its continued new-store development program, inventory requirements and stock repurchases. We opened or acquired 1,340 net new domestic auto parts stores from the beginning of fiscal 1998 to August 31, 2002. Cash flow generated from store operations provides us with a significant source of liquidity. Net cash provided by operating activities was $739.1 million in fiscal 2002, $458.9 million in fiscal 2001 and $513.0 million in fiscal 2000. The increase in cash flow from operations in the current year is due primarily to higher net income, a larger increase in accounts payable and accruals and higher employee stock option exercises.
We invested $117.2 million in capital assets in fiscal 2002 compared with $169.3 million in fiscal year 2001 and $249.7 million in fiscal year 2000. In fiscal 2002, we opened 102 new auto parts stores in the U.S. and 18 in Mexico, replaced 15 U.S. stores and closed 53 U.S. stores. During the year we sold TruckPro, our heavy-duty truck parts subsidiary, which operated 49 stores, for cash proceeds of $25.7 million. Net cash flows used in investing activities were $64.5 million in fiscal 2002, compared with $122.1 million in fiscal 2001 and $242.3 million in fiscal 2000.
Our new-store development program requires working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required by expansion. We believe that we will be able to continue financing much of our inventory growth through favorable payment terms from suppliers, but there can be no assurance that we will be successful in obtaining such terms.
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Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance will be funded through borrowings. We anticipate that we will be able to obtain such financing in view of our credit rating and favorable experiences in the debt market in the past.
Credit Ratings
At August 31, 2002, AutoZone had a senior unsecured debt credit rating from Standard & Poor’s of BBB+ and a commercial paper rating of A-2. Moody’s Investors Service had assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. Both rating agencies had AutoZone listed as having a “negative outlook.” Subsequent to year end, Standard & Poor’s changed its outlook for AutoZone to “positive” and Moody’s changed its outlook to “stable.” If these credit ratings drop, AutoZone’s interest expense may increase; similarly, we anticipate that our interest expense may decrease if our investment ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited, and obligations under our equity forward agreements may be accelerated, requiring the agreements to be settled prior to their planned settlement date.
Debt Facilities
We maintain $950 million of revolving credit facilities with a group of banks. Of the $950 million, $300 million expires in May 2003. The remaining $650 million expires in May 2005. The 364-day facility expiring in May 2003 includes a renewal feature as well as an option to extend the maturity date of the then-outstanding debt by one year. The credit facilities exist largely to support commercial paper borrowings and other short term unsecured bank loans. At August 31, 2002, outstanding commercial paper of $223.2 million is classified as long term as we have the ability and intention to refinance it on a long term basis. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the agreement) or a competitive bid rate at our option. We have agreed to observe certain covenants under the terms of our credit agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage.
During fiscal year 2001, we entered into $200 million and $115 million unsecured bank term loans with a group of banks. During fiscal 2002, the $200 million two-year unsecured term loan was increased to $350 million and the maturity was extended to November 2004. The rate of interest payable is a function of LIBOR or the bank’s base rate (as defined in the agreement) at our option.
After the fiscal year end, on October 1, 2002, we filed a shelf registration with the Securities and Exchange Commission. This filing will allow us to sell as much as $500 million in debt securities for general corporate purposes, including repaying, redeeming or repurchasing existing debt, and/or to fund working capital, capital expenditures, new store openings, stock repurchases and acquisitions. On October 16, 2002, we issued $300 million of 5.875% Senior Notes under the registration statement. The Notes mature in October 2012 and interest is payable semi-annually on April 15 and October 15.
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All of the repayment obligations under our bank lines of credit may be accelerated and come due prior to the scheduled payment date if AutoZone experiences a change in control (as defined in the agreements) of AutoZone or its Board of Directors or if covenants are breached related to total indebtedness and minimum fixed charge coverage. We expect to remain in compliance with these covenants.
Stock Repurchases
As of August 31, 2002, our Board of Directors had authorized the repurchase of up to $2.3 billion of common stock in the open market. From January 1998 to August 31, 2002, approximately $2.1 billion of common stock had been repurchased, including shares committed under outstanding forward purchase contracts. During fiscal 2002, we repurchased $699.0 million of common stock.Non-GAAP Financial Measures). The impact of the fiscal 2002 stock repurchases on diluted earnings per share in fiscal 2002 was an increase of $0.16. Subsequent to year end, we repurchased 1.1 million shares in partial settlement of the forward purchase contract outstanding at August 31, 2002, at an average cost of $69.91 per share.
At times, we utilize equity forward agreements to facilitate our repurchase of common stock and to lock in current market prices for later purchase. Our obligations under the equity forward agreements are not reflected on our balance sheet. AutoZone, at its option, may settle the forward purchase agreements in cash or in common stock.
Financial Commitments
The following table shows AutoZone’s obligations and commitments to make future payments under contractual obligations:
Payment Due by Period | ||||||||||||||||||||
Total | ||||||||||||||||||||
Contractual | Between | Between | ||||||||||||||||||
(in thousands) | Obligations | Less than 1 year | 1-3 years | 4-5 years | Over 5 years | |||||||||||||||
Long term debt | $ | 1,194,517 | $ | — | $ | 1,004,517 | $ | — | $ | 190,000 | ||||||||||
Synthetic leases | 28,194 | — | — | 28,194 | — | |||||||||||||||
Other operating leases | 658,554 | 117,215 | 190,686 | 129,289 | 221,364 | |||||||||||||||
Construction obligations | 16,034 | 16,034 | — | — | — | |||||||||||||||
$ | 1,897,299 | $ | 133,249 | $ | 1,195,203 | $ | 157,483 | $ | 411,364 | |||||||||||
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The following table shows AutoZone’s other commitments:
Amount of Commitment Expiration Per Period | ||||||||||||||||||||
Total | ||||||||||||||||||||
Other | Between | Between | Over 5 | |||||||||||||||||
(in thousands) | Commitments | Less than 1 year | 1-3 years | 4-5 years | years | |||||||||||||||
Standby letters of credit | $ | 31,715 | $ | 31,715 | $ | — | $ | — | $ | — | ||||||||||
Surety bonds | 23,660 | 23,660 | — | — | — | |||||||||||||||
Share repurchase obligations | 150,058 | 150,058 | — | — | — | |||||||||||||||
$ | 205,433 | $ | 205,433 | $ | — | $ | — | $ | — | |||||||||||
A substantial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to cover premium and deductible payments to our workers’ compensation carrier.
In conjunction with our commercial sales program, we offer credit to some of our commercial customers. The receivables related to the credit program are sold to a third party at a discount for cash with limited recourse. AutoZone has established a reserve for this recourse. At August 31, 2002, the receivables facility had an outstanding balance of $23.5 million and the balance of the recourse reserve was $1.9 million.
AutoZone has a synthetic lease facility of $30 million in total. The facility expires in fiscal 2006. At August 31, 2002, $28.2 million in synthetic lease obligations were outstanding, relating to a small number of our domestic auto parts stores. The synthetic leases qualify as operating leases for accounting purposes and are not reflected as an asset or a liability on our balance sheet. The lease payments on the stores are reflected in the income statement in operating expenses and we depreciate the underlying assets for tax purposes.
We have subleased some of our leased real property to other entities, including the purchaser of our former TruckPro business. If the purchaser of the TruckPro business becomes unable to meet its obligations under the subleases, we might incur liabilities in connection with the recovery and subsequent sublease or lease termination of the properties.
Inflation
AutoZone does not believe its operations have been materially affected by inflation. We have been successful, in many cases, in mitigating the effects of merchandise cost increases principally through efficiencies gained through economies of scale, selective forward buying and the use of alternative suppliers.
Seasonality and Quarterly Periods
AutoZone’s business is somewhat seasonal in nature, with the highest sales occurring in the summer months of June through August, in which average weekly per storeper-store sales historically have been about 15% to 25% higher than in the slower months of December through February. During short periods of time, AutoZone’s business is alsoa store’s sales can be affected by weather conditions.
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Extremely hot or extremely cold weather tends tomay enhance sales by causing parts to fail and spurring sales of seasonal products. Mild or rainy weather tends to soften sales as parts failure rates are lower in mild weather and elective maintenance is deferred during periods of rainy weather. Over the long run,longer term, the effects of weather balance out, as we have stores throughout the United States.
Each of the first three quarters of AutoZone’s fiscal year consists of 12 weeks, and the fourth quarter consists of 16 weeks (17 weeks in fiscal 2002). Because the fourth quarter contains the seasonally high sales volume and consists of 16 weeks (17 weeks in fiscal 2002), compared towith 12 weeks for each of the first three quarters, our fourth quarter represents a disproportionate share of the annual net sales and net income. The fourth quarter of fiscal 2003 represented 33.5% of annual net sales and 40.1% of net income; the fourth quarter of fiscal 2002, represented 34.6% of annual net sales and 41.6% of net income; the fourth quarter of fiscal 2001, excluding nonrecurring charges, represented 34.1% of annual net sales and 43.9% of net income. Fiscal year 2002 consisted of 53 weeks, with the fiscal fourth quarter including 17 weeks. Accordingly, the fourth quarter of fiscal 2002 included the benefit of an additional week of net sales of $109.1 million and net income of $18.3 million.
Recent Accounting PronouncementsLiquidity and Capital Resources
Net cash provided by operating activities was $698.3 million in fiscal 2003, $739.1 million in fiscal 2002 and $458.9 million in fiscal 2001. Cash flow generated from store operations provides us with a significant source of liquidity. Our new-store development program requires working capital, predominantly for inventories. During the past three fiscal year periods, we have improved our accounts payable to inventory ratio to 87% at August 30, 2003, from 83% at August 31, 2002, and 76% at August 25, 2001. In each of the three year periods, the improvement in this ratio was a source of cash from operations, particularly in fiscal 2002 when the ratio increased 7 percentage points. The increase in merchandise inventories, required to support new-store development and sales growth, has largely been financed by our vendors, as evidenced by the higher accounts payable to inventory ratio.
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AutoZone’s primary capital requirement has been the funding of its continued new store development program. From the beginning of fiscal 1999 to August 30, 2003, we have opened 562 net new domestic auto parts stores. Net cash flows used in investing activities were $167.8 million in fiscal 2003, compared with $64.5 million in fiscal 2002 and $122.1 million in fiscal 2001. The increase in cash used in investing activities during fiscal 2003 as compared to fiscal 2002 is due primarily to increased store development activities in the current year and proceeds from the sale of the TruckPro business in the prior year. We invested $182.2 million in capital assets in fiscal 2003 compared with $117.2 million in fiscal 2002 and $169.3 million in fiscal 2001. New store openings in the U.S. were 160 for fiscal 2003, 102 for fiscal 2002 and 107 for fiscal 2001. During fiscal 2002, we sold TruckPro, our heavy-duty truck parts subsidiary, which operated 49 stores, for cash proceeds of $25.7 million. Proceeds from capital asset disposals totaled $14.4 million for fiscal 2003, $25.1 million for fiscal 2002 and $44.6 million for fiscal 2001.
Net cash used in financing activities was $530.2 million in fiscal 2003, $675.4 million in fiscal 2002 and $336.5 million in fiscal 2001. The net cash used in financing activities is primarily attributable to purchases of treasury stock which totaled $891.1 million for fiscal 2003, $699.0 million for fiscal 2002 and $366.1 million for fiscal 2001. Fiscal 2003 net proceeds from the issuance of debt securities, including repayments on other debt and the net change in commercial paper borrowings, offset the increased level of treasury stock purchases by approximately $322 million.
We expect to open approximately 195 new stores during fiscal 2004. Our new-store development program requires working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required by expansion. We believe that we will be able to continue to finance much of our inventory requirements through favorable payment terms from suppliers.
Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance will be funded through borrowings. We anticipate that we will be able to obtain such financing in view of our credit rating and favorable experiences in the debt markets in the past.
Credit Ratings
At August 30, 2003, AutoZone had a senior unsecured debt credit rating from Standard & Poor’s of BBB+ and a commercial paper rating of A-2. Moody’s Investors Service had assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. As of August 30, 2003, both Moody’s and Standard & Poor’s had AutoZone listed as having a “stable” outlook. Subsequent to the 2003 fiscal year end, Moody’s changed our outlook to “negative,” while confirming AutoZone’s existing credit ratings. If our credit ratings drop, our interest expense may increase; similarly, we anticipate that our interest expense may decrease if our investment ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will
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increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited.
Debt Facilities
We maintain $950 million of revolving credit facilities with a group of banks. Of the $950 million, $300 million expires in May 2004. The remaining $650 million expires in May 2005. The portion expiring in May 2004 includes a renewal feature as well as an option to extend the maturity date of the then-outstanding debt by one year. The credit facilities exist largely to support commercial paper borrowings and other short term unsecured bank loans. At August 30, 2003, outstanding commercial paper of $268 million, the 6% Notes due November 2003 of $150 million and other debt of $2.7 million are classified as long term, as we have the ability and intention to refinance them on a long term basis. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the agreement) or a competitive bid rate at our option. We have agreed to observe certain covenants under the terms of our credit agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage. As of August 30, 2003, we are in compliance with all covenants.
On October 16, 2002, we issued $300 million of 5.875% Senior Notes. The notes mature in October 2012, and interest is payable semi-annually on April 15 and October 15. A portion of the proceeds from these senior notes was used to prepay a $115 million unsecured bank term loan due December 2003, to repay a portion of our outstanding commercial paper borrowings, and to settle interest rate hedges associated with the issuance and repayment of the related debt securities. On June 3, 2003, we issued $200 million of 4.375% Senior Notes. These senior notes mature in June 2013, and interest is payable semi-annually on June 1 and December 1. The proceeds were used to repay a portion of our outstanding commercial paper borrowings, to prepay $100 million of the $350 million unsecured bank loan due November 2004, and to settle interest rate hedges associated with the issuance of the debt securities.
On August 8, 2003, we filed a shelf registration with the Securities and Exchange Commission, which was declared effective on August 22, 2003. This filing will allow us to sell up to $500 million in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt, and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. No debt had been issued under this registration statement as of August 30, 2003.
All of the repayment obligations under our bank lines of credit may be accelerated and come due prior to the scheduled payment date if AutoZone experiences a change in control (as defined in the agreements) of AutoZone or its Board of Directors or if covenants are breached related to total indebtedness and minimum fixed charge coverage. We expect to remain in compliance with these covenants.
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Stock Repurchases
As of August 30, 2003, our Board of Directors had authorized the repurchase of up to $3.3 billion of common stock in the open market. From January 1998 to August 30, 2003, approximately $2.8 billion of common stock had been repurchased. During fiscal 2003, we repurchased $891.1 million of common stock.
At times in the past, we utilized equity forward agreements to facilitate our repurchase of common stock. There were no outstanding equity forward agreements for share repurchases as of August 30, 2003. At August 31, 2002, we held equity forward agreements, which were settled in cash during fiscal 2003, for the purchase of approximately 2.2 million shares of common stock at an average cost of $68.82 per share. Such obligations under equity forward agreements at August 31, 2002, were not reflected on our balance sheet.
Financial Commitments
The following table shows AutoZone’s obligations and commitments to make future payments under contractual obligations:
Payment Due by Period | ||||||||||||||||||||
Total | ||||||||||||||||||||
Contractual | Less than | Between | Between | Over 5 | ||||||||||||||||
(in thousands) | Obligations | 1 year | 1-3 years | 4-5 years | years | |||||||||||||||
Long term debt (1) | $ | 1,546,845 | $ | 420,700 | $ | 435,445 | $ | 190,700 | $ | 500,000 | ||||||||||
Operating leases (2) | 671,103 | 118,269 | 197,311 | 129,446 | 226,077 | |||||||||||||||
Construction obligations | 16,765 | 16,765 | — | — | — | |||||||||||||||
$ | 2,234,713 | $ | 555,734 | $ | 632,756 | $ | 320,146 | $ | 726,077 | |||||||||||
(1) Long term debt balances represent principal maturities, excluding interest. At August 30, 2003, debt balances due in less than one year of $420.7 million are classified as long term in our Consolidated Financial Statements, as we have the ability and intention to refinance them on a long-term basis.
(2) Operating lease obligations include related interest.
The following table shows AutoZone’s other commitments which all have expiration periods of less than one year:
Total | ||||
Other | ||||
(in thousands) | Commitments | |||
Standby letters of credit | $ | 52,778 | ||
Surety bonds | 8,123 | |||
$ | 60,901 | |||
Off-Balance Sheet Arrangements
The above table reflects the outstanding letters of credit and surety bonds as of August 30, 2003. A substantial portion of the outstanding standby letters of credit (which are primarily
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renewed on an annual basis) and surety bonds are used to cover reimbursement obligations to our workers’ compensation carriers. There are no additional contingent liabilities associated with them as the underlying liabilities are already reflected in our balance sheet. The letters of credit and surety bonds arrangements have automatic renewal clauses.
In October 2001,conjunction with our commercial sales program, we offer credit to some of our commercial customers. The receivables related to the credit program are sold to a third party at a discount for cash with limited recourse. AutoZone has recorded a reserve for this recourse. At August 30, 2003, the receivables facility had an outstanding balance of $42.1 million and the balance of the recourse reserve was $2.6 million.
Guarantee and Indemnification Arrangements
During fiscal 2003, AutoZone adopted the provisions of Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). Effective for interim and annual periods ending after December 15, 2002, FIN 45 elaborates on the disclosures that must be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and indemnities. It also clarifies that a guarantor is required to recognize the fair value of guarantee and indemnification arrangements issued or modified by AutoZone after December 31, 2002, if these arrangements are within the scope of FIN 45. The adoption of FIN 45 did not have a significant impact on AutoZone’s Consolidated Financial Statements.
Critical Accounting Policies
Product Warranties
Limited warranties on certain products that range from 30 days to lifetime warranties are provided to our customers by AutoZone or the vendors supplying its products. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate. We periodically assess the adequacy of our recorded warranty liability and adjust the amount as necessary.
Litigation and Other Contingent Liabilities
We have received claims related to and been notified that we are a defendant in a number of legal proceedings resulting from our business, such as employment matters, product liability, general liability related to our store premises and alleged violation of the Robinson-Patman Act (as specifically described in Note M in the Notes to Consolidated Financial Statements). Generally, we calculate contingent loss accruals using our best estimate of our probable and reasonably estimable contingent liabilities, such as lawsuits and our retained liability for insured claims.
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Vendor Allowances
AutoZone receives various payments and allowances from its vendors based on the volume of purchases or for services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and promotional funds. Typically these funds are dependent on purchase volumes and advertising plans. The amounts to be received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for AutoZone.
Rebates and other miscellaneous incentives are earned based on purchases or product sales. These monies are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.
Certain vendor allowances are used exclusively for promotions and to partially or fully offset certain other direct expenses. Such vendor funding arrangements, that were entered into on or before December 31, 2002, were recognized as a reduction to selling, general and administrative expenses when earned. However, for such vendor funding arrangements entered into or modified after December 31, 2002, AutoZone applied the new guidance pursuant to the Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor” (EITF Issue No. 02-16). Accordingly, all such vendor funds are recognized as a reduction to cost of sales as the inventories are sold.
The new accounting pronouncement for vendor funding does not impact the way AutoZone runs its business or its relationships with vendors. It does, however, require the deferral of certain vendor funding which is calculated based upon vendor inventory turns. Based on the timing of the issuance of the pronouncement and guidelines, we were precluded from adopting EITF Issue No. 02-16 as a cumulative effect of a change in accounting principle. Our timing and accounting treatment of EITF Issue No. 02-16 was not discretionary.
Impairments
In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 supersedes Statement No. 121, “Accounting, we evaluate the recoverability of the carrying amounts of long lived assets, such as property and equipment, covered by this standard whenever events or changes in circumstances dictate that the carrying value may not be recoverable. As part of the evaluation, we review performance at the store level to identify any stores with current period operating losses that should be considered for impairment. We compare the Impairmentsum of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” but retains manythe undiscounted expected future cash flows with the carrying amounts of its fundamental provisions. Additionally, SFAS 144 expands the scope of discontinued operations to include more disposal transactions. Theassets.
Under the provisions of SFAS 144Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), we perform an annual test of goodwill to compare the estimated fair value of goodwill to the carrying amount to determine if any impairment exists. We perform the annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments.
If impairments are effectiveindicated by either of the above evaluations, the amount by which the carrying amount of the assets exceeds the fair value of the assets is recognized as an impairment
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loss. Such evaluations require management to make certain assumptions based upon information available at the time the evaluation is performed, which could differ from actual results.
Restructuring and Impairment Charges
In fiscal 2001, AutoZone recorded restructuring and impairment charges of $156.8 million, including restructuring accruals of $29.6 million. The accrued obligations for AutoZone’srestructuring charges totaled approximately $12.5 million at August 30, 2003, fiscal year. We do not expectand $18.1 million at August 31, 2002. The original charges and activity in the adoption of SFAS 144restructuring accruals is described more fully in Note L in the Notes to have a significant financial impact on our Consolidated Financial Statements.
During fiscal 2002, we reevaluated remaining excess properties related to the fiscal 2001 impairment charges and determined that several properties could be developed. This resulted in the reversal of accrued lease obligations totaling $6.4 million. We also determined that additional writedowns of $9.0 million were needed to state remaining excess properties at fair value. In Juneaddition, we recognized $2.6 million of gains in fiscal 2002 as a result of closing certain stores associated with the restructuring and impairment charges in fiscal 2001. During fiscal 2003, AutoZone recognized $4.6 million of gains as a result of the disposition of properties associated with the restructuring and impairment charges in fiscal 2001.
Included in the fiscal 2001 impairment and restructure charges were asset writedowns and contractual obligations aggregating $29.9 million related to the planned sale of TruckPro, our heavy-duty truck parts subsidiary. In December 2001, TruckPro was sold to a group of investors for cash proceeds of $25.7 million and a promissory note. A deferred gain of $3.6 million was recorded as part of the sale due to uncertainties associated with the realization of the gain. During fiscal 2003, the note was paid and certain liabilities were settled. As a result, a total pre-tax gain of $4.7 million was recognized in income during fiscal 2003 as part of operating, selling, general and administrative expenses.
No other significant gains or charges are anticipated under the fiscal 2001 restructuring plan.
Value of Pension Assets
At August 30, 2003, the fair market value of AutoZone’s pension assets was $86.7 million, and the related accumulated benefit obligation was $136.1 million. On January 1, 2003, our defined benefit pension plans were frozen. Accordingly, plan participants earn no new benefits under the plan formulas, and no new participants may join the plans. The material assumptions for fiscal 2003 are an expected long-term rate of return on plan assets of 8% and a discount rate of 6%. For additional information regarding AutoZone’s qualified and non-qualified pension plans refer to Note J in the Notes to Consolidated Financial Statements.
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Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued StatementInterpretation No. 146, “Accounting for Costs Associated with Exit46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or Disposal Activities” (SFAS 146). SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and requires that a liabilitydo not have sufficient equity at risk for the cost associated with an exitentity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires the consolidation of certain types of entities in which a company absorbs a majority of another entity’s expected losses or disposal activity be recognized whenresidual returns, or both, as a result of ownership, contractual or other financial interests in the liability is incurred, as opposedother entity. These entities are called variable interest entities. FIN 46 applies immediately to the date of an entity’s commitmentvariable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to an exit plan. TheFebruary 1, 2003, the provisions of SFAS 146 are effective for exit or disposal activities that are initiatedFIN 46 must be applied at the end of periods ending after December 31, 2002. We do15, 2003. The Company is currently evaluating the impact of FIN 46 and does not expect theits adoption of SFAS 146 to have a significant financial impact on ourits Consolidated Financial Statements.
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Risk Factors
We may not be able to increase sales by the same historic growth rates.
We have significantly increased our domestic store count in the past five fiscal years, growing from 1,7282,657 stores at August 29, 1998, to 3,219 stores at August 30, 1997, to 3,068 stores at August 31, 2002,2003, an average store count increase per year of 14%4%. We do not plan to continue our store count growth rate at the historic pace. In addition, a portion of our total sales increases each year resultsresulted from increases in sales at existing stores. We cannot provide any assurance that we can continue to open stores at historical rates or increase same store sales.
Our business depends upon qualified employees.
At the end of fiscal year 2002,2003, our consolidated employee count was approximately 44,200.49,000. We docan not know ifassure that we can continue to hire and retain qualified employees at current wage rates. In the event of increasing wage rates, ifIf we do not increase ourmaintain competitive wages, competitively, our customer service could suffer by reason of a declining quality of our workforce or, alternatively, our earnings wouldcould decrease if we increase our wage rates.
If demand for our products slows, then our business may be materially affected.
Demand for products sold by our stores depends on many factors. In the short term, it may depend upon:
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• | the number of vehicles in current service that are seven years old and older, as these vehicles are no longer under the original vehicle manufacturers’ warranty and will need more maintenance and repair than younger vehicles. | ||
• | the weather, as vehicle maintenance may be | ||
• | the economy. In periods of rapidly declining economic conditions, both | ||
For the long term, demand for our products may depend upon: | |||
• | the quality of the vehicles manufactured by the original vehicle manufacturers and the length of the warranty or maintenance offered on new vehicles. | ||
• | restrictions on access to diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulation. |
For the long term, demand for our products may depend upon:
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If we are unable to compete successfully against other businesses that sell the products that we sell, we could lose customers and our revenuessales and profits may decline.
The sale of automotive parts, accessories and maintenance items is highly competitive in many areas, including name recognition, product availability, customer service, store location and price, with many competitors.price. AutoZone competes in both the DIYretail (DIY) and commercial (DIFM) auto parts and accessories markets.
Competitors include national and regional auto parts chains, independently owned parts stores, wholesalers and jobbers, repair shops, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores, supermarkets, drugstores and home stores that sell aftermarket vehicle parts and supplies, chemicals, accessories, tools and maintenance parts. Although we believe we compete effectively on the basis of customer service, including the knowledge and expertise of our AutoZoners, merchandise quality, selection and availability, product warranty, store layout, location and convenience, and the strength of our AutoZone brand name, trademarks and service marks, some competitors may have competitive advantages, such as greater financial and marketing resources, larger stores with more merchandise, longer operating histories, more frequent customer visits and more effective advertising. If we are unable to continue to develop successful competitive strategies, or if our competitors develop more effective strategies, we could lose customers and our revenuessales and profits may decline.
If we cannot profitably increase market share in the commercial auto parts business, our sales growth may be limited.
Although we are one of the largest sellers of auto parts in the commercial “do-it-for-me”DIFM market, to increase commercial sales we must compete against automotive aftermarket jobbers and
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warehouse distributors, in addition to other auto parts retailers that have recently entered the commercial business. Although we believe we compete effectively on the basis of customer service, merchandise quality, selection and availability, and distribution locations, some automotive aftermarket jobbers and warehouse distributors have been in business for substantially longer periods of time than we have, have developed long-term customer relationships and have larger available inventories. We can make no assurances that we can profitably develop new commercial customers or make available inventories required by commercial customers.
If our vendors continue to consolidate, we may pay higher prices for our merchandise.
Recently, several of our vendors have merged and others have announced plans to merge. Further vendor consolidation could limit the number of vendors from which we may purchase products and could materially affect the prices we pay for these products.
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Consolidation among our competitors may negatively impact our business.
Recently, several large auto parts chains have merged. We do not know whatthe impact these mergers will have upon competition in the retail automotive aftermarket. If our merging competitors are able to achieve efficiencies in their mergers, then there may be greater competitive pressures in the markets in which they are strongest.stronger.
War or acts of terrorism or the threat of either may negatively impact availability of merchandise and adversely impact our sales.
In the event of war,War, or acts of terrorism or the threat of either, are threatened, it may have a negative impact on our ability to obtain merchandise available for sale in our stores. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to bring into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.
In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers and stores.
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Reconciliation of Non-GAAP Financial Measures
“Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include the following financial measures not derived in accordance with generally accepted accounting principles (“GAAP”). The following non-GAAP financial measures provide additional information for determining our optimum capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders’ value.
• | After Tax Return on Invested Capital (“ROIC”) | ||
• | Cash Flow Before Share Repurchases |
In addition, the impact of certain non-recurring or infrequent items, that we believe are not indicative of our ongoing operating performance, was excluded in the determination of certain financial measures presented in “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We believe that the resulting non-GAAP financial measures are useful to investors because these measures indicate more clearly our comparative year-to-year operating results. The following non-recurring or infrequent items were all identified as “adjustments” for comparative purposes:
• | For fiscal 2003, a $4.6 million pre-tax gain as a result of the disposition of properties associated with the fiscal 2001 restructuring and impairment charges | ||
• | For fiscal 2003, a $10.0 million pre-tax negative impact and reclassification of certain vendor funding to increase operating expenses by $53 million and decrease cost of goods sold by $43 million, both as a result of the adoption of Emerging Issues Task Force Issue No. 02-16 regarding vendor funding | ||
• | For fiscal 2003, a $4.7 million pre-tax gain associated with the settlement of certain liabilities and the repayment of a note associated with the fiscal 2002 sale of the TruckPro business | ||
• | For fiscal 2002, the favorable impact of the additional week of the 53 week fiscal year | ||
• | For fiscal 2001, a $156.8 million pre-tax restructuring and impairment charge |
Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented the non-GAAP financial measures, as we believe they provide additional information to analyze or compare our operations. Furthermore, our management and Compensation Committee of the Board of Directors use the abovementioned non-GAAP financial measures to analyze and compare our underlying operating results and to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the accompanying reconciliation tables.
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Reconciliation of Non-GAAP Financial Measure: After-Tax Return on Invested Capital
The following table reconciles the percentages of after-tax return on invested capital, or “ROIC,” both including and excluding the fiscal 2001 restructuring and impairment charges, to net income. After-tax return on invested capital is calculated as after-tax operating profit (excluding rent) divided by average invested capital (which includes a factor to capitalize operating leases). The ROIC percentages are presented in the “Selected Financial Data.”
(in thousands, except per share and percentage data)
Fiscal Year Ended | |||||||||||||||||||||
August | |||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Net income | $ | 517,604 | $ | 428,148 | $ | 175,526 | $ | 267,590 | $ | 244,783 | |||||||||||
Adjustments: | |||||||||||||||||||||
After-tax interest | 52,686 | 49,471 | 61,560 | 47,241 | 28,603 | ||||||||||||||||
After-tax rent | 68,764 | 61,348 | 61,396 | 58,853 | 60,542 | ||||||||||||||||
After-tax return | 639,054 | 538,967 | 298,482 | 373,684 | 333,928 | ||||||||||||||||
After-tax restructuring and impairment charges | — | — | 95,822 | — | — | ||||||||||||||||
After-tax return, excluding restructuring and impairment charges | $ | 639,054 | $ | 538,967 | $ | 394,304 | $ | 373,684 | $ | 333,928 | |||||||||||
Average debt (a) | $ | 1,484,987 | $ | 1,329,077 | $ | 1,445,899 | $ | 1,182,055 | $ | 807,320 | |||||||||||
Average equity (b) | 580,176 | 802,289 | 879,912 | 1,149,104 | 1,316,204 | ||||||||||||||||
Rent x 6 (c) | 663,990 | 594,192 | 602,382 | 574,290 | 575,460 | ||||||||||||||||
Pretax invested capital | 2,729,153 | 2,725,558 | 2,928,193 | 2,905,449 | 2,698,984 | ||||||||||||||||
Average equity, excluding restructuring and impairment charges (d) | — | — | 6,844 | — | — | ||||||||||||||||
Pretax invested capital, excluding restructuring and impairment charges | $ | 2,729,153 | $ | 2,725,558 | $ | 2,935,037 | $ | 2,905,449 | $ | 2,698,984 | |||||||||||
ROIC | 23.4 | % | 19.8 | % | 10.1 | % | 12.9 | % | 12.4 | % | |||||||||||
ROIC, before restructuring and impairment charges | 23.4 | % | 19.8 | % | 13.4 | %(e) | 12.9 | % | 12.4 | % |
a) | Average debt is equal to the average of our long-term debt measured at the end of each of the 13 fiscal periods in our fiscal year. Long-term debt (in thousands) was $545,067 at August 29, 1998. | |
b) | Average equity is equal to the average of our stockholders’ equity measured at the end of each of the 13 fiscal periods in our fiscal year. Stockholders’ equity (in thousands) was $1,302,057 at August 29, 1998. | |
c) | Rent is multiplied by a factor of six to capitalize operating leases in the determination of pretax invested capital. | |
d) | Average equity at August 25, 2001 increased by $6.8 million as a result of excluding restructuring and impairment charges. | |
e) | ROIC excluding nonrecurring charges was presented as 14.3% in our Form 10-K for the fiscal year ended August 31, 2002, but has been revised to reflect a rolling 13-period average of debt and equity to conform with our current methodology for calculating ROIC. |
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Reconciliation of Non-GAAP Financial Measure: Cash Flow Before Share Repurchases
The following table reconciles net cash provided by operating activities to cash flow before share repurchases. Cash flow before share repurchases is defined as the change in debt plus treasury stock purchases. Cash flow before share repurchases is presented in the “Selected Financial Data”.
Fiscal Year Ended August | ||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net cash provided by operating activities | $ | 698,255 | $ | 739,091 | $ | 458,937 | $ | 512,960 | $ | 311,668 | ||||||||||
Net cash used by investing activities | (167,799 | ) | (64,511 | ) | (122,143 | ) | (242,349 | ) | (428,315 | ) | ||||||||||
Net cash provided by financing activities other than the net change in debt and treasury stock purchases | 8,555 | 54,500 | 54,155 | 8,768 | 7,263 | |||||||||||||||
(Increase) decrease in cash and cash equivalents | (244 | ) | 788 | (317 | ) | (1,051 | ) | 713 | ||||||||||||
Cash flow before share repurchases | $ | 538,767 | $ | 729,868 | $ | 390,632 | $ | 278,328 | $ | (108,671 | ) | |||||||||
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Reconciliation of Non-GAAP Financial Measure: Fiscal 2003, Fiscal 2002 and Fiscal 2001
Excluding Nonrecurring/Infrequent Items
The following table summarizes the effect of nonrecurring or infrequent items on operating results for fiscal 2003. The nonrecurring or infrequent items include a pre-tax gain of $4.6 million as a result of the disposition of properties associated with the fiscal 2001 restructuring and impairment charges, a $4.7 million pre-tax gain associated with the settlement of certain liabilities and the payment of a note from the TruckPro sale in December 2001, and a $10.0 million pre-tax negative impact and the reclassification of certain vendor funding to increase operating expenses by $53 million and decrease cost of goods sold by $43 million, both related to the implementation of EITF Issue No. 02-16.
(in thousands, except per share and percentage data)
Fiscal 2003 | ||||||||||||||||||||
Results of | ||||||||||||||||||||
Operations | ||||||||||||||||||||
Excluding | ||||||||||||||||||||
Fiscal 2003 | Percent | Nonrecurring | Nonrecurring or | Percent | ||||||||||||||||
Results of | of | or Infrequent | Infrequent | of | ||||||||||||||||
Operations | Revenue | Items | Items | Revenue | ||||||||||||||||
Net sales | $ | 5,457,123 | 100.0 | % | $ | — | $ | 5,457,123 | 100.0 | % | ||||||||||
Cost of goods sold | 2,942,114 | 53.9 | % | 42,600 | 2,984,714 | 54.7 | % | |||||||||||||
Gross profit | 2,515,009 | 46.1 | % | (42,600 | ) | 2,472,409 | 45.3 | % | ||||||||||||
Operating expenses | 1,597,212 | 29.3 | % | (43,300 | ) | 1,553,912 | 28.5 | % | ||||||||||||
Operating profit | 917,797 | 16.8 | % | 700 | 918,497 | 16.8 | % | |||||||||||||
Interest expense, net | 84,790 | 1.5 | % | — | 84,790 | 1.5 | % | |||||||||||||
Income before taxes | 833,007 | 15.3 | % | 700 | 833,707 | 15.3 | % | |||||||||||||
Income taxes | 315,403 | 5.8 | % | 265 | 315,668 | 5.8 | % | |||||||||||||
Net income | $ | 517,604 | 9.5 | % | $ | 435 | $ | 518,039 | 9.5 | % | ||||||||||
Diluted earnings per share | $ | 5.34 | $ | — | $ | 5.34 | ||||||||||||||
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Reconciliation of Non-GAAP Financial Measure: Fiscal 2003, Fiscal 2002 and Fiscal 2001
Excluding Nonrecurring/Infrequent Items –continued
The following table summarizes the favorable impact of the additional week of the 53 week fiscal year ended August 31, 2002.
(in thousands, except per share and percentage data)
Fiscal 2002 | ||||||||||||||||||||
Results of | Results of | |||||||||||||||||||
Fiscal 2002 | Percent | Operations | Operations | Percent | ||||||||||||||||
Results of | of | for | Excluding | of | ||||||||||||||||
Operations | Revenue | 53rd Week | 53rd Week | Revenue | ||||||||||||||||
Net sales | $ | 5,325,510 | 100.0 | % | $ | (109,079 | ) | $ | 5,216,431 | 100.0 | % | |||||||||
Cost of goods sold | 2,950,123 | 55.4 | % | (58,688 | ) | 2,891,435 | 55.4 | % | ||||||||||||
Gross profit | 2,375,387 | 44.6 | % | (50,391 | ) | 2,324,996 | 44.6 | % | ||||||||||||
Operating expenses | 1,604,379 | 30.1 | % | (20,911 | ) | 1,583,468 | 30.4 | % | ||||||||||||
Operating profit | 771,008 | 14.5 | % | (29,480 | ) | 741,528 | 14.2 | % | ||||||||||||
Interest expense, net | 79,860 | 1.5 | % | — | 79,860 | 1.5 | % | |||||||||||||
Income before taxes | 691,148 | 13.0 | % | (29,480 | ) | 661,668 | 12.7 | % | ||||||||||||
Income taxes | 263,000 | 5.0 | % | (11,210 | ) | 251,790 | 4.8 | % | ||||||||||||
Net income | $ | 428,148 | 8.0 | % | $ | (18,270 | ) | $ | 409,878 | 7.9 | % | |||||||||
Diluted earnings per share | $ | 4.00 | $ | (0.17 | ) | $ | 3.83 | |||||||||||||
37
Reconciliation of Non-GAAP Financial Measure: Fiscal 2003, Fiscal 2002 and Fiscal 2001
Excluding Nonrecurring/Infrequent Items –continued
The following table summarizes the effect of restructuring and impairment charges on operating results for fiscal 2001.
(in thousands, except per share and percentage data)
Fiscal 2001 | ||||||||||||||||||||
Results of | ||||||||||||||||||||
Operations | ||||||||||||||||||||
Restructuring | Excluding | |||||||||||||||||||
Fiscal 2001 | Percent | and | Restructuring | Percent | ||||||||||||||||
Results of | of | Impairment | and Impairment | of | ||||||||||||||||
Operations | Revenue | Charges | Charges | Revenue | ||||||||||||||||
Net sales | $ | 4,818,185 | 100.0 | % | $ | — | $ | 4,818,185 | 100.0 | % | ||||||||||
Cost of goods sold | 2,804,896 | 58.2 | % | (30,133 | ) | 2,774,763 | 57.6 | % | ||||||||||||
Gross profit | 2,013,289 | 41.8 | % | 30,133 | 2,043,422 | 42.4 | % | |||||||||||||
Operating expenses | 1,498,909 | 31.1 | % | — | 1,498,909 | 31.1 | % | |||||||||||||
Restructuring and impairment charges | 126,689 | 2.7 | % | (126,689 | ) | — | — | % | ||||||||||||
Operating profit | 387,691 | 8.0 | % | 156,822 | 544,513 | 11.3 | % | |||||||||||||
Interest expense, net | 100,665 | 2.1 | % | — | 100,665 | 2.1 | % | |||||||||||||
Income before taxes | 287,026 | 5.9 | % | 156,822 | 443,848 | 9.2 | % | |||||||||||||
Income taxes | 111,500 | 2.3 | % | 61,000 | 172,500 | 3.6 | % | |||||||||||||
Net income | $ | 175,526 | 3.6 | % | $ | 95,822 | $ | 271,348 | 5.6 | % | ||||||||||
Diluted earnings per share | $ | 1.54 | $ | 0.84 | $ | 2.38 | ||||||||||||||
38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
�� AutoZone is exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and interest rates. To reduce such risks,fuel prices. From time to time, we may periodically use various financial instruments.instruments to reduce such risks. To date, based upon our current level of foreign operations, hedging costs and past changes in the associated foreign exchange exposure has notrates, no instruments have been material.utilized to reduce this market risk. All of our hedging transactionsactivities are governed by guidelines that are authorized and executed pursuant to policies and procedures.by our Board of Directors. Further, we do not buy or sell financial instruments for trading purposes.
Derivatives and HedgingInterest Rate Risk
FinancialAutoZone’s financial market risk relating to AutoZone’s operations results primarily from changes in interest rates. We comply with Statement of Financial Accounting Standards Nos. 133, 137 and 138 (collectively “SFAS 133”) pertaining to the accounting for derivatives and hedging activities. SFAS 133 requires us to recognize all derivative instruments on the balance sheet at fair value. AutoZone reduces itsAt times, we reduce our exposure to increaseschanges in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, and treasury lock agreements. All of ouragreements and forward starting interest rate swaps and treasury locks are designated as cash flow hedges.swaps.
AutoZone has utilized interest rate swaps to convert variable rate debt to fixed rate debt. At August 30, 2003, we held an interest rate swap contract, with a September 2003 maturity date, to hedge $25 million of variable rate debt associated with commercial paper borrowings.
At August 30, 2003, we also held treasury lock agreements with notional amounts of $300 million and forward starting interest rate swaps with notional amounts of $200 million. These agreements, which expire in November 2003, are used to hedge the exposure to variability in future cash flows resulting from changes in variable interest rates relating to anticipated debt transactions. It is expected that upon settlement of the agreements, the realized gain or loss will be deferred in other comprehensive income and reclassified to interest expense over the life of the underlying debt. In addition, during fiscal 2003, we entered into and settled a forward starting interest rate swap with a notional amount of $200 million, used to hedge the variability in future cash flows resulting from changes in variable interest rates related to AutoZone’s issuance of $200 million 4.375% Senior Notes. The loss realized upon settlement was deferred in other comprehensive income and is being reclassified to interest expense over the life of the underlying senior notes, resulting in an effective interest rate of 5.65%.
At August 31, 2002, and at August 25, 2001, we held interest rate swap contracts related to $190 million of variable rate debt. Of the $190 million, $115 million of the swaps, maturedue in December 2003, and arewere used to hedge the variable rate debt associated with AutoZone’s $115 million term loan. The remaining $75 million of swaps, expirewith expiration dates throughout fiscal years 2003 and 2004, and are usedwere designated to hedge the variable rate debt associated with commercial paper borrowings. Additionally, at August 31, 2002, we held treasury lock agreements with notional amounts of $300 million that expireexpired in October 2002 and are used to hedgehedged the exposure to variability in future cash flows of anticipated debt transactions. The agreements will be settled upon theresulting from changes in variable interest rates related to AutoZone’s issuance of the debt. Upon$300 million 5.875% Senior Notes. The loss realized upon settlement of the agreements, the realized gain or losswas deferred in other comprehensive income and is being reclassified to be paid or received by AutoZone will be amortized as interest expense over the life of the underlying debt.senior notes, resulting in an effective interest rate of 6.33%. A portion of the proceeds generated
2839
In accordance with SFAS 133,from the issuance of the senior notes was used to prepay a $115 million term loan. Accordingly, the related interest rate swap agreements were settled in cash and the realized loss was deferred in other comprehensive income and is being reclassified to interest expense over the life of the underlying term loan.
AutoZone reflects the current fair value of all interest rate swaps and treasury lock agreementshedge instruments on itsour balance sheet. The related gains or losses on these transactions are deferred in stockholders’ equity as a component of other comprehensive income.income or loss. These deferred gains and losses are recognized in income in the period in which the related interest rates being hedged have beenare recognized in expense. However, to the extent that the change in value of an interest rate swap contract or treasury lock agreementhedge instrument does not perfectly offset the change in the value of the interest rate being hedged, that ineffective portion is immediately recognized in income. For the fiscal years ended August 31, 2002,30, 2003, and August 25, 2001,31, 2002, all of our interest rate swap contracts and treasury lock agreementshedge instruments were determined to be highly effective, and no ineffective portion was recognized in income. The fair values of the interest rate hedge instruments at August 30, 2003, were an asset of $41.6 million. The fair values of the interest rate hedge instruments at August 31, 2002, were a liability of $10.4 million.
The fair value of AutoZone’s debt was estimated at $1.57 billion as of August 30, 2003, and $1.22 billion as of August 31, 2002, and $1.21 billion as of August 25, 2001, based on the quoted market valuesprices for the same or similar debt issues or on the current rates available to AutoZone for debt of the debt at those dates.same remaining maturities. Such fair value is greater than the carrying value of debt at August 31, 2002,30, 2003, by $27.2$27.3 million, and lessgreater than the carrying value of debt at August 25, 2001,31, 2002, by $17.3$27.2 million. We had $699.8$556.8 million of variable rate debt outstanding at August 31, 2002,30, 2003, and $730.4$699.8 million outstanding at August 25, 2001.31, 2002, both of which exclude the effect of interest rate swaps designated and effective as cash flow hedges of such variable rate debt. At these borrowing levels for variable rate debt, a one percentage point increase in interest rates would have had an unfavorable impact on AutoZone’s pretax earnings and cash flows of $5.3 million in 2003 and $5.1 million in fiscal 2002, and $6.6 million in 2001, which includes the effects of interest rate swaps. The primary interest rate exposure on variable rate debt is based on LIBOR. We had $990.0 million of fixed rate debt outstanding at August 30, 2003. A one percentage point increase in interest rates would reduce the fair value of AutoZone’s fixed rate debt of $47.0 million.
Fuel Price Risk
Fuel swap contracts utilized by AutoZone have not previously been designated as hedging instruments under the provisions of SFAS 133 and do not qualify for hedge accounting treatment, although the instruments were executed to economically hedge the consumption of diesel fuel used to distribute our products. Accordingly, mark-to-market gains and losses related to such fuel swap contracts are recorded in cost of sales as a component of distribution costs. As of August 30, 2003, no fuel swap contracts were outstanding. During fiscal 2003, we entered into fuel swaps to economically hedge a portion of our diesel fuel exposure between April and August 2003. These swaps were settled prior to August 30, 2003, and had no significant impact on cost of sales for fiscal year 2003.
40
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page | ||||
Management’s Report | 42 | |||
Report of Independent Auditors | ||||
Consolidated Statements of Income for the years ended August | ||||
Consolidated Balance Sheets as of August 30, 2003, and August 31, 2002 | 45 | |||
Consolidated Statements of Cash Flows for the years ended August 30, 2003, August 31, 2002, and August 25, 2001 | ||||
Consolidated Statements of Stockholders’ Equity for the years ended August 30, 2003, August 31, 2002, and August 25, 2001 | ||||
Notes to Consolidated Financial Statements |
29
Report of Independent Auditors
StockholdersAutoZone, Inc.
We have audited the accompanying consolidated balance sheets of AutoZone, Inc. as of August 31, 2002 and August 25, 2001, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended August 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AutoZone, Inc. at August 31, 2002 and August 25, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note C to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, in fiscal year 2002.
/s/ Ernst & Young LLP
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Management’s Report
Management is responsible for the preparation, integrity, and fair presentation of the accompanying consolidated financial statements of the Company and its subsidiaries. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the best estimates and judgments of management. Management also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements. The opinion of the independent auditors, Ernst & Young LLP, based upon their audits of the consolidated financial statements, is contained in this Annual Report.
Management is responsible for maintaining a system of internal control over financial reporting that provides reasonable assurance, at an appropriate cost-benefit relationship, about the reliability of financial reporting. The system contains self-monitoring mechanisms, and is regularly tested by Deloitte & Touche LLP, the Company’s internal auditors. Actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations – including the possibility of the circumvention or overriding of controls – and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time.
The Audit Committee of our Company’s Board of Directors, composed solely of independent Directors,directors, regularly meets with the independent auditors, management and internal auditors to discuss auditing and financial reporting matters and the system of internal control over auditing and financial reporting matters.control. The Committee also meets periodicallyregularly with the independent auditors and the internal auditors without management present to discuss any matters that may require attention.
Management assessed the Company’s system of internal control over financial reporting as of August 31, 2002,30, 2003, in relation to criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of August 31, 2002,30, 2003, the Company’s system of internal control over financial reporting met those criteria.
/s/ Steve Odland | /s/ Michael Archbold | |
Steve Odland | Michael Archbold | |
Chairman, President, and | Senior Vice President and | |
Chief Executive Officer | Chief Financial Officer | |
Customer Satisfaction |
42
Report of Independent Auditors
Stockholders
We have audited the accompanying consolidated balance sheets of AutoZone, Inc. as of August 30, 2003 and August 31, 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended August 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AutoZone, Inc. at August 30, 2003 and August 31, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 30, 2003, in conformity with accounting principles generally accepted in the United States.
As discussed in Note A, Vendor Allowances and Advertising Costs, to the consolidated financial statements, in fiscal year 2003 the Company adopted Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.”
/s/ Ernst & Young LLP |
Memphis, Tennessee
43
Consolidated Statements of Income
Year Ended | ||||||||||||
August 31, | August 25, | August 26, | ||||||||||
2002 | 2001 | 2000 | ||||||||||
(in thousands, except per share data) | (53 Weeks) | (52 Weeks) | (52 Weeks) | |||||||||
Net sales | $ | 5,325,510 | $ | 4,818,185 | $ | 4,482,696 | ||||||
Cost of sales, including warehouse and delivery expenses | 2,950,123 | 2,804,896 | 2,602,386 | |||||||||
Operating, selling, general and administrative expenses | 1,604,379 | 1,498,909 | 1,368,290 | |||||||||
Restructuring and impairment charges | — | 126,689 | — | |||||||||
Operating profit | 771,008 | 387,691 | 512,020 | |||||||||
Interest expense – net | 79,860 | 100,665 | 76,830 | |||||||||
Income before income taxes | 691,148 | 287,026 | 435,190 | |||||||||
Income taxes | 263,000 | 111,500 | 167,600 | |||||||||
Net income | $ | 428,148 | $ | 175,526 | $ | 267,590 | ||||||
Weighted average shares for basic earnings per share | 104,446 | 112,834 | 132,945 | |||||||||
Effect of dilutive stock equivalents | 2,665 | 967 | 924 | |||||||||
Adjusted weighted average shares for diluted earnings per share | 107,111 | 113,801 | 133,869 | |||||||||
Basic earnings per share | $ | 4.10 | $ | 1.56 | $ | 2.01 | ||||||
Diluted earnings per share | $ | 4.00 | $ | 1.54 | $ | 2.00 | ||||||
See Notes to Consolidated Financial Statements.
32
Consolidated Balance Sheets
August 31, | August 25, | |||||||||
(in thousands, except per share data) | 2002 | 2001 | ||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 6,498 | $ | 7,286 | ||||||
Accounts receivable | 23,782 | 19,135 | ||||||||
Merchandise inventories | 1,375,584 | 1,242,896 | ||||||||
Prepaid expenses | 11,690 | 18,426 | ||||||||
Deferred income taxes | 32,574 | 40,768 | ||||||||
Total current assets | 1,450,128 | 1,328,511 | ||||||||
Property and equipment | ||||||||||
Land | 502,302 | 492,287 | ||||||||
Buildings and improvements | 1,228,604 | 1,182,880 | ||||||||
Equipment | 533,121 | 505,282 | ||||||||
Leasehold improvements and interests | 114,317 | 116,639 | ||||||||
Construction in progress | 53,786 | 75,223 | ||||||||
2,432,130 | 2,372,311 | |||||||||
Less: Accumulated depreciation and amortization | 770,402 | 661,868 | ||||||||
1,661,728 | 1,710,443 | |||||||||
Other assets | ||||||||||
Cost in excess of net assets acquired, net of accumulated amortization of $32,186 in 2002 and 2001 | 305,390 | 305,390 | ||||||||
Deferred income taxes | 60,304 | 80,593 | ||||||||
Other assets | 241 | 7,575 | ||||||||
365,935 | 393,558 | |||||||||
$ | 3,477,791 | $ | 3,432,512 | |||||||
Liabilities and Stockholders’ Equity | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 1,145,533 | $ | 945,666 | ||||||
Accrued expenses | 344,600 | 292,153 | ||||||||
Income taxes payable | 43,438 | 28,835 | ||||||||
Total current liabilities | 1,533,571 | 1,266,654 | ||||||||
Long term debt | 1,194,517 | 1,225,402 | ||||||||
Other liabilities | 60,576 | 74,243 | ||||||||
Commitments and contingencies (See notes L and M) | — | — | ||||||||
Stockholders’ equity | ||||||||||
Preferred stock, authorized 1,000 shares; no shares issued Common stock, par value $.01 per share, authorized 200,000 shares; 109,962 shares issued and 99,268 shares outstanding in 2002 and 119,518 shares issued and 109,408 shares outstanding in 2001 | 1,100 | 1,195 | ||||||||
Additional paid-in capital | 370,457 | 295,629 | ||||||||
Notes receivable from officers | — | (1,911 | ) | |||||||
Retained earnings | 974,141 | 825,196 | ||||||||
Accumulated other comprehensive loss | (11,603 | ) | (5,308 | ) | ||||||
Treasury stock, at cost | (644,968 | ) | (248,588 | ) | ||||||
Total stockholders’ equity | 689,127 | 866,213 | ||||||||
$ | 3,477,791 | $ | 3,432,512 | |||||||
Year Ended | ||||||||||||
August 30, | August 31, | August 25, | ||||||||||
2003 | 2002 | 2001 | ||||||||||
(in thousands, except per share data) | (52 Weeks) | (53 Weeks) | (52 Weeks) | |||||||||
Net sales | $ | 5,457,123 | $ | 5,325,510 | $ | 4,818,185 | ||||||
Cost of sales, including warehouse and delivery expenses | 2,942,114 | 2,950,123 | 2,804,896 | |||||||||
Operating, selling, general and administrative expenses | 1,597,212 | 1,604,379 | 1,498,909 | |||||||||
Restructuring and impairment charges | — | — | 126,689 | |||||||||
Operating profit | 917,797 | 771,008 | 387,691 | |||||||||
Interest expense – net | 84,790 | 79,860 | 100,665 | |||||||||
Income before income taxes | 833,007 | 691,148 | 287,026 | |||||||||
Income taxes | 315,403 | 263,000 | 111,500 | |||||||||
Net income | $ | 517,604 | $ | 428,148 | $ | 175,526 | ||||||
Weighted average shares for basic earnings per share | 94,906 | 104,446 | 112,834 | |||||||||
Effect of dilutive stock equivalents | 2,057 | 2,665 | 967 | |||||||||
Adjusted weighted average shares for diluted earnings per share | 96,963 | 107,111 | 113,801 | |||||||||
Basic earnings per share | $ | 5.45 | $ | 4.10 | $ | 1.56 | ||||||
Diluted earnings per share | $ | 5.34 | $ | 4.00 | $ | 1.54 | ||||||
See Notes to Consolidated Financial Statements.
3344
Consolidated Balance Sheets
August 30, | August 31, | |||||||||
(in thousands, except per share data) | 2003 | 2002 | ||||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 6,742 | $ | 6,498 | ||||||
Accounts receivable | 43,746 | 23,782 | ||||||||
Merchandise inventories | 1,511,316 | 1,375,584 | ||||||||
Prepaid expenses | 19,194 | 11,690 | ||||||||
Deferred income taxes | 3,996 | 32,574 | ||||||||
Total current assets | 1,584,994 | 1,450,128 | ||||||||
Property and equipment | ||||||||||
Land | 525,473 | 502,302 | ||||||||
Buildings and improvements | 1,325,759 | 1,228,604 | ||||||||
Equipment | 551,465 | 533,121 | ||||||||
Leasehold improvements | 125,592 | 114,317 | ||||||||
Construction in progress | 44,871 | 53,786 | ||||||||
2,573,160 | 2,432,130 | |||||||||
Less: Accumulated depreciation and amortization | 857,407 | 770,402 | ||||||||
1,715,753 | 1,661,728 | |||||||||
Other assets | ||||||||||
Cost in excess of net assets acquired, net of accumulated amortization of $32,186 in 2003 and 2002 | 294,348 | 305,390 | ||||||||
Deferred income taxes | 25,543 | 60,304 | ||||||||
Other assets | 59,828 | 241 | ||||||||
379,719 | 365,935 | |||||||||
$ | 3,680,466 | $ | 3,477,791 | |||||||
Liabilities and Stockholders’ Equity | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 1,321,905 | $ | 1,145,533 | ||||||
Accrued expenses | 313,683 | 344,600 | ||||||||
Income taxes payable | 39,978 | 43,438 | ||||||||
Total current liabilities | 1,675,566 | 1,533,571 | ||||||||
Long term debt | 1,546,845 | 1,194,517 | ||||||||
Other liabilities | 84,297 | 60,576 | ||||||||
Commitments and contingencies | — | — | ||||||||
Stockholders’ equity | ||||||||||
Preferred stock, authorized 1,000 shares; no shares issued | — | — | ||||||||
Common stock, par value $.01 per share, authorized 200,000 shares; 100,670 shares issued and 88,708 shares outstanding in 2003 and 109,962 shares issued and 99,268 shares outstanding in 2002 | 1,007 | 1,100 | ||||||||
Additional paid-in capital | 410,962 | 370,457 | ||||||||
Retained earnings | 869,739 | 974,141 | ||||||||
Accumulated other comprehensive loss | (37,297 | ) | (11,603 | ) | ||||||
Treasury stock, at cost | (870,653 | ) | (644,968 | ) | ||||||
Total stockholders’ equity | 373,758 | 689,127 | ||||||||
$ | 3,680,466 | $ | 3,477,791 | |||||||
See Notes to Consolidated Financial Statements.
45
Consolidated Statements of Cash Flows
Year Ended | Year Ended | |||||||||||||||||||||||||||||
August 31, | August 25, | August 26, | August 30, | August 31, | August 25, | |||||||||||||||||||||||||
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | (53 Weeks) | (52 Weeks) | (52 Weeks) | (in thousands) | (52 Weeks) | (53 Weeks) | (52 Weeks) | ||||||||||||||||||||||
Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | ||||||||||||||||||||||||||||
Net income | $ | 428,148 | $ | 175,526 | $ | 267,590 | Net income | $ | 517,604 | $ | 428,148 | $ | 175,526 | |||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||||||||||
Depreciation and amortization of property and equipment | 118,255 | 122,576 | 117,932 | Depreciation and amortization of property and equipment | 109,748 | 118,255 | 122,576 | |||||||||||||||||||||||
Amortization of intangible and other assets | — | 8,757 | 8,868 | Amortization of intangible and other assets | — | — | 8,757 | |||||||||||||||||||||||
Deferred income tax expense (benefit) | 28,483 | (46,981 | ) | 39,338 | Deferred income tax expense (benefit) | 65,701 | 28,483 | (46,981 | ) | |||||||||||||||||||||
Restructuring and impairment charges | — | 156,822 | — | Restructuring and impairment charges | — | — | 156,822 | |||||||||||||||||||||||
Income tax benefit realized from exercise of options | 42,159 | 13,495 | 4,050 | Income tax benefit realized from exercise of options | 37,402 | 42,159 | 13,495 | |||||||||||||||||||||||
Net change in accounts receivable and prepaid expenses | (12,879 | ) | 10,562 | 7,764 | Net change in accounts receivable and prepaid expenses | (27,468 | ) | (12,879 | ) | 10,562 | ||||||||||||||||||||
Net change in merchandise inventories | (168,150 | ) | (164,164 | ) | 20,715 | Net increase in merchandise inventories | (135,732 | ) | (168,150 | ) | (164,164 | ) | ||||||||||||||||||
Net increase in accounts payable and accrued expenses | 285,329 | 187,801 | 61,382 | Net increase in accounts payable and accrued expenses | 145,455 | 285,329 | 187,801 | |||||||||||||||||||||||
Net increase in income taxes payable | 13,743 | 10,798 | 4,966 | Net change in income taxes payable | (3,460 | ) | 13,743 | 10,798 | ||||||||||||||||||||||
Net change in other assets and liabilities | 4,003 | (16,255 | ) | (19,645 | ) | Net change in other assets and liabilities | (10,995 | ) | 4,003 | (16,255 | ) | |||||||||||||||||||
Net cash provided by operating activities | 739,091 | 458,937 | 512,960 | Net cash provided by operating activities | 698,255 | 739,091 | 458,937 | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||||||||||||||||
Capital expenditures | (117,239 | ) | (169,296 | ) | (249,657 | ) | Capital expenditures | (182,242 | ) | (117,239 | ) | (169,296 | ) | |||||||||||||||||
Proceeds from sale of business | 25,723 | — | — | Proceeds from sale of business | — | 25,723 | — | |||||||||||||||||||||||
Proceeds from disposal of capital assets | 25,094 | 44,601 | 11,771 | Proceeds from disposal of capital assets | 14,443 | 25,094 | 44,601 | |||||||||||||||||||||||
Notes receivable from officers | 1,911 | 2,552 | (4,463 | ) | Notes receivable from officers | — | 1,911 | 2,552 | ||||||||||||||||||||||
Net cash used in investing activities | (64,511 | ) | (122,143 | ) | (242,349 | ) | Net cash used in investing activities | (167,799 | ) | (64,511 | ) | (122,143 | ) | |||||||||||||||||
Cash flows from financing activities: | Cash flows from financing activities: | |||||||||||||||||||||||||||||
| Net change in commercial paper | 44,800 | (162,247 | ) | (381,853 | ) | ||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||
Net change in commercial paper | (162,247 | ) | (381,853 | ) | 234,300 | Proceeds from issuance of debt | 500,000 | 150,000 | 465,000 | |||||||||||||||||||||
Net proceeds from debentures/notes | 150,000 | 465,000 | — | Repayment of debt | (215,000 | ) | (15,000 | ) | (105,000 | ) | ||||||||||||||||||||
Net change in unsecured bank loans | (15,000 | ) | (105,000 | ) | 120,000 | Net proceeds from sale of common stock | 45,303 | 55,676 | 48,410 | |||||||||||||||||||||
Net proceeds from sale of common stock | 55,676 | 48,410 | 5,455 | Purchase of treasury stock | (891,095 | ) | (698,983 | ) | (366,097 | ) | ||||||||||||||||||||
Purchase of treasury stock | (698,983 | ) | (366,097 | ) | (639,925 | ) | Settlement of interest rate hedge instruments | (28,524 | ) | — | — | |||||||||||||||||||
Other | (4,814 | ) | 3,063 | 10,610 | Other | 14,304 | (4,814 | ) | 3,063 | |||||||||||||||||||||
Net cash used in financing activities | (675,368 | ) | (336,477 | ) | (269,560 | ) | Net cash used in financing activities | (530,212 | ) | (675,368 | ) | (336,477 | ) | |||||||||||||||||
Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | (788 | ) | 317 | 1,051 | Net increase (decrease) in cash and cash equivalents | 244 | (788 | ) | 317 | ||||||||||||||||||||
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 7,286 | 6,969 | 5,918 | Cash and cash equivalents at beginning of year | 6,498 | 7,286 | 6,969 | ||||||||||||||||||||||
Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 6,498 | $ | 7,286 | $ | 6,969 | Cash and cash equivalents at end of year | $ | 6,742 | $ | 6,498 | $ | 7,286 | ||||||||||||||||
Supplemental cash flow information: | Supplemental cash flow information: | Supplemental cash flow information: | ||||||||||||||||||||||||||||
Interest paid, net of interest cost capitalized | $ | 77,935 | $ | 97,968 | $ | 74,745 | Interest paid, net of interest cost capitalized | $ | 77,533 | $ | 77,935 | $ | 97,968 | |||||||||||||||||
Income taxes paid | $ | 178,417 | $ | 100,702 | $ | 123,036 | Income taxes paid | $ | 215,760 | $ | 178,417 | $ | 100,702 |
See Notes to Consolidated Financial Statements.
3446
Consolidated Statements of Stockholders’ Equity
Accumulated | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Notes | Retained | Comprehensive | Treasury | Common | Paid-in | Notes | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | Stock | Capital | Receivable | Earnings | Loss | Stock | Total | (in thousands) | Stock | Capital | Receivable | Earnings | Loss | Stock | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at August 28, 1999 | $ | 1,540 | $ | 289,084 | $ | — | $ | 1,296,528 | $ | (3 | ) | $ | (263,348 | ) | $ | 1,323,801 | |||||||||||||||||||||||||||||||||||||||||||
Net income | 267,590 | 267,590 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 267,588 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of notes receivable from officers | (4,463 | ) | (4,463 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of 23,208 shares of treasury stock | 3,315 | (607,567 | ) | (604,252 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Sale of 361 shares of common stock under stock option and stock purchase plans | 3 | 5,452 | 5,455 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit of exercise of stock options | 4,050 | 4,050 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 26, 2000 | Balance at August 26, 2000 | 1,543 | 301,901 | (4,463 | ) | 1,564,118 | (5 | ) | (870,915 | ) | 992,179 | Balance at August 26, 2000 | $ | 1,543 | $ | 301,901 | $ | (4,463 | ) | $ | 1,564,118 | $ | (5 | ) | $ | (870,915 | ) | $ | 992,179 | ||||||||||||||||||||||||||||||
Net income | Net income | 175,526 | 175,526 | Net income | 175,526 | 175,526 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | Foreign currency translation adjustment | 294 | 294 | Foreign currency translation adjustment | 294 | 294 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on interest rate swap contracts | (5,597 | ) | (5,597 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized losses on derivatives | Unrealized losses on derivatives | (5,597 | ) | (5,597 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 170,223 | Comprehensive income | 170,223 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repayments of notes receivable from officers | Repayments of notes receivable from officers | 2,552 | 2,552 | Repayments of notes receivable from officers | 2,552 | 2,552 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of 14,345 shares of treasury stock | Purchase of 14,345 shares of treasury stock | 5,451 | (366,097 | ) | (360,646 | ) | Purchase of 14,345 shares of treasury stock | 5,451 | (366,097 | ) | (360,646 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Retirement of 37,000 shares of treasury stock | Retirement of 37,000 shares of treasury stock | (370 | ) | (71,781 | ) | (914,448 | ) | 986,599 | — | Retirement of 37,000 shares of treasury stock | (370 | ) | (71,781 | ) | (914,448 | ) | 986,599 | — | |||||||||||||||||||||||||||||||||||||||||
Sale of 2,061 shares of common stock under stock option and stock purchase plans | Sale of 2,061 shares of common stock under stock option and stock purchase plans | 22 | 46,563 | 1,825 | 48,410 | Sale of 2,061 shares of common stock under stock option and stock purchase plans | 22 | 46,563 | 1,825 | 48,410 | |||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit of exercise of stock options | Tax benefit of exercise of stock options | 13,495 | 13,495 | Tax benefit of exercise of stock options | 13,495 | 13,495 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 25, 2001 | Balance at August 25, 2001 | 1,195 | 295,629 | (1,911 | ) | 825,196 | (5,308 | ) | (248,588 | ) | 866,213 | Balance at August 25, 2001 | 1,195 | 295,629 | (1,911 | ) | 825,196 | (5,308 | ) | (248,588 | ) | 866,213 | |||||||||||||||||||||||||||||||||||||
Net income | Net income | 428,148 | 428,148 | Net income | 428,148 | 428,148 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | Foreign currency translation adjustment | (1,447 | ) | (1,447 | ) | Foreign currency translation adjustment | (1,447 | ) | (1,447 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on interest rate swap contracts and treasury lock agreements | (4,848 | ) | (4,848 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized losses on derivatives | Unrealized losses on derivatives | (4,848 | ) | (4,848 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 421,853 | Comprehensive income | 421,853 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repayments of notes receivable from officers | Repayments of notes receivable from officers | 1,911 | 1,911 | Repayments of notes receivable from officers | 1,911 | 1,911 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of 12,591 shares of treasury stock | Purchase of 12,591 shares of treasury stock | 298 | (698,983 | ) | (698,685 | ) | Purchase of 12,591 shares of treasury stock | 298 | (698,983 | ) | (698,685 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Retirement of 12,000 shares of treasury stock | Retirement of 12,000 shares of treasury stock | (120 | ) | (23,280 | ) | (279,203 | ) | 302,603 | — | Retirement of 12,000 shares of treasury stock | (120 | ) | (23,280 | ) | (279,203 | ) | 302,603 | — | |||||||||||||||||||||||||||||||||||||||||
Sale of 2,563 shares of common stock under stock option and stock purchase plans | Sale of 2,563 shares of common stock under stock option and stock purchase plans | 25 | 55,651 | 55,676 | Sale of 2,563 shares of common stock under stock option and stock purchase plans | 25 | 55,651 | 55,676 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit of exercise of stock options | Tax benefit of exercise of stock options | 42,159 | 42,159 | Tax benefit of exercise of stock options | 42,159 | 42,159 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2002 | Balance at August 31, 2002 | $ | 1,100 | $ | 370,457 | $ | — | $ | 974,141 | $ | (11,603 | ) | $ | (644,968 | ) | $ | 689,127 | Balance at August 31, 2002 | 1,100 | 370,457 | — | 974,141 | (11,603 | ) | (644,968 | ) | 689,127 | ||||||||||||||||||||||||||||||||
Net income | Net income | 517,604 | 517,604 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability net of taxes of $(18,072) | Minimum pension liability net of taxes of $(18,072) | (29,739 | ) | (29,739 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | Foreign currency translation adjustment | (8,276 | ) | (8,276 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net gains on outstanding derivatives net of taxes of $15,710 | Net gains on outstanding derivatives net of taxes of $15,710 | 25,856 | 25,856 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net losses on terminated/matured derivatives | Net losses on terminated/matured derivatives | (20,014 | ) | (20,014 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of net losses on derivatives into earnings | Reclassification of net losses on derivatives into earnings | 6,479 | 6,479 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 491,910 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of 12,266 shares of treasury stock | Purchase of 12,266 shares of treasury stock | 1,111 | (891,095 | ) | (889,984 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Retirement of 11,000 shares of treasury stock | Retirement of 11,000 shares of treasury stock | (110 | ) | (43,120 | ) | (622,006 | ) | 665,236 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Sale of 1,782 shares of common stock under stock option and stock purchase plans | Sale of 1,782 shares of common stock under stock option and stock purchase plans | 17 | 45,112 | 174 | 45,303 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax benefit of exercise of stock options | Tax benefit of exercise of stock options | 37,402 | 37,402 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 30, 2003 | Balance at August 30, 2003 | $ | 1,007 | $ | 410,962 | $ | — | $ | 869,739 | $ | (37,297 | ) | $ | (870,653 | ) | $ | 373,758 | ||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
Note A – Significant Accounting Policies
Business:The Company is principally a retailer of automotive and light truck parts chemicals and accessories. At the end of fiscal 2002,2003, the Company operated 3,0683,219 domestic auto parts stores in 4448 states and the District of Columbia and 3949 auto parts stores in Mexico. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items and accessories.
In addition, the Company also has a domestic commercial program that provides commercial credit and delivery of parts and other products to local, regional and national repair garages, dealers and service stations. The Company also sells products online atautozone.com. In addition, the Companyand sells ALLDATA automotive diagnostic and repair software which is also available through ALLDATAalldatapro.com and throughalldatadiy.com.
Fiscal Year:The Company’s fiscal year consists of 52 or 53 weeks ending on the last Saturday in August.
Basis of Presentation:The consolidated financial statements include the accounts of AutoZone, Inc. and its wholly-ownedwholly owned subsidiaries (the Company). All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates:Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements. Actual results could differ from those estimates.
Cash Equivalents:Cash equivalents consist of investments with original maturities of 90 days or less at the date of purchase.
Merchandise Inventories:Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. Included in inventory are related purchasing, storage and handling costs.
Property and Equipment:Property and equipment is stated at cost. Depreciation is computed principally byusing the straight-line method over the following estimated useful lives: buildings, and40 to 50 years; building improvements, 5 to 5015 years; equipment, 3 to 107 years; and leasehold improvements, and interests, 5 to 15 years. Leasehold improvementsyears, not to exceed the remaining lease term.
Impairment of Long-Lived Assets:The Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) on September 1, 2002. SFAS 144 establishes accounting standards for the impairment of long-lived assets such as property and interests are amortized overequipment. In accordance with SFAS 144, the termsCompany evaluates the recoverability of the leases.carrying amounts of the assets covered by this standard whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As part of the evaluation, the Company reviews performance at the store level to identify any stores
48
with current period operating losses that should be considered for impairment. The Company compares the sum of the undiscounted expected future cash flows with the carrying amounts of the assets. If impairments are indicated, the amount by which the carrying amount of the assets exceeded the fair value of the assets is recognized as an impairment loss. The adoption of SFAS 144 did not have a significant impact on the Company’s Consolidated Financial Statements.
Intangible Assets:The cost in excess of fair value of net assets of businesses acquired is recorded as goodwill and, priorgoodwill. Prior to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142) in fiscal 2002, goodwill was amortized on a straight-line basis over 40 years. Refer to Note C for the impact ofSince the adoption of SFAS 142 on August 26, 2001, amortization of goodwill was discontinued. Under the Consolidated Financial Statements.provisions of SFAS 142, an annual test of goodwill is required to compare the fair value of goodwill to the carrying amount to determine if any impairment exists. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. No impairment loss resulted from the 2003 or 2002 tests performed under SFAS 142. Refer to Note C for additional disclosures regarding the adoption of SFAS 142.
Preopening Expenses:Derivative Instruments and Hedging Activities:Preopening expenses, which consist primarilyAutoZone is exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, the Company uses various financial instruments to reduce such risks. To date, based upon the Company’s current level of payrollforeign operations, hedging costs and occupancy costs,past changes in the associated foreign exchange rates, no instruments have been utilized to reduce this market risk. All of the Company’s hedging activities are expensed as incurred.
Advertising Costs:The Company expenses advertising costs as incurred. Advertising expense, netgoverned by guidelines that are authorized by AutoZone’s Board of vendor funding, was approximately $17.5 million in fiscal 2002, $20.7 million in fiscal 2001 and $14.4 million in fiscal 2000.
Shipping and Handling Costs: TheDirectors. Further, the Company does not charge the customer separatelybuy or sell financial instruments for shippingtrading purposes.
AutoZone’s financial market risk results primarily from changes in interest rates. At times, AutoZone reduces its exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and handling.forward starting interest rate swaps. The cost the Company incurs to ship productscomplies with Statement of Financial Accounting Standards Nos. 133, 137 and 138 (collectively “SFAS 133”) pertaining to the storesaccounting for deliverythese derivatives and hedging activities which require all such interest rate hedge instruments to be recognized on the customer is included in cost of sales in the Consolidated Statements of Income.
Warranty Costs:The Company provides its customers with a warranty on certain products. Estimated warranty obligations are providedbalance sheet at the time of salefair value. All of the product.
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Company’s interest rate hedge instruments are designated as cash flow hedges. Refer to Note B for additional disclosures regarding the Company’s derivatives instruments and hedging activities.
Financial Instruments:The Company has certain financial instruments, including cash, accounts receivable and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in Note G,F, while a discussion of the Company’s fair values of its derivatives is included in the section entitled “Derivative Instruments and Hedging Activities” in Note A.B.
Income Taxes:The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax
49
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Revenue Recognition:The Company recognizes sales at the time the sale is made and the product is delivered to the customer.
Vendor Allowances and Advertising Costs:The Company receives various payments and allowances from its vendors based on the volume of purchases or for services that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and promotional funds. Typically, these funds are dependent on purchase volumes and advertising plans. The amounts to be received are subject to changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for AutoZone.
Rebates and other miscellaneous incentives are earned based on purchases or product sales. These monies are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold.
Certain vendor allowances are used exclusively for promotions and to partially or fully offset certain other direct expenses. Such vendor funding arrangements, that were entered into on or before December 31, 2002, were recognized as a reduction to selling, general and administrative expenses when earned. However, for such vendor funding arrangements entered into or modified after December 31, 2002, the Company applied the new guidance pursuant to the Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Equivalents:Cash equivalents consistConsideration Received from a Vendor” (EITF Issue No. 02-16). Accordingly, all vendor funds are recognized as a reduction to cost of investmentssales as the inventories are sold. As a result of the adoption of EITF Issue No. 02-16, fiscal 2003 selling, general, and administrative expenses were approximately $53 million higher and gross margin was approximately $43 million higher than such amounts would have been prior to the accounting change.
Advertising expense, net of vendor funding, was approximately $32.5 million in fiscal 2003, $17.5 million in fiscal 2002 and $20.7 million in fiscal 2001. The higher expense for fiscal 2003 reflects the impact of vendor allowances, from agreements entered into or modified subsequent to December 31, 2002, that are no longer netted against advertising expense but recorded as a reduction of cost of sales. The Company expenses advertising costs as incurred.
Warranty Costs:The Company or the vendors supplying its products provide its customers with maturities of 90 days or lessa warranty on certain products. Estimated warranty obligations are provided at the datetime of purchase.sale of the product and are charged to cost of sales.
Use of Estimates:Shipping and Handling Costs:Management of The Company does not generally charge customers separately for shipping and handling. The cost the Company has made a number of estimates and assumptions relatingincurs to ship products to the reportingstores for delivery to the customer is included in cost of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements in conformity with accounting principles generally acceptedsales in the United States. Actual results could differ from those estimates.Consolidated Statements of Income.
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Preopening Expenses:Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred.
Earnings Per Share:Basic earnings per share is based on the weighted average outstanding common shares. Diluted earnings per share is based on the weighted average outstanding shares adjusted for the effect of common stock equivalents. At this time, stock options are the Company’s only common stock equivalents.
Revenue Recognition:Stock Options:At August 30, 2003, the Company has stock option plans that provide for the purchase of the Company’s common stock by some of its employees and directors, which are described more fully in Note I. The Company recognizes sales revenueaccounts for those plans using the intrinsic-value-based recognition method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in net income, as options are granted under those plans at an exercise price equal to the timemarket value of the sale is madeunderlying common stock on the date of grant. SFAS 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed under SFAS 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting and has adopted only the disclosure requirements of SFAS 123. The following table illustrates the effect on net income and earnings per share had the Company applied the fair-value recognition provisions of SFAS 123 to stock-based employee compensation.
Year ended | |||||||||||||
August 30, | August 31, | August 25, | |||||||||||
(in thousands, except per share data) | 2003 | 2002 | 2001 | ||||||||||
Reported net income | $ | 517,604 | $ | 428,148 | $ | 175,526 | |||||||
Deduct total incremental stock-based compensation expense determined under fair-value-based method for all awards, net of related tax effects | 14,506 | 8,969 | 6,945 | ||||||||||
Pro forma net income | $ | 503,098 | $ | 419,179 | $ | 168,581 | |||||||
Basic earnings per share: | |||||||||||||
As reported | $ | 5.45 | $ | 4.10 | $ | 1.56 | |||||||
Pro forma | $ | 5.30 | $ | 4.01 | $ | 1.50 | |||||||
Diluted earnings per share: | |||||||||||||
As reported | $ | 5.34 | $ | 4.00 | $ | 1.54 | |||||||
Pro forma | $ | 5.20 | $ | 3.91 | $ | 1.48 | |||||||
Stock options that were not included in the pro forma fully diluted computation because they would have been anti-dilutive were 1.5 million shares at August 30, 2003, and 0.1 million shares at August 31, 2002.
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The effects of applying SFAS 123 and the product is delivered toresults obtained through the customer.
Impairment of Long-Lived Assets:The Company routinely reviews performance at the store level to identify any stores with current period operating losses that should be considered for impairment. As part of this review, the Company compares the sumuse of the expectedBlack-Scholes option pricing model in this pro forma disclosure are not necessarily indicative of future cash flows with the carrying amounts of the assets. If impairments are indicated, the amount by which the carrying amount of the assets exceeded theamounts. The weighted average fair value of the assetsstock options granted was $24.59 per share during fiscal 2003, $16.10 per share during fiscal 2002 and $10.19 per share during fiscal 2001. The fair value of each option granted is recognized as an impairment loss.estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2003, 2002 and 2001:
Year Ended | ||||||||||||
August 30, | August 31, | August 25, | ||||||||||
2003 | 2002 | 2001 | ||||||||||
Expected price volatility | 38 | % | 39 | % | 37 | % | ||||||
Risk-free interest rates | 2.99 | % | 2.41 | % | 4.15 | % | ||||||
Expected lives in years | 4.24 | 4.30 | 5.32 | |||||||||
Dividend yield | 0 | % | 0 | % | 0 | % |
Recent Accounting Pronouncements:In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires the consolidation of certain types of entities in which a company absorbs a majority of another entity’s expected losses or residual returns, or both, as a result of ownership, contractual or other financial interests in the other entity. These entities are called variable interest entities. FIN 46 applies immediately to variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied at the end of periods ending after December 15, 2003. The Company is currently evaluating the impact of FIN 46 and does not expect its adoption to have a significant impact on its Consolidated Financial Statements.
Note B – Derivative Instruments and Hedging Activities:The Company complies with Statement of Financial Accounting Standards Nos. 133, 137 and 138 (collectively “SFAS 133”) pertaining
AutoZone has utilized interest rate swaps to the accounting for derivatives and hedging activities. SFAS 133 requiresconvert variable rate debt to fixed rate debt. At August 30, 2003, the Company to recognize all derivative instruments on the balance sheet at fair value. The adoption of SFAS 133 impacted the accounting for the Company’sheld an interest rate hedging program. Theswap contract, with a September 2003 maturity date, to hedge $25 million variable rate debt associated with commercial paper borrowings.
At August 30, 2003, the Company reduces itsheld treasury lock agreements with notional amounts of $300 million and forward starting swaps with notional amounts of $200 million. These agreements, which expire in November 2003, are used to hedge the exposure to increasesvariability in
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future cash flows resulting from changes in variable interest rates by enteringrelating to anticipated debt transactions. It is expected that upon settlement of the agreements, the realized gain or loss will be deferred in other comprehensive income and reclassified to interest expense over the life of the underlying debt. In addition, during fiscal 2003, the Company entered into and settled a forward starting interest rate swap with a notional amount of $200 million, used to hedge the variability in future cash flows resulting from changes in variable interest rates related to AutoZone’s issuance of $200 million 4.375% Senior Notes. The loss realized upon settlement was deferred in other comprehensive income and is being reclassified to interest expense over the life of the underlying senior notes, resulting in an effective interest rate of 5.65%
At August 31, 2002, the Company held interest rate swap contracts and treasury lock agreements. Allrelated to $190 million of variable rate debt. Of the $190 million, $115 million of the Company’s interestswaps, due in December 2003, were used to hedge the variable rate debt associated with AutoZone’s $115 million term loan. The remaining $75 million of swaps, with expiration dates throughout fiscal years 2003 and treasury locks are2004, were designated as cash flow hedges. At August 31, 2002, and August 25, 2001,to hedge the Company had interestvariable rate swap contractsdebt associated with notional amounts totaling $190 million.commercial paper borrowings. Additionally, at August 31, 2002, the Company hadheld treasury lock agreements with notional amounts totalingof $300 million.million that expired in October 2002 and hedged the exposure to variability in future cash flows resulting from changes in variable interest rates related to AutoZone’s issuance of $300 million 5.875% Senior Notes. The fair valuesloss realized upon settlement was deferred in other comprehensive income and is being reclassified to interest expense over the life of the underlying senior notes, resulting in an effective interest rate swaps and treasury lock agreements were a liability of $10.4 million at August 31, 2002, and the fair values6.33%. A portion of the interest rate swaps wereproceeds generated from the issuance of the senior notes was used to prepay a liability of $5.6$115 million at August 25, 2001. Theterm loan. Accordingly, the related interest rate swap contracts matureagreements were settled in fiscal years 2003 and 2004cash and the treasury lock agreements maturerealized loss was deferred in fiscal 2003.
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other comprehensive income and is being reclassified to interest expense over the life of underlying term loan.
The Company reflects the current fair value of all interest rate swaps and treasury lock agreementshedge instruments on its balance sheet. The related gains or losses on these transactions are deferred in stockholders’ equity as a component of other comprehensive income.income or loss. These deferred gains and losses are recognized in income in the period in which the related interest rates being hedged have been recognized in expense. However, to the extent that the change in value of an interest rate swap contract or treasury lockhedge instrument agreement does not perfectly offset the change in the value of the interest rate being hedged, that ineffective portion is immediately recognized in income. For the fiscal years ended August 30, 2003, and August 31, 2002, and August 25, 2001, all of ourthe Company’s interest rate swap contracts and treasury lock agreementshedge instruments were determined to be highly effective, and no ineffective portion was recognized in income. The fair values of the interest rate hedge instruments at August 30, 2003 were an asset of $41.6 million. The fair values of the interest rate hedge instruments at August 31, 2002, were a liability of $10.4 million.
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The following table summarizes the fiscal 2003 activity in Accumulated Other Comprehensive Income (Loss) as it relates to interest rate hedge instruments (in thousands):
Before-Tax | Income | After-Tax | |||||||||||
Amount | Tax | Amount | |||||||||||
Accumulated net losses as of August 31, 2002 | $ | (10,445 | ) | $ | — | $ | (10,445 | ) | |||||
Net gains on outstanding derivatives | 41,566 | (15,710 | ) | 25,856 | |||||||||
Net losses on terminated/matured derivatives | (20,014 | ) | — | (20,014 | ) | ||||||||
Reclassification of net losses into earnings | 6,479 | — | 6,479 | ||||||||||
Accumulated net gains as of August 30, 2003 | $ | 17,586 | $ | (15,710 | ) | $ | 1,876 | ||||||
The Company primarily executes derivative transactions of relatively short duration with major financial institutions.strong creditworthy counterparties. These counterparties expose the Company to credit risk in the event of non-performance. The amount of such exposure is limited to the unpaid portion of amounts due to the Company pursuant to the terms of the derivative financial instruments, if any. Although there are no collateral requirements, if a downgrade in the credit rating of these counterparties occurs, management believes that this exposure is mitigated by provisions in the derivative agreements which allow for the legal right of offset of any amounts due to the Company from the counterparties with any amounts payable, if any, to the counterparties by the Company. As a result, managementManagement considers the risk of counterparty default to be minimal.
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Note C - Amortization of Goodwill
Recently Issued Accounting Standards:As of the beginning of fiscal 2002, the Company adopted SFAS 142. Under SFAS 142, goodwill amortization ceased upon adoption. The following SFAS 142 disclosure presents the net income and related per share amounts for fiscal 2001 as if amortization of goodwill had not been recorded.
Year ended | |||||||||||||
August 30, | August 31, | August 25, | |||||||||||
(in thousands, except per share data) | 2003 | 2002 | 2001 | ||||||||||
Reported net income | $ | 517,604 | $ | 428,148 | $ | 175,526 | |||||||
Goodwill amortization, net of tax | — | — | 5,359 | ||||||||||
Adjusted net income | $ | 517,604 | $ | 428,148 | $ | 180,885 | |||||||
Basic earnings per share: | |||||||||||||
As reported | $ | 5.45 | $ | 4.10 | $ | 1.56 | |||||||
Goodwill amortization, net of tax | — | — | 0.05 | ||||||||||
Adjusted | $ | 5.45 | $ | 4.10 | $ | 1.61 | |||||||
Diluted earnings per share: | |||||||||||||
As reported | $ | 5.34 | $ | 4.00 | $ | 1.54 | |||||||
Goodwill amortization, net of tax | — | — | 0.05 | ||||||||||
Adjusted | $ | 5.34 | $ | 4.00 | $ | 1.59 | |||||||
During fiscal 2003, the Company terminated various leases relating to stores closed in connection with previous acquisitions. The amount paid to terminate these leases was less than the related accrual and, as a result, the excess accrual of $11.0 million was recorded as a reduction against the goodwill established at the acquisition date.
Note D – Accrued Expenses
Accrued expenses at August 30, 2003, and August 31, 2002, consisted of the following:
August 30, | August 31, | |||||||
(in thousands) | 2003 | 2002 | ||||||
Medical and casualty insurance claims | $ | 92,666 | $ | 83,813 | ||||
Accrued compensation and related payroll taxes | 60,777 | 78,656 | ||||||
Property and sales taxes | 44,371 | 51,379 | ||||||
Accrued sales and warranty returns | 78,482 | 82,035 | ||||||
Other | 37,387 | 48,717 | ||||||
$ | 313,683 | $ | 344,600 | |||||
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The Company or the vendors supplying its products provide its customers limited warranties on certain products that range from 30 days to lifetime warranties. In most cases, the Company’s vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. Accrued sales returns amounted to approximately $5 million at August 30, 2003, and August 31, 2002. Changes in the Company’s accrued sales and warranty returns for the last three fiscal years consisted of the following:
Year Ended | |||||||||||||
August 30, | August 31, | August 25, | |||||||||||
(in thousands) | 2003 | 2002 | 2001 | ||||||||||
Balance, beginning of fiscal year | $ | 82,035 | $ | 63,467 | $ | 50,014 | |||||||
Allowances received from vendors | 116,808 | 109,498 | 98,750 | ||||||||||
Expense (income) | (25,522 | ) | 2,978 | 2,568 | |||||||||
Claim settlements | (94,839 | ) | (93,908 | ) | (87,865 | ) | |||||||
Balance, end of fiscal year | $ | 78,482 | $ | 82,035 | $ | 63,467 | |||||||
Note E – Income Taxes
At August 30, 2003, the Company had net operating loss carryforwards (NOLs) for federal income tax purposes of approximately $27.5 million that expire in years 2007 through 2017. These carryforwards resulted from the Company’s acquisition of ADAP, Inc. (which had been doing business as “Auto Palace”) in fiscal 1998. The use of the federal tax NOLs is subject to annual limitations. A valuation allowance of $8.6 million in fiscal 2003 and $8.7 million in fiscal 2002 relates to these carryforwards. In addition, some of the Company’s subsidiaries have state income tax NOLs that expire in years 2004 through 2022. These state NOLs resulted from the Company’s acquisition of Chief Auto Parts Inc. and ADAP, Inc. The use of the NOLs is limited to future taxable earnings of these subsidiaries and may be subject to annual limitations. Valuation allowances of $5.7 million in fiscal 2003 and fiscal 2002 relate to these carryforwards.
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The provision for income tax expense for each of the last three fiscal years consisted of the following:
Year Ended | |||||||||||||
August 30, | August 31, | August 25, | |||||||||||
(in thousands) | 2003 | 2002 | 2001 | ||||||||||
Current: | |||||||||||||
Federal | $ | 219,699 | $ | 210,457 | $ | 144,538 | |||||||
State | 30,003 | 24,060 | 13,943 | ||||||||||
249,702 | 234,517 | 158,481 | |||||||||||
Deferred: | |||||||||||||
Federal | 60,835 | 26,200 | (42,380 | ) | |||||||||
State | 4,866 | 2,283 | (4,601 | ) | |||||||||
65,701 | 28,483 | (46,981 | ) | ||||||||||
$ | 315,403 | $ | 263,000 | $ | 111,500 | ||||||||
The following table presents a reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35% to income before income taxes.
Year Ended | ||||||||||||
August 30, | August 31, | August 25, | ||||||||||
(in thousands) | 2003 | 2002 | 2001 | |||||||||
Expected tax at statutory rate | $ | 291,552 | $ | 241,902 | $ | 100,459 | ||||||
State income taxes, net | 22,665 | 17,123 | 6,072 | |||||||||
Other | 1,186 | 3,975 | 4,969 | |||||||||
$ | 315,403 | $ | 263,000 | $ | 111,500 | |||||||
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Significant components of the Company’s deferred tax assets and liabilities were as follows:
August 30, | August 31, | ||||||||
(in thousands) | 2003 | 2002 | |||||||
Net deferred tax assets: | |||||||||
Net operating loss and credit carryforwards | $ | 29,181 | $ | 25,590 | |||||
Insurance reserves | 29,319 | 25,930 | |||||||
Warranty reserves | 28,786 | 30,660 | |||||||
Closed store reserves | 10,321 | 20,398 | |||||||
Inventory | — | 4,108 | |||||||
Minimum pension liability | 18,072 | — | |||||||
Other | 6,236 | 12,847 | |||||||
Total deferred tax assets | 121,915 | 119,533 | |||||||
Less: Valuation allowance | (14,329 | ) | (14,367 | ) | |||||
Net deferred tax assets | 107,586 | 105,166 | |||||||
Deferred tax liabilities: | |||||||||
Property and equipment | 23,401 | 6,218 | |||||||
Inventory | 27,997 | — | |||||||
Derivatives | 15,710 | — | |||||||
Other | 10,939 | 6,070 | |||||||
Deferred tax liabilities | 78,047 | 12,288 | |||||||
Net deferred tax assets | $ | 29,539 | $ | 92,878 | |||||
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Note F – Financing
The Company’s long term debt as of August 30, 2003, and August 31, 2002, consisted of the following:
August 30, | August 31, | ||||||||
(in thousands) | 2003 | 2002 | |||||||
5.875% Senior Notes due October 2012, effective interest rate of 6.33% | $ | 300,000 | $ | — | |||||
4.375% Senior Notes due June 2013, effective interest rate of 5.65% | 200,000 | — | |||||||
6% Notes due November 2003 | 150,000 | 150,000 | |||||||
6.5% Debentures due July 2008 | 190,000 | 190,000 | |||||||
7.99% Notes due April 2006 | 150,000 | 150,000 | |||||||
Bank term loan, due December 2003, variable interest rate of 3.11% at August 31, 2002 | — | 115,000 | |||||||
Bank term loan, due November 2004, variable interest rate of 2.26% at August 30, 2003, and 2.56 % at August 31, 2002 | 250,000 | 350,000 | |||||||
Commercial paper, weighted average interest rate of 1.2% at August 30, 2003, and 2.1% at August 31, 2002 | 268,000 | 223,200 | |||||||
Other | 38,845 | 16,317 | |||||||
$ | 1,546,845 | $ | 1,194,517 | ||||||
The Company maintains $950 million of revolving credit facilities with a group of banks. Of the $950 million, $300 million expires in May 2004. The remaining $650 million expires in May 2005. The 364-day facility expiring in May 2004 includes a renewal feature as well as an option to extend the maturity date of the then-outstanding debt by one year. The credit facilities exist largely to support commercial paper borrowings and other short term unsecured bank loans. At August 30, 2003,outstanding commercial paper of $268 million, the 6% Notes due November 2003 of $150 million, and other debt of $2.7 million are classified as long term as the Company has the ability and intention to refinance them on a long term basis. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the agreement) or a competitive bid rate at the option of the Company. The Company has agreed to observe certain covenants under the terms of its credit agreements, including limitations
59
on total indebtedness, restrictions on liens and minimum fixed charge coverage. As of August 30, 2003, the Company was in compliance with all covenants.
On October 2001,16, 2002, the Company issued $300 million of 5.875% Senior Notes. The notes mature in October 2012, and interest is payable semi-annually on April 15 and October 15. A portion of the proceeds from these senior notes was used to prepay a $115 million unsecured bank term loan due December 2003, to repay a portion of the Company’s outstanding commercial paper borrowings, and to settle interest rate hedges associated with the issuance and repayment of the related debt securities. On June 3, 2003, the Company issued $200 million of 4.375% Senior Notes. These senior notes mature in June 2013, and interest is payable semi-annually on June 1 and December 1. The proceeds were used to repay a portion of the Company’s outstanding commercial paper borrowings, to prepay $100 million of the $350 million unsecured bank loan due November 2004, and to settle interest rate hedges associated with the issuance of the debt securities.
On August 8, 2003, the Company filed a shelf registration with the Securities and Exchange Commission, which was declared effective on August 22, 2003. This filing will allow the Company to sell up to $500 million in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt, and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. No debt had been issued under this registration statement as of August 30, 2003.
As of August 30, 2003, “Other” long term debt included approximately $30 million related to the Company’s synthetic leases, with expiration dates in fiscal 2006, for a small number of its domestic stores. At August 30, 2003, the Company recognized the obligations under the lease facility and increased its property and long term debt balances on its balance sheet by approximately $30 million.
All of the Company’s debt is unsecured, except for $8.9 million, which is collateralized by property. Maturities of long-term debt are $420.7 million in fiscal 2004, $252.7 million in fiscal 2005, $182.7 million in fiscal 2006, $0.7 million in fiscal 2007, $190.0 million in fiscal 2008 and $500.0 million thereafter. The maturities for fiscal 2004 are classified as long term as the Company has the ability and intention to refinance them on a long term basis.
The fair value of the Company’s debt was estimated at $1.57 billion as of August 30, 2003, and $1.22 billion as of August 31, 2002, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same remaining maturities. Such fair value is greater than the carrying value of debt at August 30, 2003, and August 31, 2002, by $27.3 million and $27.2 million, respectively. The Company had outstanding variable rate debt of $556.8 million at August 30, 2003, and $699.8 million at August 31, 2002, both of which exclude the effect of interest rate swaps designated and effective as cash flow hedges of such variable rate debt.
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Note G – Interest Expense
Net interest expense for each of the last three fiscal years consisted of the following:
Year Ended | ||||||||||||
August 30, | August 31, | August 25, | ||||||||||
(in thousands) | 2003 | 2002 | 2001 | |||||||||
Interest expense | $ | 86,635 | $ | 80,466 | $ | 102,667 | ||||||
Interest income | (1,054 | ) | (169 | ) | (623 | ) | ||||||
Capitalized interest | (791 | ) | (437 | ) | (1,379 | ) | ||||||
$ | 84,790 | $ | 79,860 | $ | 100,665 | |||||||
Note H – Stock Repurchase Program
As of August 30, 2003, the Board of Directors had authorized the Company to repurchase up to $3.3 billion of common stock in the open market. From January 1998 to August 30, 2003, the Company has repurchased a total of 72.1 million shares at an aggregate cost of $2.8 billion. During fiscal 2003, the Company repurchased 12.3 million shares of its common stock at an aggregate cost of $891.1 million.
At times in the past, the Company utilized equity forward agreements to facilitate its repurchase of common stock. There were no equity forward agreements for share repurchases as of August 30, 2003. At August 31, 2002, the Company held equity forward agreements, which were settled in cash during fiscal 2003, for the purchase of approximately 2.2 million shares of common stock at an average cost of $68.82 per share. Such obligations under the equity forward agreements at August 31, 2002, were not reflected on the balance sheet. During 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144,150, “Accounting for the Impairment or DisposalCertain Financial Instruments with Characteristics of Long-Lived Assets”both Liabilities and Equity” (SFAS 144)150). SFAS 144 supersedes Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets150 applied to Be Disposed Of,” but retains many of its fundamental provisions. Additionally, SFAS 144 expands the scope of discontinued operations to include more disposal transactions. The provisions of SFAS 144 are effective for the Company’s 2003 fiscal year. Theuse of equity forward agreements to repurchase common stock and would have required the Company does not expectto record any forward purchase obligations as a liability on the balance sheet. All of the Company’s outstanding forward purchase contracts were settled prior to the adoption of SFAS 144 to have a significant financial impact on its Consolidated Financial Statements.
In June 2002,150 during the Financial Accounting Standards Board issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and requires that a liability for the cost associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to the datefourth quarter of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expectfiscal 2003. Accordingly, the adoption of SFAS 146 to have a significant financial150 had no impact on itsthe Company’s Consolidated Financial Statements.
38Note I – Employee Stock Plans
The Company has granted options to purchase common stock to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options were granted. Options become exercisable in a one to seven year period, and expire ten years after the grant date. See Note A for additional information regarding the Company’s stock option plans.
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Reclassifications:Certain prior year amountsA summary of outstanding stock options is as follows:
Weighted | |||||||||
Average | |||||||||
Number | Exercise | ||||||||
of Shares | Price | ||||||||
Outstanding August 26, 2000 | 10,767,622 | $ | 25.64 | ||||||
Granted | 908,566 | 25.53 | |||||||
Exercised | (2,135,328 | ) | 22.12 | ||||||
Canceled | (1,084,683 | ) | 27.16 | ||||||
Outstanding August 25, 2001 | 8,456,177 | 26.33 | |||||||
Granted | 1,134,064 | 46.88 | |||||||
Exercised | (2,621,247 | ) | 25.26 | ||||||
Canceled | (684,435 | ) | 29.50 | ||||||
Outstanding August 31, 2002 | 6,284,559 | 30.09 | |||||||
Granted | 1,475,922 | 71.55 | |||||||
Exercised | (1,763,940 | ) | 27.79 | ||||||
Canceled | (714,840 | ) | 32.00 | ||||||
Outstanding August 30, 2003 | 5,281,701 | $ | 42.14 | ||||||
The following table summarizes information about stock options outstanding at August 30, 2003:
Options Outstanding | Options Exercisable | ||||||||||||||||||||
Weighted | |||||||||||||||||||||
Average | |||||||||||||||||||||
Weighted | Remaining | Weighted | |||||||||||||||||||
Average | Contractual | Average | |||||||||||||||||||
Range of Exercise | Number | Exercise | Life | Number | Exercise | ||||||||||||||||
Prices | Outstanding | Price | (in years) | Exercisable | Price | ||||||||||||||||
$ 4.86 - $25.13 | 1,171,656 | $ | 23.24 | 5.05 | 548,256 | $ | 22.63 | ||||||||||||||
$25.25 - $28.19 | 1,084,053 | 26.68 | 5.90 | 425,470 | 26.63 | ||||||||||||||||
$28.38 - $43.90 | 1,454,536 | 37.86 | 6.60 | 446,739 | 34.59 | ||||||||||||||||
$45.53 - $69.71 | 132,614 | 63.00 | 8.35 | 36,575 | 59.73 | ||||||||||||||||
$71.12 - $90.50 | 1,438,842 | 71.57 | 9.04 | 1,875 | 73.20 | ||||||||||||||||
$ 4.86 - $90.50 | 5,281,701 | $ | 42.14 | 6.82 | 1,458,915 | $ | 28.46 | ||||||||||||||
Options to purchase 1.5 million shares at August 30, 2003, 2.1 million shares at August 31, 2002, and 2.9 million shares at August 25, 2001, were exercisable. Shares reserved for future grants were 3.9 million at August 30, 2003.
The Company also has an employee stock purchase plan, qualified under Section 423 of the Internal Revenue Code, under which all eligible employees may purchase AutoZone’s common stock at 85% of the lower of the market price of the common stock on the first day or
62
last day of each calendar quarter through payroll deductions. Maximum permitted annual purchases are $15,000 per employee or 10 percent of compensation, whichever is less. Under the plan, 0.1 million shares were sold in fiscal 2003, 0.1 million shares were sold in fiscal 2002 and 0.2 million shares were sold in fiscal 2001. The Company repurchased, at fair value, 0.1 million shares in fiscal 2003, 0.3 million shares in fiscal 2002 and 0.2 million shares in fiscal 2001 from employees electing to sell their stock. At August 30, 2003, 0.6 million shares of common stock were reserved for future issuance under this plan.
The Amended and Restated Executive Stock Purchase Plan permits senior Company executives to purchase common stock up to 25 percent of their annual salary and bonus after the limits under the employee stock purchase plan have been reclassifiedexceeded. The Company has reserved 0.3 million shares for issuance under the plan. During fiscal 2003, purchases under this plan were approximately 18,500 shares.
Under the AutoZone, Inc. 2003 Director Compensation Plan, a non-employee director may receive no more than one-half of the annual and meeting fees immediately in cash, and the remainder of the fees must be taken in common stock or may be deferred in units with value equivalent to conformthe value of shares of common stock as of the grant date (also known as “stock appreciation rights”).
Under the AutoZone, Inc. 2003 Director Stock Option Plan, on January 1 of each year, each non-employee director receives an option to purchase 1,500 shares of common stock, and each non-employee director that owns common stock worth at least five times the annual fee paid to each non-employee director on an annual basis will receive an additional option to purchase 1,500 shares of common stock. In addition, each new director receives an option to purchase 3,000 shares upon election to the Board of Directors, plus a portion of the annual directors’ option grant prorated for the portion of the year actually served in office. These stock option grants are made at the fair market value as of the grant date.
Note J – Pension and Savings Plans
Prior to January 1, 2003, substantially all full-time employees were covered by a defined benefit pension plan. The benefits under the plan were based on years of service and the employee’s highest consecutive five-year average compensation. On January 1, 2003, the plan was frozen. Accordingly, pension plan participants will earn no new benefits under the plan formula and no new participants will join the pension plan.
On January 1, 2003, the Company’s supplemental defined benefit pension plan for certain highly compensated employees was also frozen. Accordingly, plan participants will earn no new benefits under the plan formula and no new participants will join the pension plan.
The Company makes annual contributions in amounts at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The following table sets forth the plans’ funded status and amounts recognized in the Company’s financial statements:
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August 30, | August 31, | |||||||
(in thousands) | 2003 | 2002 | ||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 117,005 | $ | 91,993 | ||||
Service cost | 4,823 | 13,500 | ||||||
Interest cost | 6,214 | 6,861 | ||||||
Actuarial losses | 39,518 | 5,802 | ||||||
Plan amendments | (29,813 | ) | — | |||||
Benefits paid | (1,670 | ) | (1,151 | ) | ||||
Benefit obligation at end of year | 136,077 | 117,005 | ||||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | 83,306 | 73,735 | ||||||
Loss on plan assets | (603 | ) | (2,242 | ) | ||||
Company contributions | 6,293 | 12,964 | ||||||
Benefits paid | (1,670 | ) | (1,151 | ) | ||||
Administrative expenses | (589 | ) | — | |||||
Fair value of plan assets at end of year | 86,737 | 83,306 | ||||||
Reconciliation of funded status: | ||||||||
Underfunded status of the plans | (49,340 | ) | (33,699 | ) | ||||
Unrecognized net actuarial losses | 49,622 | 31,360 | ||||||
Unamortized prior service cost | (1,811 | ) | (1,738 | ) | ||||
Accrued benefit cost | $ | (1,529 | ) | $ | (4,077 | ) | ||
Recognized defined benefit pension liability: | ||||||||
Accrued benefit liability | $ | (49,340 | ) | $ | (4,091 | ) | ||
Intangible asset | — | 14 | ||||||
Accumulated other comprehensive income | 47,811 | — | ||||||
Net liability recognized | $ | (1,529 | ) | $ | (4,077 | ) | ||
Year Ended | ||||||||||||
August 30, | August 31, | August 25, | ||||||||||
(in thousands) | 2003 | 2002 | 2001 | |||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 4,823 | $ | 13,500 | $ | 10,339 | ||||||
Interest cost | 6,214 | 6,861 | 5,330 | |||||||||
Expected return on plan assets | (6,609 | ) | (6,255 | ) | (6,555 | ) | ||||||
Amortization of prior service cost | (575 | ) | (568 | ) | (518 | ) | ||||||
Recognized net actuarial losses | — | 1,030 | — | |||||||||
Curtailment gain | (107 | ) | — | — | ||||||||
Net periodic benefit cost | $ | 3,746 | $ | 14,568 | $ | 8,596 | ||||||
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The actuarial present value of the projected benefit obligation was determined using weighted average discount rates of 6.0% at August 30, 2003, 7.25% at August 31, 2002, and 7.5% at August 25, 2001. In fiscal years 2003, 2002 and 2001, the assumed increases in future compensation levels were generally age weighted rates from 5-10% after the first two years of service using 15% for year one and 12% for year two. The expected long-term rate of return on plan assets was 8.0% at August 30, 2003, and August 31, 2002, and 9.5% at August 25, 2001. Prior service cost is amortized over the estimated average remaining service lives of the plan participants and the unrecognized actuarial loss is amortized over the remaining service period of 8.23 years at August 30, 2003.
On January 1, 2003, the Company introduced an enhanced defined contribution plan (“401(k) plan”) pursuant to Section 401(k) of the Internal Revenue Code that replaced the previous 401(k) plan. The 401(k) plan covers substantially all employees that meet the plan’s service requirements. The new plan features include increased Company matching contributions, immediate 100% vesting of Company contributions and an increased savings option to 25% of qualified earnings. The Company makes matching contributions, per pay period, up to a specified percentage of employees’ contributions as approved by the Board of Directors. The Company made matching contributions to employee accounts in connection with the 401(k) plan of $4.5 million in fiscal 2003 and $1.4 million in fiscal years 2002 presentation.and 2001.
Note BK – Leases
Some of the Company’s retail stores, distribution centers and equipment are leased. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales.
Rental expense was $110.7 million in fiscal 2003, $99.0 million in fiscal 2002 and $100.4 million for fiscal 2001. Percentage rentals were insignificant.
Minimum annual rental commitments under non-cancelable operating leases were as follows at the end of fiscal 2003 (in thousands):
Fiscal Year | Amount | |||
2004 | $ | 118,269 | ||
2005 | 105,210 | |||
2006 | 92,101 | |||
2007 | 74,303 | |||
2008 | 55,143 | |||
Thereafter | 226,077 | |||
Total minimum payments required | 671,103 | |||
Less: Sublease rentals | (37,762 | ) | ||
$ | 633,341 | |||
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In connection with the Company’s December 2001 sale of the TruckPro business, the Company subleased some properties to the purchaser for an initial term of not less than 20 years. The Company’s remaining aggregate rental obligation at August 30, 2003 of $31.6 million is entirely offset by the sublease rental agreement.
Note L – Restructuring and Impairment Charges
In fiscal 2001, the Company recorded restructuring and impairment charges of $156.8 million. The planned closure of 51 domestic auto parts stores and the disposal of real estate projects in process and excess properties accounted for the largest portion, or $56.1 million, of the charge. In fiscal 2002, these stores were closed, and sales of certain excess properties resulted in gains of approximately $2.6 million. Remaining excess properties are currently being marketed for sale. During the third quarter of fiscal 2002, all remaining excess properties were reevaluated. At that time, it was determined that several properties could be developed. This resulted in the reversal of accrued lease obligations totaling $6.4 million. It was also determined that additional writedowns were needed to state remaining excess properties at fair value. These writedowns totaled $9.0 million. BecauseDuring fiscal 2002 adjustments offset, there was no impact on net income.2003, AutoZone recognized $4.6 million of gains as a result of the disposition of properties associated with the restructuring and impairment charges in fiscal 2001.
Another portion of the charge, $32.0 million, related to other asset writedowns and the accrual of lease obligations associated with the closure of a supply depot and for the unoccupied ALLDATA office building. During the fourth quarter of fiscal 2002, the ALLDATA office building was sold to a third party. The reserve previously established was adequate to cover the loss incurred on the sale. The Company continues to pursue the sale, sublease or early termination of the leases associated with the remaining leased facilities.
The Company also reserved $30.1 million for inventory rationalization, including a provision for inventory losses in closed stores. All of the scheduled recalls and disposals of inventory took place during fiscal 2002 and the reserve was adequate to cover all losses incurred.
The Company recorded asset writedowns and contractual obligations aggregating $29.9 million related to the planned sale of TruckPro, its heavy-duty truck parts subsidiary. In December 2001, TruckPro was sold to a group of investors for cash proceeds of $25.7 million and a promissory note. The Company has deferred a gain on the sale of $3.6 million due to uncertainties associated with the realization of the gain. Refer to Note K for further discussion of this transaction.
The remainder of the restructuring and impairment charges, $8.7 million, related to contractual obligations, severance and other charges. The Company did not reverse any reserves into income.
Total remaining accrued obligations for restructuring charges were $18.1 million at August 31, 2002. The following table presents a summary of the activity in accrued obligations for the restructuring charges:
39
Contract | ||||||||||||
Settlements/ | Severance | |||||||||||
(in thousands) | Lease Obligations | Terminations | & Other | |||||||||
Beginning balance | $ | 29,576 | $ | 6,713 | $ | 2,715 | ||||||
Cash outlays/adjustments | 11,436 | 6,713 | 2,715 | |||||||||
Balance at August 31, 2002 | $ | 18,140 | $ | — | $ | — | ||||||
Note C — Amortization of Goodwill
On August 26, 2001, the Company adopted SFAS 142. Under SFAS 142, goodwill amortization ceased upon adoption of the new standard. Had the application of the non-amortization provisions of SFAS 142 not been adopted, net income would have been reduced by $5.4 million ($0.05 per share) in the fiscal year ended August 31, 2002. The new rules also require an initial goodwill impairment assessment in the year of adoption and annual impairment tests thereafter. During the second quarter of fiscal 2002, the Company performed the first of the required impairment tests of goodwill. No impairment loss resulted from the initial goodwill impairment test, or from the annual impairment test that was performed during the fourth quarter of fiscal 2002. The pro forma effects of the adoption of SFAS 142 on the results of operations for periods prior to fiscal year 2002 are as follows:
Year ended | |||||||||||||
August 31, | August 25, | August 26, | |||||||||||
(in thousands, except per share data) | 2002 | 2001 | 2000 | ||||||||||
Reported net income: | $ | 428,148 | $ | 175,526 | $ | 267,590 | |||||||
Goodwill amortization, net of tax | — | 5,359 | 5,453 | ||||||||||
Adjusted net income | $ | 428,148 | $ | 180,885 | $ | 273,043 | |||||||
Basic earnings per share: | |||||||||||||
Reported net income | $ | 4.10 | $ | 1.56 | $ | 2.01 | |||||||
Goodwill amortization, net of tax | — | 0.05 | 0.04 | ||||||||||
Adjusted net income | $ | 4.10 | $ | 1.61 | $ | 2.05 | |||||||
Diluted earnings per share: | |||||||||||||
Reported net income | $ | 4.00 | $ | 1.54 | $ | 2.00 | |||||||
Goodwill amortization, net of tax | — | 0.05 | 0.04 | ||||||||||
Adjusted net income | $ | 4.00 | $ | 1.59 | $ | 2.04 | |||||||
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Note D – Accrued Expenses
Accrued expenses at August 31, 2002, and August 25, 2001, consisted of the following:
August 31, | August 25, | |||||||
(in thousands) | 2002 | 2001 | ||||||
Medical and casualty insurance claims | $ | 83,813 | $ | 70,719 | ||||
Accrued compensation and related payroll taxes | 78,656 | 49,589 | ||||||
Property and sales taxes | 51,379 | 45,030 | ||||||
Accrued sales and warranty returns | 82,035 | 63,467 | ||||||
Other | 48,717 | 63,348 | ||||||
$ | 344,600 | $ | 292,153 | |||||
Note E – Income Taxes
At August 31, 2002, the Company had federal tax net operating loss carryforwards (NOLs) of approximately $31.3 million that expire in years 2007 through 2017. These carryforwards resulted from the Company’s acquisition of Chief Auto Parts Inc., and ADAP, Inc. (which had been doing business as “Auto Palace”) in fiscal 1998. The use of the federal tax NOLs is limited to future taxable earnings of these companies and is subject to annual limitations. A valuation allowance of $8.7 million in fiscal 2002 and fiscal 2001 relates to these carryforwards. In addition, some of the Company’s subsidiaries have state tax NOLs that expire in years 2003 through 2022. The use of the NOLs is limited to future taxable earnings of these subsidiaries and may be subject to annual limitations. Valuation allowances of $5.7 million in fiscal 2002 and $6.1 million in fiscal 2001 relate to these carryforwards.
The provision for income tax expense for each of the last three fiscal years consisted of the following:
Year Ended | ||||||||||||||
August 31, | August 25, | August 26, | ||||||||||||
(in thousands) | 2002 | 2001 | 2000 | |||||||||||
Current: | ||||||||||||||
Federal | $ | 210,457 | $ | 144,538 | $ | 119,259 | ||||||||
State | 24,060 | 13,943 | 9,003 | |||||||||||
234,517 | 158,481 | 128,262 | ||||||||||||
Deferred: | ||||||||||||||
Federal | 26,200 | (42,380 | ) | 35,762 | ||||||||||
State | 2,283 | (4,601 | ) | 3,576 | ||||||||||
28,483 | (46,981 | ) | 39,338 | |||||||||||
$ | 263,000 | $ | 111,500 | $ | 167,600 | |||||||||
41
Significant components of the Company’s deferred tax assets and liabilities were as follows:
August 31, | August 25, | ||||||||
(in thousands) | 2002 | 2001 | |||||||
Net deferred tax assets: | |||||||||
Net operating loss and credit carryforwards | $ | 25,590 | $ | 25,226 | |||||
Insurance reserves | 25,930 | 22,804 | |||||||
Warranty reserves | 30,660 | 23,684 | |||||||
Closed store reserves | 20,398 | 25,585 | |||||||
Inventory reserves | 4,108 | 14,256 | |||||||
Other | 559 | 24,598 | |||||||
107,245 | 136,153 | ||||||||
Less: Valuation allowance | (14,367 | ) | (14,792 | ) | |||||
$ | 92,878 | $ | 121,361 | ||||||
The following table presents a reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35% to income before income taxes.
Year Ended | ||||||||||||
August 31, | August 25, | August 26, | ||||||||||
(in thousands) | 2002 | 2001 | 2000 | |||||||||
Expected tax at statutory rate | $ | 241,902 | $ | 100,459 | $ | 152,317 | ||||||
State income taxes, net | 17,123 | 6,072 | 8,176 | |||||||||
Other | 3,975 | 4,969 | 7,107 | |||||||||
$ | 263,000 | $ | 111,500 | $ | 167,600 | |||||||
Note F – Interest Expense
Net interest expense for each of the last three fiscal years consisted of the following:
Year Ended | ||||||||||||
August 31, | August 25, | August 26, | ||||||||||
(in thousands) | 2002 | 2001 | 2000 | |||||||||
Interest expense | $ | 80,466 | $ | 102,667 | $ | 79,908 | ||||||
Interest income | (169 | ) | (623 | ) | (305 | ) | ||||||
Capitalized interest | (437 | ) | (1,379 | ) | (2,773 | ) | ||||||
$ | 79,860 | $ | 100,665 | $ | 76,830 | |||||||
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Note G – Financing Arrangements
The Company’s long term debt as of August 31, 2002, and August 25, 2001, consisted of the following:
August 31, | August 25, | |||||||
(in thousands) | 2002 | 2001 | ||||||
6% Notes due November 2003 | $ | 150,000 | $ | 150,000 | ||||
6.5% Debentures due July 2008 | 190,000 | 190,000 | ||||||
7.99% Notes due April 2006 | 150,000 | 150,000 | ||||||
Bank term loan due December 2003, interest rate of 3.11% at August 31, 2002, and 4.95% at August 25, 2001 | 115,000 | 115,000 | ||||||
Bank term loan due November 2004, interest rate of 2.56% at August 31, 2002, and 4.69% at August 25, 2001 | 350,000 | 200,000 | ||||||
Commercial paper, weighted average interest rate of 2.1% at August 31, 2002, and 3.9% at August 25, 2001 | 223,200 | 385,447 | ||||||
Unsecured bank loans | — | 15,000 | ||||||
Other | 16,317 | 19,955 | ||||||
$ | 1,194,517 | $ | 1,225,402 | |||||
The Company maintains $950 million of revolving credit facilities with a group of banks. Of the $950 million, $300 million expires in May 2003. The remaining $650 million expires in May 2005. The 364-day facility expiring in May 2003 includes a renewal feature as well as an option to extend the maturity date of the then-outstanding debt by one year. The credit facilities exist largely to support commercial paper borrowings and other short term unsecured bank loans. At August 31, 2002, outstanding commercial paper of $223.2 million is classified as long term as the Company has the ability and intention to refinance it on a long term basis. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the agreement) or a competitive bid rate at the option of the Company. The Company has agreed to observe certain covenants under the terms of its credit agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage.
During the fiscal year 2001, the Company entered into $200 million and $115 million unsecured bank term loans with a group of banks. During fiscal 2002, the $200 million two-year unsecured term loan was increased to $350 million and the maturity was extended to November 2004. The rate of interest payable is a function of LIBOR or the bank’s base rate (as defined in the agreement) at the option of the Company.
43
Subsequent to year end, on October 1, 2002, the Company filed a shelf registration with the Securities and Exchange Commission. This filing will allow the Company to sell as much as $500 million in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing existing debt, and/or to fund working capital, capital expenditures, new store openings, stock repurchases and acquisitions. On October 16, 2002, the Company issued $300 million of 5.875% Senior Notes under the registration statement. The Notes mature in October 2012, and interest is payable semi-annually on April 15 and October 15.
All of the Company’s debt is unsecured, except for $11.6 million, which is collateralized by property. Maturities of long-term debt are $265.0 million for fiscal 2004, $589.5 million for fiscal 2005, $150.0 million for fiscal 2006 and $190.0 million thereafter.
The fair value of the Company’s debt was estimated at $1.22 billion as of August 31, 2002, and $1.21 billion as of August 25, 2001, based on the market values of the debt at those dates. Such fair value is greater than the carrying value of debt at August 31, 2002, by $27.2 million and less than the carrying value of debt at August 25, 2001, by $17.3 million. The Company had $699.8 million of variable rate debt outstanding at August 31, 2002, and $730.4 million outstanding at August 25, 2001.
Note H – Stock Repurchase Program
As of August 31, 2002, the Board of Directors had authorized the Company to repurchase up to $2.3 billion of common stock in the open market. In fiscal 2002, the Company repurchased 12.6 million shares of its common stock at an aggregate cost of $699.0 million. Since fiscal 1998, the Company has repurchased a total of 59.8 million shares at an aggregate cost of $1.9 billion. At times, the Company utilizes equity forward agreements to facilitate its repurchase of common stock. At August 31, 2002, the Company held equity forward contracts that relate to the purchase of approximately 2.2 million shares of common stock at an average cost of $68.82 per share, all of which mature in fiscal 2003. The Company, at its option, may settle the forward contracts in cash or common stock. The Company has historically settled all similar contracts in cash. In accordance with the provisions of Emerging Issues Task Force Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” these contracts qualify as equity instruments and are not reflected in the Company’s Consolidated Balance Sheets. Due to fluctuations in the Company’s stock price, when the Company settles these forward contracts, the settlement price may be above or below the market price of the underlying common stock.
Subsequent to year end, the Company purchased 1.1 million shares in partial settlement of the forward contract outstanding at August 31, 2002, at an average cost of $69.91 per share.
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Note I – Employee Stock Plans
The Company has granted options to purchase common stock to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options were granted. Options are exercisable in a one to seven year period, and expire ten years after the grant date. A summary of outstanding stock options is as follows:
Wtd. Avg. | Number | ||||||||
Exercise Price | of Shares | ||||||||
Outstanding August 28, 1999 | $ | 24.95 | 10,500,406 | ||||||
Granted | $ | 25.96 | 1,960,256 | ||||||
Exercised | $ | 7.13 | (520,186 | ) | |||||
Canceled | $ | 28.27 | (1,172,854 | ) | |||||
Outstanding August 26, 2000 | $ | 25.64 | 10,767,622 | ||||||
Granted | $ | 25.53 | 908,566 | ||||||
Exercised | $ | 22.12 | (2,135,328 | ) | |||||
Canceled | $ | 27.16 | (1,084,683 | ) | |||||
Outstanding August 25, 2001 | $ | 26.33 | 8,456,177 | ||||||
Granted | $ | 46.88 | 1,134,064 | ||||||
Exercised | $ | 25.26 | (2,621,247 | ) | |||||
Canceled | $ | 29.50 | (684,435 | ) | |||||
Outstanding August 31, 2002 | $ | 30.09 | 6,284,559 | ||||||
The following table summarizes information about stock options outstanding at August 31, 2002:
Options Outstanding | Options Exercisable | ||||||||||||||||||||
Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | |||||||||||||||||||
Range of Exercise | No. of | Exercise | Contractual | No. of | Exercise | ||||||||||||||||
Price | Options | Price | Life (in years) | Options | Price | ||||||||||||||||
$4.86 - $24.63 | 1,495,805 | $ | 22.88 | 6.09 | 649,860 | $ | 21.97 | ||||||||||||||
$24.94 - $26.14 | 1,383,331 | $ | 25.50 | 5.38 | 665,948 | $ | 25.31 | ||||||||||||||
$26.38 - $28.63 | 1,274,555 | $ | 27.70 | 5.03 | 536,675 | $ | 27.65 | ||||||||||||||
$29.13 - $43.90 | 1,968,304 | $ | 37.48 | 7.53 | 254,202 | $ | 32.55 | ||||||||||||||
$45.53 - $73.20 | 162,564 | $ | 64.63 | 9.35 | 6,500 | $ | 45.53 | ||||||||||||||
$4.86 - $73.20 | 6,284,559 | $ | 30.09 | 6.26 | 2,113,185 | $ | 25.81 | ||||||||||||||
Options to purchase 2.1 million shares at August 31, 2002, 2.9 million shares at August 25, 2001, and 3.5 million shares at August 26, 2000, were exercisable. Shares reserved for future grants were 4.7 million at August 31, 2002.
45
Pro forma information is required by SFAS 123, “Accounting for Stock-Based Compensation.” In accordance with the provisions of SFAS 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, no compensation expense for stock options has been recognized. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed in SFAS 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated as follows:
Year Ended | ||||||||||||||
August 31, | August 25, | August 26, | ||||||||||||
(in thousands, except per share data) | 2002 | 2001 | 2000 | |||||||||||
Net income: | ||||||||||||||
As reported | $ | 428,148 | $ | 175,526 | $ | 267,590 | ||||||||
Pro forma | $ | 419,179 | $ | 168,581 | $ | 258,374 | ||||||||
Basic earnings per share: | ||||||||||||||
As reported | $ | 4.10 | $ | 1.56 | $ | 2.01 | ||||||||
Pro forma | $ | 4.01 | $ | 1.50 | $ | 1.95 | ||||||||
Diluted earnings per share: | ||||||||||||||
As reported | $ | 4.00 | $ | 1.54 | $ | 2.00 | ||||||||
Pro forma | $ | 3.91 | $ | 1.48 | $ | 1.93 |
The effects of applying SFAS 123 and the results obtained through the use of the Black-Scholes option pricing model in this pro forma disclosure are not necessarily indicative of future amounts. The weighted average fair value of the stock options granted was $16.10 per share during fiscal 2002, $10.19 per share during fiscal 2001 and $11.92 per share during fiscal 2000. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2002, 2001 and 2000:
Year Ended | ||||||||||||||
August 31, | August 25, | August 26, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||||
Expected price volatility | 39% | 37% | 36% | |||||||||||
Risk-free interest rates range | 2.15% – 3.21% | 3.76% – 4.54% | 6.08% – 6.18% | |||||||||||
Expected lives range in years | 4.79 – 8.79 | 4.83 – 8.83 | 4.67 – 8.67 |
Stock options that could potentially dilute basic earnings per share in the future, that were not included in the fully diluted computation because they would have been antidilutive, were 0.1 million shares at August 31, 2002, and 7.5 million shares at August 26, 2000.
The Company also has an employee stock purchase plan under which all eligible employees may purchase common stock at 85% of fair market value (determined quarterly) through payroll deductions. Maximum permitted annual purchases are $15,000 per employee or ten percent of compensation, whichever is less. Under the plan, 0.1 million shares were sold in fiscal 2002, 0.2 million shares were sold in fiscal 2001 and 0.3 million shares were sold in fiscal 2000. The Company repurchased 0.3 million shares in fiscal year 2002 and 0.2 million shares in fiscal years 2001 and 2000 for sale to employees under the plan. At August 31, 2002, 0.7 million shares of common stock were reserved for future issuance under this plan.
46
The Amended and Restated Executive Stock Purchase Plan permits senior Company executives to purchase common stock up to 25 percent of their annual salary and bonus after the limits under the employee stock purchase plan have been exceeded. The Company has reserved 0.3 million shares for issuance under the plan.
Under the Fourth Amended and Restated Directors Stock Option Plan each non-employee director will receive an option to purchase 1,500 shares of common stock on January 1 of each year. In addition, as long as the non-employee director owns common stock valued at least equal to five times the value of the annual fee paid to such director, that director will receive an additional option to purchase 1,500 shares as of January 1 of each year. New directors receive options to purchase 3,000 shares plus a grant of an option to purchase a number of shares equal to the annual option grant, prorated for the time in service for the year.
Under the Second Amended and Restated Directors Compensation Plan a director may receive no more than one-half of the annual and meeting fees immediately in cash, and the remainder of the fees must be taken in either common stock or the fees deferred in units with value equivalent to the value of a share of common stock as of the grant date (“stock appreciation rights”).
Note J – Pension and Savings Plan
Substantially all full-time employees are covered by a defined benefit pension plan. The benefits are based on years of service and the employee’s highest consecutive five-year average compensation. In addition, the Company has established a supplemental defined benefit pension plan for certain highly compensated employees.
The Company makes annual contributions in amounts at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The following table sets forth the plans’ funded status and amounts recognized in the Company’s financial statements:
47
August 31, | August 25, | |||||||
(in thousands) | 2002 | 2001 | ||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 91,993 | $ | 66,990 | ||||
Service cost | 13,500 | 10,339 | ||||||
Interest cost | 6,861 | 5,330 | ||||||
Actuarial losses | 5,802 | 11,437 | ||||||
Benefits paid | (1,151 | ) | (2,103 | ) | ||||
Benefit obligation at end of year | 117,005 | 91,993 | ||||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | 73,735 | 65,379 | ||||||
Actual (loss) return on plan assets | (2,242 | ) | 1,285 | |||||
Company contributions | 12,964 | 9,652 | ||||||
Benefits paid | (1,151 | ) | (2,103 | ) | ||||
Administrative expenses | — | (478 | ) | |||||
Fair value of plan assets at end of year | 83,306 | 73,735 | ||||||
Reconciliation of funded status: | ||||||||
Underfunded status of the plans | (33,699 | ) | (18,258 | ) | ||||
Unrecognized net actuarial losses | 31,360 | 17,953 | ||||||
Unamortized prior service cost | (1,738 | ) | (2,167 | ) | ||||
Accrued benefit cost | $ | (4,077 | ) | $ | (2,472 | ) | ||
Year Ended | ||||||||||||
August 31, | August 25, | August 26, | ||||||||||
(in thousands) | 2002 | 2001 | 2000 | |||||||||
Components of net periodic benefit cost: | ||||||||||||
Service cost | $ | 13,500 | $ | 10,339 | $ | 9,778 | ||||||
Interest cost | 6,861 | 5,330 | 4,523 | |||||||||
Expected return on plan assets | (6,255 | ) | (6,555 | ) | (5,617 | ) | ||||||
Amortization prior service cost | (568 | ) | (518 | ) | (605 | ) | ||||||
Recognized net actuarial losses | 1,030 | — | 540 | |||||||||
Net periodic benefit cost | $ | 14,568 | $ | 8,596 | $ | 8,619 | ||||||
The actuarial present value of the projected benefit obligation was determined using weighted average discount rates of 7.0% at August 31, 2002, 7.5% at August 25, 2001, and 8% at August 26, 2000. The assumed increases in future compensation levels were generally 5-10% based on age in fiscal 2002, 2001 and 2000. The expected long-term rate of return on plan assets was 8.0% at August 31, 2002, and 9.5% at August 25, 2001, and August 26, 2000. Prior service cost is amortized over the estimated average remaining service lives of the plan participants and the unrecognized actuarial loss is amortized over the remaining service period of 8.37 years at August 31, 2002.
48
The Company has also established a defined contribution plan (“401(k) plan”) pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) plan covers substantially all employees that meet the plan’s service requirements. The Company makes matching contributions, on an annual basis, up to a specified percentage of employees’ contributions as approved by the Board of Directors. The Company made matching contributions to employee accounts in connection with the 401(k) plan of $1.4 million in fiscal years 2002 and 2001 and $1.2 million in fiscal 2000.
Note K – Sale of TruckPro Business
In December 2001, the Company’s heavy-duty truck parts business was sold to a group of investors in exchange for cash and a six-year note. The Company has deferred a gain of $3.6 million related to the sale due to uncertainties associated with the realization of the gain. During fiscal 2003, the note (with a face value of $4.5 million) was repaid to the Company and certain liabilities were settled. As a result, a total gain of $4.7 million was recognized into income during fiscal 2003.
The Company has subleased someremainder of the TruckPro propertiesrestructuring and impairment charges, $8.7 million, was related to the purchaser of the TruckPro business for an initial term of not less than twenty years.contractual obligations, severance and other charges. The cash outlays associated with these charges were made during fiscal 2002.
Note L – Leases
A portion of the Company’s retail stores, distribution centers and certain equipment is leased. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. In addition, some of the leases contain guaranteed residual values.
Rental expense was $99.0 million in fiscal 2002, $100.4 million in fiscal 2001 and $95.7 million for fiscal 2000. Percentage rentals were insignificant.
Minimum annual rental commitments under non-cancelable operating leases were as follows at the end of fiscal 2002 (in thousands):
Year | Amount | |||
2003 | $ | 117,215 | ||
2004 | 103,982 | |||
2005 | 86,704 | |||
2006 | 73,085 | |||
2007 | 56,204 | |||
Thereafter | 221,364 | |||
$ | 658,554 | |||
4966
Total remaining accrued obligations for restructuring charges were $12.5 million at August 30, 2003. The following table presents a summary of the activity in accrued obligations for the restructuring charges:
Contract | ||||||||||||
Lease | Settlements/ | Severance | ||||||||||
(in thousands) | Obligations | Terminations | & Other | |||||||||
Balance at August 25, 2001 (1) | $ | 29,576 | $ | 6,713 | $ | 2,715 | ||||||
Cash outlays/adjustments | 11,436 | 6,713 | 2,715 | |||||||||
Balance at August 31, 2002 | 18,140 | — | — | |||||||||
Cash outlays/adjustments | 5,664 | — | — | |||||||||
Balance at August 30, 2003 | $ | 12,476 | $ | — | $ | — | ||||||
(1) | Balance at August 25, 2001, represents the original provisions recorded in fiscal 2001. |
No other significant gains or charges are anticipated under the fiscal 2001 restructuring plan.
Note M – Commitments and Contingencies
Construction commitments, primarily for new stores, totaled approximately $16$16.8 million at August 31, 2002.30, 2003.
AutoZone, Inc., and severalwas one of its subsidiaries aremultiple defendants in a lawsuit entitled “Coalition for a Level Playing Field, L.L.C.,et al.,v. AutoZone, Inc., Wal-mart Stores, Inc., Advance Auto Parts, Inc., O’Reilly Automotive, Inc., and Keystone Automotive Operations, Inc.,et al.” filed in the U.S. District Court for the Eastern District of New York in February 2000. The case was filedbrought by over 100approximately 225 plaintiffs, which are principally automotive aftermarket warehouse distributors and jobbers. The plaintiffs claimclaimed that the defendants have knowingly received volume discounts, rebates, slotting and other allowances, fees, free inventory, sham advertising and promotional payments, a share in the manufacturers’ profits, and excessive payments for services purportedly performed for the manufacturers in violation of the Robinson-Patman Act. Plaintiffs’ third amended and corrected complaint seeksPlaintiffs sought unspecified damages suffered by each plaintiff (prior to statutory trebling), ranging from several million dollars to $35 million for each plaintiff, and a permanent injunction prohibiting defendants from committing further violations of the Robinson-Patman Act and from opening any further stores to compete with plaintiffs as long as defendants continue to violate the Act. The litigation is currentlyclaims of 22 of the original plaintiffs were tried to a jury verdict in favor of AutoZone in January 2003. On February 26, 2003, the plaintiffs, involved in the early stagestrial, filed a notice to appeal. The U.S. Circuit Court of discovery. The Company does not know howAppeals for the Second Circuit will hear oral argument on the appeal on November 5, 2003. On July 22, 2003, approximately 200 plaintiffs have calculatedin the original lawsuit, whose cases had been dismissed without prejudice and with leave to reinstate their alleged damages. The Companyclaims, filed a notice to be reactivated as parties in the
67
lawsuit and for their claims against the defendants to be reinstated. While the outcome of this matter cannot be predicted, AutoZone intends to vigorously defend against this action and believes that it has substantive defenses to all of the claims in the complaint.it.
The Company currently, and from time to time, is involved in various other legal proceedings incidental to the conduct of its business. Although the amount of liability that may result from these proceedings cannot be ascertained, the Company does not currently believe that, in the aggregate, these other matters will result in liabilities material to the Company’s financial condition, or results of operations.operations or cash flows.
The Company is self-insured for workers’ compensation, automobile, general and product liability and property losses. The Company is also self-insured for health care claims for eligible active employees. The Company maintains certain levels for stop loss coverage for each self-insured plan. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported.
50
Note N – Segment Reporting
The Company manages its business on the basis of one reportable segment. See Note A for a brief description of the Company’s business. As of August 31, 2002,30, 2003, the majority of the Company’s operations were located within the United States. The Company also hasOther operations in Mexico, however,include ALLDATA and the Mexico operations compriselocations, each of which comprises less than three3 percent of consolidated revenues, profitnet sales, net income and total assets. The following data is presented in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.”
Year Ended | Year Ended | |||||||||||||||||||||||||||
August 31, | August 25, | August 26, | August 30, | August 31, | August 25, | |||||||||||||||||||||||
(in thousands) | (in thousands) | 2002 | 2001 | 2000 | (in thousands) | 2003 | 2002 | 2001 | ||||||||||||||||||||
Primary business focus: | Primary business focus: | Primary business focus: | ||||||||||||||||||||||||||
Net sales: | U.S. Retail | $ | 4,638,361 | $ | 4,621,234 | $ | 4,134,326 | |||||||||||||||||||||
U.S. Retail | $ | 4,621,234 | $ | 4,134,326 | $ | 3,871,424 | AZ Commercial | 670,010 | 531,776 | 443,533 | ||||||||||||||||||
AZ Commercial | 531,776 | 443,533 | 396,729 | Other | 148,752 | 172,500 | 240,326 | |||||||||||||||||||||
Other | 172,500 | 240,326 | 214,543 | |||||||||||||||||||||||||
Net sales | $ | 5,457,123 | $ | 5,325,510 | $ | 4,818,185 | ||||||||||||||||||||||
$ | 5,325,510 | $ | 4,818,185 | $ | 4,482,696 | |||||||||||||||||||||||
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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
51
PART III
Item 9A. Controls and Procedures
As of August 30, 2003, an evaluation was performed under the supervision and with the participation of AutoZone’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, AutoZone’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of August 30, 2003. No significant changes in AutoZone’s internal controls or in other factors have occurred that could significantly affect controls subsequent to August 30, 2003.
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PART III
Item 10. Directors and Officers of the Registrant
The information required by this item is incorporated by reference to Part I of this document and to the definitive Proxy Statement to be filed within 120 days of August 31, 2002,30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held December 12, 2002.11, 2003.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the definitive Proxy Statement to be filed within 120 days of August 31, 2002,30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held December 12, 2002.11, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the definitive Proxy Statement to be filed within 120 days of August 31, 2002,30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held December 12, 2002.11, 2003.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the definitive Proxy Statement to be filed within 120 days of August 31, 2002,30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held December 12, 2002.11, 2003.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the definitive Proxy Statement to be filed within 120 days of August 30, 2003, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders to be held December 11, 2003.
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PART IV
Item 14. Controls and Procedures
As of August 31, 2002, an evaluation was performed under the supervision and with the participation of AutoZone’s management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, AutoZone’s management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of August 31, 2002. No significant changes in AutoZone’s internal controls or in other factors have occurred that could significantly affect controls subsequent to August 31, 2002.
52
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
(a) |
The following financial statements for the fiscal year ended August 31, 2002,30, 2003, are incorporated herein by reference to Item 8:
Report of Independent Auditors | |||||
Consolidated Statements of Income for the fiscal years ended August | |||||
Consolidated Balance Sheets as of August 30, 2003, and August 31, 2002 | |||||
Consolidated Statements of Cash Flows for the fiscal years ended August 30, 2003, August 31, | |||||
2002, and August 25, 2001 | |||||
Consolidated Statements of Stockholders’ Equity for the fiscal years ended | |||||
August 30, 2003, August 31, 2002, and August 25, 2001 | |||||
Notes to Consolidated Financial Statements |
2. Financial Statement Schedules |
Report of Independent Auditors | page 74 |
Schedule II – Valuation and Qualifying Accounts | page 75 |
2. Financial Statement Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because the information is not required or because the information required is included in the financial statements or notes thereto.
3. The following exhibits are filed as a part of this report:
3. Exhibits |
The Exhibit Index on pages following Schedule II is incorporated herein by reference.
53
54
55
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated May | |
The Company filed a Current Report on Form 8-K dated |
5671
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AUTOZONE, INC. | ||||
By: | /s/ Steve Odland | |||
Steve Odland Chairman, President, and Chief Executive Officer (Principal Executive Officer) | ||||
Dated: October 29, 2003
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE | TITLE | DATE | ||
/s/ Steve Odland Steve Odland | Chairman, President, Chief Executive | |||
Officer, & Director | ||||
(Principal Executive Officer) | October 29, 2003 | |||
/s/ Michael Archbold Michael Archbold | Senior Vice President & Chief | |||
Financial Officer (Principal Financial Officer) | October 29, 2003 | |||
/s/ Charlie Pleas, III | Vice President & Controller | |||
(Principal Accounting Officer) | October 29, 2003 | |||
/s/ Charles M. Elson Charles M. Elson | Director | October | ||
/s/ Marsha J. Evans Marsha J. Evans | Director | October | ||
/s/ Earl G. Graves, Jr. Earl G. Graves, Jr. | Director | October | ||
/s/ N. Gerry House N. Gerry House | Director | October | ||
5772
CERTIFICATIONS
I, Steve Odland, certify that:
TITLE | DATE | |||
/s/ J.R. Hyde, III J.R. Hyde, III | October 29, 2003 | |||
/s/ James F. Keegan James F. Keegan | Director | October 29, 2003 | ||
/s/ Edward S. Lampert Edward S. Lampert | Director | October 29, 2003 | ||
/s/ W. Andrew McKenna W. Andrew McKenna | Director | October 29, 2003 | ||
/s/ James J. Postl James J. Postl | Director | October 29, 2003 |
5873
I, Michael Archbold, certify that:Report of Independent Auditors
Stockholders
AutoZone, Inc.
We have audited the consolidated financial statements of AutoZone, Inc. as of August 30, 2003 and August 31, 2002, and for each of the three years in the period ended August 30, 2003, and have issued our report thereon dated September 22, 2003 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule listed in Item 15(a) of this Annual Report on Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/Ernst & Young LLP
Memphis, Tennessee
September 22, 2003
74
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
AUTOZONE, INC.
(In thousands)
COL. A | COL. B | COL. C | COL. D | COL. E | ||||||||||||||||||
Additions | ||||||||||||||||||||||
Balance at | Charged (Credited) | Charged to Other | Balance at | |||||||||||||||||||
Beginning of | to Costs | Accounts – | Deductions - | End of | ||||||||||||||||||
Description | Period | And Expenses | Describe (1) | Describe | Period | |||||||||||||||||
YEAR ENDED AUGUST 30, 2003: | ||||||||||||||||||||||
Reserves and allowances: | ||||||||||||||||||||||
Reserves for accrued sales and warranty returns | $ | 82,035 | $ | (25,522 | ) | $ | 116,808 | $ | 94,839 | (2) | $ | 78,482 | ||||||||||
Closed store reserves | 52,472 | 1,000 | — | 26,634 | (3) | 26,838 | (4) | |||||||||||||||
YEAR ENDED AUGUST 31, 2002: | ||||||||||||||||||||||
Reserves and allowances: | ||||||||||||||||||||||
Reserves for accrued sales and warranty returns | 63,467 | 2,978 | 109,498 | 93,908 | (2) | 82,035 | ||||||||||||||||
Closed store reserves | 66,258 | 1,000 | — | 14,786 | (3) | 52,472 | (4) | |||||||||||||||
YEAR ENDED AUGUST 25, 2001: | ||||||||||||||||||||||
Reserves and allowances: | ||||||||||||||||||||||
Reserves for accrued sales and warranty returns | 50,014 | 2,568 | 98,750 | 87,865 | (2) | 63,467 | ||||||||||||||||
Closed store reserves | 52,462 | 46,532 | — | 32,736 | (3) | 66,258 | (4) |
(1) | Amounts represent warranty allowances received from vendors. | |||
(3) | Amounts include payments for rent and common area maintenance (CAM) charges. | |||
5975
EXHIBIT INDEX
3.1 | Restated Articles of Incorporation of AutoZone, Inc. Incorporated by reference to Exhibit 3.1 to the Form 10-Q for the quarter ended February 13, 1999. | |
3.2 | Third Amended and Restated By-laws of AutoZone, Inc. Incorporated by reference to Exhibit 3.1 to the Form 8-K dated October 1, 2002. | |
4.1 | Senior Indenture, dated as of July 22, 1998, between AutoZone, Inc. and the First National Bank of Chicago. Incorporated by reference to Exhibit 4.1 to the Form 8-K dated July 17, 1998. | |
4.2 | Letter Agreement dated October 10, 2000 between AutoZone, Inc., and ESL Investments, Inc., dated October 10, 2000. Incorporated by reference to Exhibit 10.2 to Form 8-K dated October 10, 2000. | |
4.3 | ||
4.4 | Indenture dated as of August 8, 2003, between AutoZone, Inc. and Bank One Trust Company, N.A. Incorporated by reference to Exhibit 4.1 to the Form S-3 (No. 333-107828) filed August 11, 2003. | |
*10.1 | Fourth Amended and Restated Director Stock Option Plan. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended May 4, 2002. | |
*10.2 | Second Amended and Restated 1998 Director Compensation Plan. Incorporated by reference to Exhibit 10.2 to the Form 10-K for the fiscal year ended August 26, 2000. | |
*10.3 | ||
*10.4 | Form of Incentive Stock Option Agreement. Incorporated by reference to | |
*10.5 | Form of Non-qualified Stock Option Agreement. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended November | |
*10.6 | AutoZone, Inc. Amended and Restated 2000 Executive Incentive Compensation Plan. | |
*10.7 | AutoZone, Inc. Executive Deferred Compensation Plan. Incorporated by reference to Exhibit 10.3 to the Form 10-Q for the quarter ended February 12, 2000. |
*10.8 | ||
Form of Amended and Restated Employment and Non-Compete Agreement between AutoZone, Inc. and various executive officers. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended November 22, 1999. | ||
* | Form of Employment and Non-Compete Agreement between AutoZone, Inc. and various executive officers. Incorporated by reference to Exhibit 10.2 to the Form 10-Q for the quarter ended November 22, 1999. | |
* | ||
Employment and Non-Compete Agreement between Steve Odland and AutoZone, Inc., dated January 29, 2001. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended February 10, 2001. | ||
10.11 | Amended and Restated Credit Agreement dated as of May 21, 2002, among AutoZone, Inc., as borrower, the several lenders from time to time party thereto, and Fleet National Bank, as Administrative Agent and JPMorgan Chase Bank, as Syndication Agent. Incorporated by reference to Exhibit 10.4 of the Form 8-K dated October 1, 2002. |
Amendment No. 1, Consent and Waiver dated as of May 19, 2003, to Amended and Restated Credit Agreement dated as of May 21, 2002, among AutoZone, Inc., as borrower, the several lenders from time to time party thereto, and Fleet National Bank, as Administrative Agent and as Syndication Agent. | ||
10.13 | Five-Year Credit Agreement dated as of May 23, 2000, among AutoZone, Inc., as borrower, the several lenders from time to time party thereto, and Bank of America, as Administrative Agent and The Chase Manhattan Bank, as Syndication Agent. Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the quarter ended May 6, 2000. | |
10.14 | Amendment No. 1 dated May 23, 2001, to Five-Year Credit Agreement dated as of May 23, 2000, among AutoZone, Inc., as borrower, the several lenders from time to time party thereto, and Bank of America, as Administrative Agent and The Chase Manhattan Bank, as Syndication Agent. Incorporated by reference to Exhibit 10.20 to the Form 10-K for the fiscal year ended August 25, 2001. | |
10.15 | Amendment No. 2 dated August 9, 2002, to Five-Year Credit Agreement dated as of |
2
* | Form of Employment and Non-Compete Agreement between AutoZone, Inc., and various officers. Incorporated by reference to Exhibit 10.2 to the Form 10-Q for the quarter ended November 18, 2000. | |
* | AutoZone, Inc., Amended and Restated Executive Stock Purchase Plan. Incorporated by reference to Exhibit 10.20 to the Form 10-K for the fiscal year ended August 31, 2002. | |
*10.18 | AutoZone, Inc. 2003 Director Stock Option Plan. Incorporated by reference to Appendix C to the definitive proxy statement dated November 1, 2002, for the annual meeting of stockholders held December 12, 2002. | |
*10.19 | AutoZone, Inc. 2003 Director Compensation Plan. Incorporated by reference to Appendix D to the definitive proxy statement dated November 1, 2002, for the annual meeting of stockholders held December 12, 2002. | |
*10.20 | Amended and Restated AutoZone, Inc. Executive Deferred Compensation Plan. Incorporated by reference to the Form 10-Q for the quarter ended February 15, 2003. | |
12.1 | Statement re Computation of Ratio of Earnings to Fixed Charges | |
14.1 | Code of Ethics | |
21.1 | Subsidiaries of the Registrant. | |
23.1 | Consent of Ernst & Young LLP. | |
31.1 | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
3
32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Management contract or compensatory plan or arrangement. |
4
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTSAUTOZONE, INC.(In thousands)
COL. A | COL. B | COL. C | COL. D | COL. E | ||||||||||||||||||
Additions | ||||||||||||||||||||||
Balance at | Balance at | |||||||||||||||||||||
Beginning of | Charged to Costs | Charged to Other | End of | |||||||||||||||||||
Description | Period | And Expenses | Accounts – Describe | Deductions – Describe | Period | |||||||||||||||||
YEAR ENDED AUGUST 26, 2000: | ||||||||||||||||||||||
Reserves and allowances: | ||||||||||||||||||||||
Reserve for accrued sales and warranty returns | $ | 32,950 | $ | 100,381 | $ | 83,317 | (1) | $ | 50,014 | |||||||||||||
Other reserves | 94,640 | 57,585 | (2) | |||||||||||||||||||
YEAR ENDED AUGUST 25, 2001: | ||||||||||||||||||||||
Reserves and allowances: | ||||||||||||||||||||||
Reserves for accrued sales and warranty returns | 50,014 | 101,318 | 87,865 | (1) | 63,467 | |||||||||||||||||
Other reserves | 57,585 | 98,689 | (2) | |||||||||||||||||||
YEAR ENDED AUGUST 31, 2002: | ||||||||||||||||||||||
Reserves and allowances: | ||||||||||||||||||||||
Reserves for accrued sales and warranty returns | 63,467 | 112,476 | 93,908 | (1) | 82,035 | |||||||||||||||||
Other reserves | 98,689 | 67,172 | (2) |