The following pages are excerpted from AutoZone, Inc.'s Annual Report to
Stockholders for the fiscal year ended August 29, 1998.
TEN-YEAR REVIEW
(in thousands, except per share data and selected operating data)
5-Year 10-Year Fiscal Year Ended August
Compound Compound --------------------------
Growth Growth 1998 1997
--------------------------
INCOME STATEMENT DATA
Net sales........................................................... 22% 22% $3,242,922 $2,691,440
Cost of sales, including warehouse and delivery expenses............ 1,889,847 1,559,296
Operating, selling, general and administrative expenses............. 970,768 810,793
-------------------------
Operating profit.................................................... 22% 36% 382,307 321,351
Interest income (expense)........................................... (18,204) (8,843)
-------------------------
Income before income taxes.......................................... 21% 45% 364,103 312,508
Income taxes........................................................ 136,200 117,500
-------------------------
Net income.......................................................... 21% 47% $ 227,903 $ 195,008
=========================
Diluted earnings per share.......................................... 20% 44% $ 1.48 $ 1.28
=========================
Adjusted weighted average shares for diluted earnings per share..... 154,070 152,535
BALANCE SHEET DATA
Current assets...................................................... $1,117,090 $ 778,802
Working capital..................................................... 257,261 186,350
Total assets........................................................ 2,748,113 1,884,017
Current liabilities................................................. 859,829 592,452
Debt................................................................ 545,067 198,400
Stockholders' equity................................................ 1,302,057 1,075,208
SELECTED OPERATING DATA
Number of auto parts stores at beginning of year.................... 1,728 1,423
New stores...................................................... 952 308
Replacement stores.............................................. 12 17
Closed stores................................................... 23 3
Net new stores.................................................. 929 305
Number of auto parts stores at end of year.......................... 2,657 1,728
Total auto parts store square footage (000's)....................... 16,499 11,611
Percentage increase in auto parts square footage.................... 42% 23%
Percentage increase in auto parts comparable store net sales........ 2% 8%
Average net sales per auto parts store (000's)...................... $ 1,568 $ 1,691
Average net sales per auto parts store square foot.................. $ 238 $ 253
Total employment.................................................... 38,526 28,700
Gross profit - percentage of sales.................................. 41.7% 42.0%
Operating profit - percentage of sales.............................. 11.8% 11.9%
Net income - percentage of sales.................................... 7.0% 7.2%
Debt-to-capital - percentage........................................ 29.5% 15.6%
Inventory turnover.................................................. 2.3x 2.5x
Return on average equity............................................ 19% 20%
Ten-Year Review
(in thousands, except per share data and selected operating data)
Fiscal Year Ended August
--------------------------------------------------------
1996* 1995 1994 1993
--------------------------------------------------------
INCOME STATEMENT DATA
Net sales........................................................... $2,242,633 $1,808,131 $1,508,029 $1,216,793
Cost of sales, including warehouse and delivery expenses............ 1,307,638 1,057,033 886,068 731,971
Operating, selling, general and administrative expenses............. 666,061 523,440 431,219 344,060
-------------------------------------------------------
Operating profit.................................................... 268,934 227,658 190,742 140,762
Interest income (expense)........................................... (1,969) 623 2,244 2,473
-------------------------------------------------------
Income before income taxes.......................................... 266,965 228,281 192,986 143,235
Income taxes........................................................ 99,800 89,500 76,600 56,300
-------------------------------------------------------
Net income.......................................................... $ 167,165 $ 138,781 $ 116,386 $ 86,935
=======================================================
Diluted earnings per share.......................................... $ 1.11 $ 0.93 $ 0.78 $ 0.59
=======================================================
Adjusted weighted average shares for diluted earnings per share..... 151,238 149,302 148,726 147,608
BALANCE SHEET DATA
Current assets...................................................... $ 613,097 $ 447,822 $ 424,402 $ 378,467
Working capital..................................................... 219 30,273 85,373 92,331
Total assets........................................................ 1,498,397 1,111,778 882,102 696,547
Current liabilities................................................. 612,878 417,549 339,029 286,136
Debt................................................................ 94,400 13,503 4,252 4,458
Stockholders' equity................................................ 865,582 684,710 528,377 396,613
SELECTED OPERATING DATA
Number of auto parts stores at beginning of year.................... 1,143 933 783 678
New stores...................................................... 280 210 151 107
Replacement stores.............................................. 31 29 20 20
Closed stores................................................... 0 0 1 2
Net new stores.................................................. 280 210 150 105
Number of auto parts stores at end of year.......................... 1,423 1,143 933 783
Total auto parts store square footage (000's)....................... 9,437 7,480 5,949 4,839
Percentage increase in auto parts square footage.................... 26% 26% 23% 20%
Percentage increase in auto parts comparable store net sales........ 6% 6% 9% 9%
Average net sales per auto parts store (000's)...................... $ 1,702 $ 1,742 $ 1,758 $ 1,666
Average net sales per auto parts store square foot.................. $ 258 $ 269 $ 280 $ 274
Total employment.................................................... 26,800 20,200 17,400 15,700
Gross profit - percentage of sales.................................. 41.7% 41.5% 41.2% 39.8%
Operating profit - percentage of sales.............................. 12.0% 12.6% 12.6% 11.5%
Net income - percentage of sales.................................... 7.5% 7.7% 7.7% 7.1%
Debt-to-capital - percentage........................................ 9.8% 1.9% 0.8% 1.1%
Inventory turnover.................................................. 2.7x 2.9x 3.0x 3.2x
Return on average equity............................................ 22% 23% 25% 26%
Fiscal Year Ended August
-----------------------------------------------------
1992 1991* 1990 1989
-----------------------------------------------------
INCOME STATEMENT DATA
Net sales........................................................... $1,002,327 $817,962 $671,725 $535,843
Cost of sales, including warehouse and delivery expenses............ 602,956 491,261 416,846 341,130
Operating, selling, general and administrative expenses............. 295,701 247,355 205,609 169,786
-----------------------------------------------------
Operating profit.................................................... 103,670 79,346 49,270 24,927
Interest income (expense)........................................... 818 (7,295) (10,936) (9,799)
-----------------------------------------------------
Income before income taxes.......................................... 104,488 72,051 38,334 15,128
Income taxes........................................................ 41,200 27,900 14,840 6,200
-----------------------------------------------------
Net income.......................................................... $ 63,288 $ 44,151 $ 23,494 $ 8,928
=====================================================
Diluted earnings per share.......................................... $ 0.43 $ 0.33 $ 0.19 $ 0.07
=====================================================
Adjusted weighted average shares for diluted earnings per share..... 145,940 134,656 121,212 119,320
BALANCE SHEET DATA
Current assets...................................................... $ 279,350 $233,439 $191,736 $177,824
Working capital..................................................... 72,270 55,807 26,803 35,831
Total assets........................................................ 501,048 397,776 327,368 296,546
Current liabilities................................................. 207,080 177,632 164,933 141,993
Debt................................................................ 7,057 7,246 74,851 93,293
Stockholders' equity................................................ 278,120 204,628 80,356 54,592
SELECTED OPERATING DATA
Number of auto parts stores at beginning of year.................... 598 538 504 440
New stores...................................................... 82 60 38 70
Replacement stores.............................................. 14 4 7 7
Closed stores................................................... 2 0 4 6
Net new stores.................................................. 80 60 34 64
Number of auto parts stores at end of year.......................... 678 598 538 504
Total auto parts store square footage (000's)....................... 4,043 3,458 3,031 2,758
Percentage increase in auto parts square footage.................... 17% 14% 10% 19%
Percentage increase in auto parts comparable store net sales........ 15% 12% 13% 10%
Average net sales per auto parts store (000's)...................... $ 1,570 $ 1,408 $ 1,289 $ 1,135
Average net sales per auto parts store square foot.................. $ 267 $ 246 $ 232 $ 211
Total employment.................................................... 13,200 11,700 9,300 7,900
Gross profit - percentage of sales.................................. 39.8% 39.9% 37.9% 36.6%
Operating profit - percentage of sales.............................. 10.3% 9.7% 7.3% 4.6%
Net income - percentage of sales.................................... 6.3% 5.4% 3.5% 1.7%
Debt-to-capital - percentage........................................ 2.5% 3.4% 48.2% 63.1%
Inventory turnover.................................................. 3.0x 2.6x 2.4x 2.4x
Return on average equity............................................ 26% 31% 35% 18%
Fiscal Year
Ended August
---------
1988
---------
INCOME STATEMENT DATA
Net sales........................................................... $437,399
Cost of sales, including warehouse and delivery expenses............ 277,043
Operating, selling, general and administrative expenses............. 142,868
--------
Operating profit.................................................... 17,488
Interest income (expense)........................................... (8,826)
--------
Income before income taxes.......................................... 8,662
Income taxes........................................................ 3,770
--------
Net income.......................................................... $ 4,892
========
Diluted earnings per share.......................................... $ 0.04
========
Adjusted weighted average shares for diluted earnings per share..... 119,936
BALANCE SHEET DATA
Current assets...................................................... $137,098
Working capital..................................................... 35,226
Total assets........................................................ 232,977
Current liabilities................................................. 101,872
Debt................................................................ 77,138
Stockholders' equity................................................ 45,608
SELECTED OPERATING DATA
Number of auto parts stores at beginning of year.................... 396
New stores...................................................... 47
Replacement stores.............................................. 1
Closed stores................................................... 3
Net new stores.................................................. 44
Number of auto parts store at end of year........................... 440
Total auto parts store square footage (000's)...................... 2,318
Percentage increase in auto parts square footage.................... 14%
Percentage increase in auto parts comparable store net sales........ 6%
Average net sales per auto parts store (000's)...................... $ 1,046
Average net sales per auto parts store square foot.................. $ 201
Total employment.................................................... 7,100
Gross profit - percentage of sales.................................. 36.6%
Operating profit - percentage of sales.............................. 4.0%
Net income - percentage of sales.................................... 1.1%
Debt-to-capital - percentage........................................ 62.8%
Inventory turnover.................................................. 2.3x
Return on average equity............................................ 11%
* 53 weeks. Comparable store sales, average net sales per store and average
net sales per store square foot for fiscal year 1996 and 1991 have been
adjusted to exclude net sales for the 53rd week.
QUARTERLY SUMMARY
(Unaudited)
Sixteen
Twelve Weeks Ended Weeks Ended
----------------------------------------------------------------------------------
(in thousands, except per share data)
November 22, February 14, May 9, August 29,
1997 1998 1998 1998
----------------------------------------------------------------------------------
Net sales ..................................... $675,274 $607,097 $743,661 $1,216,890
Increase in comparable store sales ............ 7% 2% 2% 0%
Gross profit .................................. $280,441 $253,681 $311,080 $ 507,873
Operating profit .............................. 78,648 58,082 90,457 155,120
Income before income taxes .................... 76,146 55,054 86,240 146,663
Net income .................................... 47,546 34,354 53,940 92,063
Basic earnings per share ...................... 0.31 0.23 0.35 0.60
Diluted earnings per share .................... 0.31 0.22 0.35 0.60
Stock price range:
High ....................................... $ 32.75 $ 32.06 $ 36.25 $ 38.00
Low ........................................ $ 27.00 $ 23.75 $ 29.00 $ 26.63
November 23, February 15, May, 10 August 30,
1996 1997 1997 1997
----------------------------------------------------------------------------------
Net sales ..................................... $569,145 $538,012 $637,895 $ 946,388
Increase in comparable store sales ............ 7% 10% 7% 8%
Gross profit .................................. $240,298 $226,956 $268,975 $ 395,915
Operating profit .............................. 61,898 49,217 76,775 133,461
Income before income taxes .................... 60,725 47,107 74,103 130,573
Net income .................................... 37,975 29,407 46,103 81,523
Basic earnings per share ...................... 0.25 0.20 0.31 0.54
Diluted earnings per share .................... 0.25 0.19 0.30 0.53
Stock price range:
High ....................................... $ 30.63 $ 27.50 $ 26.13 $ 29.50
Low ........................................ $ 24.50 $ 20.13 $ 22.25 $ 22.25
Financial Review
The following table sets forth income statement data of AutoZone expressed
as a percentage of net sales for the periods indicated:
Fiscal Year Ended
--------------------------------------
August 29, August 30, August 31,
1998 1997 1996
--------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales, including warehouse
and delivery expenses 58.3 58.0 58.3
--------------------------------------
Gross profit 41.7 42.0 41.7
Operating, selling, general
and administrative expenses 29.9 30.1 29.7
--------------------------------------
Operating profit 11.8 11.9 12.0
Interest expense - net 0.6 0.3 0.1
Income taxes 4.2 4.4 4.4
--------------------------------------
Net income 7.0% 7.2% 7.5%
======================================
RESULTS OF OPERATIONS
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
Financial Review should be read in conjunction with the consolidated financial
statements presented in this annual report.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 increased by $551.5 million or 20.5% over net
sales for fiscal 1997. This increase was due to a comparable store net sales
increase of 2% (which was primarily due to sales growth in the Company's newer
auto parts stores and the added sales of the Company's commercial program) and
an increase in net sales of $485.7 million for stores opened or acquired since
the beginning of fiscal 1997. At August 29, 1998, the Company had 2,657 auto
parts stores in operation, a net increase of 929 stores, including the
acquisition of 112 and 560 auto parts stores acquired in February and June 1998
respectively.
Gross profit for fiscal 1998 was $1,353.1 million, or 41.7% of net sales,
compared with $1,132.1 million, or 42.0% of net sales, for fiscal 1997. The
decrease in gross profit percentage was due primarily to lower commodities
gross margins coupled with lower gross margins in certain recently acquired
stores.
Operating, selling, general and administrative expenses for fiscal 1998
increased by $160.0 million over such expenses for fiscal 1997 and decreased as
a percentage of net sales from 30.1% to 29.9%. The decrease in the expense
ratio was primarily due to commercial expense leverage and additional
cooperative advertising funds received from vendors partially offset by higher
occupancy costs primarily in recently acquired stores.
Net interest expense for fiscal 1998 was $18.2 million compared with $8.8
million for fiscal 1997. The increase in interest expense was primarily due to
higher levels of borrowings as a result of the acquisitions.
AutoZone's effective income tax rate was 37.4% of pre-tax income for
fiscal 1998 and 37.6% for fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 increased by $448.8 million or 20.0% over net
sales for fiscal 1996. This increase was due to a comparable store net sales
increase of 8% (which was primarily due to sales growth in the Company's newer
stores and the added sales of the Company's commercial program) and an increase
in net sales of $313.1 million for stores opened since the beginning of fiscal
1996, offset by net sales for the 53rd week of fiscal 1996. At August 30, 1997,
the Company had 1,728 stores in operation, a net increase of 305 stores, or
approximately 23% in new store square footage for the year.
Gross profit for fiscal 1997 was $1,132.1 million, or 42.0% of net sales,
compared with $935.0 million, or 41.7% of net sales, for fiscal 1996. The
increase in gross profit percentage was due primarily to improved leveraging of
warehouse and delivery expenses.
Operating, selling, general and administrative expenses for fiscal 1997
increased by $144.7 million over such expenses for fiscal 1996 and increased as
a percentage of net sales from 29.7% to 30.1%. The increase in the expense
ratio
was primarily due to operating costs of ALLDATA and to costs of the Company's
commercial program.
Net interest expense for fiscal 1997 was $8.8 million compared with $2.0
million for fiscal 1996. The increase in interest expense was primarily due to
higher levels of borrowings.
AutoZone's effective income tax rate was 37.6% of pre-tax income for
fiscal 1997 and 37.4% for fiscal 1996.
FINANCIAL MARKET RISK
Financial market risks relating to the Company's operations result
primarily from changes in interest rates. The Company enters into interest rate
swaps to minimize the risk associated with its financing activities. The swap
agreements are contracts to exchange fixed or variable rates for floating
interest rate payments periodically over the life of the instruments.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements have been the funding of its
continued new store expansion program, inventory requirements and more
recently, acquisitions. The Company has opened or acquired 1,874 net new auto
parts stores and constructed four new distribution centers from the beginning of
fiscal 1994 to August 29, 1998. Cash flow generated from store operations
provides the Company with a significant source of liquidity. Net cash provided
by operating activities was $366.8 million in fiscal 1998, $177.6 million in
fiscal 1997, and $174.9 million in fiscal 1996. The significant increase in net
cash provided by operating activities in fiscal 1998 is due primarily to
improved inventory turnover, excluding acquisitions, coupled with favorable
payment terms.
In fiscal 1998, the Company invested $337.2 million in capital assets and
had a net cash outlay of $365.5 million for acquisitions including the
retirement of the acquired companies' debt. Acquisitions included Chief Auto
Parts, with stores primarily in California, Auto Palace, with stores primarily
in the Northeast, and a truck parts chain, TruckPro. Capital expenditures were
$337.2 million in fiscal 1998, $295.4 million in fiscal 1997, and $280.2
million in fiscal 1996. The Company opened or acquired 929 net new auto parts
stores and 43 truck parts stores in fiscal 1998. Construction commitments
totaled approximately $76 million at August 29, 1998.
The Company's new store development program requires significant working
capital, principally for inventories. Historically, the Company has negotiated
extended payment terms from suppliers, minimizing the working capital required
by its expansion. The Company believes that it will be able to continue
financing much of its inventory growth by favorable payment terms from
suppliers, but there can be no assurance that the Company will be successful in
obtaining such terms.
In July 1998, the Company sold $200 million of 6.5% Debentures due July
15, 2008 at a discount. Interest on the Debentures is payable semi-annually on
January 15 and July 15 of each year, beginning January 15, 1999. The Debentures
may be redeemed at any time at the option of the Company. Proceeds were used to
repay portions of the Company's long-term variable rate bank debt and for
general corporate purposes.
The Company has a commercial paper program that allows borrowing up to
$500 million. As of August 29, 1998, there were borrowings of $305 million
outstanding under the program. In connection with the program, the Company has
a credit facility with a group of banks for up to $350 million and a 364-day
$150 million credit facility with another group of banks. Borrowings under the
commercial paper program reduce availability under the credit facilities. As of
August 29, 1998, the Company had $34 million outstanding under the $350 million
credit facility which expires in December 2001. There were no amounts
outstanding under the $150 million credit facility at August 29,1998. Both of
the revolving credit facilities contain a covenant limiting the amount of debt
the Company may incur relative to its total capitalization.
In fiscal 1998, the Company announced plans to repurchase up to $100
million of the Company's common stock in the open market. Under this plan, in
fiscal 1998 the Company repurchased nearly one million shares of its common
stock for $28.7 million.
Subsequent to year end, the Company announced an agreement to acquire real
estate and real estate leases for approximately 100 Express auto parts stores
from Pep Boys for approximately $108 million. If consummated, the transaction
would not have a material impact on the fiscal 1999 financial position or
consolidated operating results.
The Company anticipates that it will rely primarily on internally
generated funds to support a majority of its capital expenditures, working
capital requirements, and treasury stock repurchases. The balance will be funded
through borrowings. The Company anticipates no difficulty in obtaining such
long-term financing in view of its credit rating and favorable experiences in
the debt market in the past. In addition to the available credit lines mentioned
above, the Company may sell up to $200 million of public debt under shelf
registration statements filed with the Securities and Exchange Commission.
YEAR 200 CONVERSION
The Company began addressing the Year 2000 issue in June 1996 and
implemented a formal Year 2000 project office in May 1997. As of August 29,
1998, the Company had completed over half of its conversion efforts. The
Company anticipates completing the conversion and testing of all known remaining
programs by July 31, 1999.
The total estimated cost of the Year 2000 project is $12 million, which is
being expensed as incurred. As of August 29, 1998, approximately $3 million of
the $12 million cost of conversion had been incurred. All of the related costs
are being funded through operating cash flows. These costs are an immaterial
part of the overall information technology budget. No major information
technology projects or programs have been deferred.
In addition to internal system activities, the Company is addressing Year
2000 issues which do not normally fall under information technology such as
embedded chip equipment and the compliance status of business partners.
Although the Company believes that the ongoing assessment and testing will
minimize the Company's risks, there is no guarantee that there will not be an
adverse effect on the Company if third parties, such as merchandise vendors,
service providers, or utility companies are not Year 2000 compliant.
Although the Company does not anticipate any major business disruptions as
a result of Year 2000 issues, it is possible that certain disruptions may occur
including loss of communications with stores, distribution centers, or business
partners; inability to process transactions in a timely manner or loss of
power. The Company is currently developing contingency plans which should be
finalized by July 31, 1999. Elements of the Company's contingency plans may
include: switching vendors, back-up systems or manual processes, and the
stockpiling of certain products prior to the Year 2000.
The cost of conversion and the completion date are based on management's
best estimates and may be updated as additional information becomes available.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," and No. 131, "Disclosures about Segments of an
Enterprise and Related Information." In February 1998, the FASB issued SFAS No.
132, "Employers' Disclosure about Pensions and Other Postretirement Benefits."
All statements are effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company plans to adopt all three
statements in the 1999 fiscal year.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. Adoption of this statement will have
no impact on the Company's consolidated financial position or results of
operations.
SFAS No. 131 revises existing guidelines about the level of financial
disclosure of a Company's operations by requiring inclusion of selected
information about operating segments in financial statements. The adoption of
this statement requires only additional reporting and will not have an impact
on the Company's reported results.
SFAS No. 132 establishes standards for the reporting of information about
pensions and other postretirement benefits. Adoption of this statement will not
materially change the Company's current reporting of pension and other
postretirement benefits.
INFLATION
The Company does not believe its operations have been materially affected
by inflation. The Company has been successful, in many cases, in mitigating the
effects of merchandise cost increases principally due to economies of scale
resulting from increased volumes of purchases, selective forward buying and the
use of alternative suppliers.
SEASONALITY AND QUARTERLY PERIODS
The Company'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 store sales historically have been about 20% to 30% higher than in
the slowest months of December through February. The Company's business is also
affected by weather conditions. Extremely hot or extremely cold weather tends
to 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.
Each of the first three quarters of AutoZone's fiscal year consists of
twelve weeks and the fourth quarter consists of sixteen weeks. Because the
fourth quarter contains the seasonally high sales volume and consists of
sixteen weeks, compared to twelve weeks for each of the first three quarters,
the Company's fourth quarter represents a disproportionate share of the annual
net sales and net income. The fourth quarter of fiscal 1998 represented 37.5% of
annual net sales and 40.4% of net income; the fourth quarter of fiscal 1997
represented 35.2% of annual net sales and 41.8% of net income.
FORWARD LOOKING STATEMENTS
Certain statements contained in the Financial Review and elsewhere in this
annual report are forward-looking statements. These statements discuss, among
other things, expected growth, domestic and international development and
expansion strategy, business strategies, future revenues and future
performance. The forward-looking statements are subject to risks, uncertainties
and assumptions including, but not limited to competition, product demand,
domestic and international economies, government approvals and regulations, the
ability to hire and retain qualified employees, the ability to convert acquired
stores in a timely and profitable manner, inflation and the weather. Actual
results may materially differ from anticipated results.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
--------------------------------------------
August 29, August 30, August 31,
1998 1997 1996
(52 Weeks) (52 Weeks) (53 Weeks)
--------------------------------------------
(in thousands, except per share data)
Net sales $3,242,922 $2,691,440 $2,242,633
Cost of sales, including warehouse and delivery expenses 1,889,847 1,559,296 1,307,638
Operating, selling, general and administrative expenses 970,768 810,793 666,061
- - ---------------------------------------------------------------------------------------------------------------
Operating profit 382,307 321,351 268,934
Interest expense - net 18,204 8,843 1,969
- - ---------------------------------------------------------------------------------------------------------------
Income before income taxes 364,103 312,508 266,965
Income taxes 136,200 117,500 99,800
- - ---------------------------------------------------------------------------------------------------------------
Net income $ 227,903 $ 195,008 $ 167,165
- - ---------------------------------------------------------------------------------------------------------------
Weighted average shares for basic earnings per share 152,160 150,726 148,476
Effect of dilutive stock options 1,910 1,809 2,762
- - ---------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares for diluted earnings per share 154,070 152,535 151,238
- - ---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.50 $ 1.29 $ 1.13
- - ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.48 $ 1.28 $ 1.11
- - ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
August 29, August 30,
1998 1997
-------------------------------------
(in thousands, except per share data)
ASSETS Current assets:
Cash and cash equivalents $ 6,631 $ 4,668
Accounts receivable 42,252 18,713
Merchandise inventories 966,560 709,446
Prepaid expenses 37,532 20,987
Deferred income taxes 61,964 24,988
Income taxes receivable 2,151
-------------------------------------------------------------------------------------------------
Total current assets 1,117,090 778,802
Property and equipment:
Land 320,203 243,587
Buildings and improvements 851,083 682,710
Equipment 374,465 267,536
Leasehold improvements and interests 82,273 45,667
Construction in progress 150,461 97,411
-------------------------------------------------------------------------------------------------
1,778,485 1,336,911
Less accumulated depreciation and amortization 350,979 255,783
-------------------------------------------------------------------------------------------------
1,427,506 1,081,128
Other assets:
Cost in excess of net assets acquired, net of accumulated
amortization of $9,096 in 1998 and $8,084 in 1997 181,315 16,570
Deferred income taxes 3,510 4,339
Other assets 18,692 3,178
-------------------------------------------------------------------------------------------------
203,517 24,087
-------------------------------------------------------------------------------------------------
$2,748,113 $1,884,017
-------------------------------------------------------------------------------------------------
LIABILITIES AND Current liabilities:
STOCKHOLDERS' Accounts payable $ 683,372 $ 449,793
EQUITY Accrued expenses 176,457 122,580
Income taxes payable 20,079
-------------------------------------------------------------------------------------------------
Total current liabilities 859,829 592,452
Long-term debt 545,067 198,400
Other liabilities 41,160 17,957
Commitments and contingencies (See notes G and H)
Stockholders' equity:
Preferred Stock, authorized 1,000 shares; no shares issued
Common Stock, par value $.01 per share, authorized 200,000 shares;
153,039 shares issued and 152,086 shares outstanding in 1998 and
151,313 issued and outstanding shares in 1997 1,530 1,513
Additional paid-in-capital 277,528 249,853
Retained earnings 1,051,745 823,842
Treasury stock, at cost (28,746)
-------------------------------------------------------------------------------------------------
Total stockholders' equity 1,302,057 1,075,208
-------------------------------------------------------------------------------------------------
$2,748,113 $1,884,017
-------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-------------------------------------
August 29, August 30, August 31,
1998 1997 1996
(52 Weeks) (52 Weeks) (53 Weeks)
-------------------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 227,903 $ 195,008 $ 167,165
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 95,464 77,163 62,919
Amortization of intangible and other assets 1,135 658 622
Deferred income tax expense (benefit) 20,241 (7,781) 6,082
Net increase in accounts receivable and prepaid expenses (15,260) (5,009) (7,564)
Net increase in merchandise inventories (47,285) (153,552) (158,673)
Net increase in accounts payable and accrued expenses 127,683 66,155 94,916
Net change in income taxes payable and receivable (22,230) 7,819 6,493
Net change in other assets and liabilities (20,813) (2,898) 2,930
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 366,838 177,563 174,890
Cash flows from investing activities:
Acquisitions (100,031)
Capital expenditures (337,202) (295,417) (280,237)
---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (437,233) (295,417) (280,237)
Cash flows from financing activities:
Repayment of acquired companies' debt (265,429)
Increase in commercial paper 305,000
Proceeds from debentures 197,751
Net increase (decrease) in revolver (164,350) 104,000 84,900
Repayment of long-term debt (4,003)
Net proceeds from sale of Common Stock, including related tax benefit 27,692 14,618 17,699
Purchase of Treasury Stock (28,746)
Other 173
---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 72,091 118,618 98,596
- - ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,696 764 (6,751)
Cash and cash equivalents at beginning of year 4,668 3,904 6,411
Cash provided by acquisitions/mergers 267 4,244
- - ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,631 $ 4,668 $ 3,904
- - ---------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid, net of interest cost capitalized $ 17,042 $ 8,779 $ 1,971
Income taxes paid $ 122,529 $ 109,681 $ 69,791
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
----------------------------------------------------------------------------
(in thousands)
Balance at August 26, 1995 $1,471 $196,625 $ 486,614 $ -- $ 684,710
Net income 167,165 167,165
Equity of pooled entity (issued 1,697 shares) 17 20,936 (24,945) (3,992)
Sale of 1,386 shares of Common Stock under stock
option and stock purchase plans 13 6,836 6,849
Tax benefit of exercise of stock options 10,850 10,850
----------------------------------------------------------------------------
Balance at August 31, 1996 1,501 235,247 628,834 865,582
Net income 195,008 195,008
Sale of 1,176 shares of Common Stock under stock
option and stock purchase plans 12 7,676 7,688
Tax benefit of exercise of stock options 6,930 6,930
----------------------------------------------------------------------------
Balance at August 30, 1997 1,513 249,853 823,842 1,075,208
Net income 227,903 227,903
Sale of 1,726 shares of Common Stock under stock
option and stock purchase plans 17 11,475 11,492
Tax benefit of exercise of stock options 16,200 16,200
Purchase of 953 shares of Treasury Stock (28,746) (28,746)
----------------------------------------------------------------------------
Balance at August 29, 1998 $1,530 $277,528 $ 1,051,745 $ (28,746) $ 1,302,057
----------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Accounting Policies
Business: The Company is principally a specialty retailer of automotive
parts and accessories. At the end of fiscal 1998, the Company operated 2,657
auto parts stores in 38 states. In addition, the Company sells heavy duty truck
parts and accessories through its 43 TruckPro stores in 14 states and
automotive diagnostic and repair information software through its ALLDATA
subsidiary.
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 owned subsidiaries (the Company). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Merchandise Inventories: Inventories are stated at the lower of cost or
market using the last-in, first-out (LIFO) method.
Property and Equipment: Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Leasehold interests and improvements are
amortized over the terms of the leases.
Amortization: The cost in excess of net assets acquired is amortized by
the straight-line method over 40 years.
Preopening Expenses: Preopening expenses, which consist primarily of
payroll and occupancy costs, are expensed as incurred.
Advertising Costs: The Company expenses advertising costs as incurred.
Advertising expense, net of vendor rebates, was approximately $30,109,000 in
fiscal 1998, $27,271,000 in fiscal 1997 and $25,442,000 in fiscal 1996.
Warranty Costs: The Company provides the retail consumer with a warranty
on certain products. Estimated warranty obligations are provided at the time of
sale of the product.
Financial Instruments: The Company has certain financial instruments which
include cash, accounts receivable and accounts payable. The carrying amounts of
these financial instruments approximate fair value because of their short
maturities or variable interest rates. The Company uses derivative financial
instruments for purposes other than trading to minimize the risk associated
with financing activities. Settlements of interest rate swaps are accounted for
by recording the net interest received or paid as an adjustment to interest
expense on a current basis. Gains or losses resulting from market movements
are not recognized. Contracts that effectively meet risk reduction and
correlation criteria are recorded using hedge accounting. Hedges of anticipated
transactions are deferred and recognized when the hedged transaction occurs.
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 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.
Cash Equivalents: Cash equivalents consist of investments with maturities
of 90 days or less at the date of purchase.
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 in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Net Income Per Share: In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 replaces primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effect of options. Diluted earnings per share
is based on the weighted average outstanding shares reduced by the effect of
stock options. All earnings per share amounts for all periods presented have
been restated to conform with SFAS No. 128 requirements.
Reclassifications: Certain prior year amounts have been reclassified to
conform to current year presentation.
Impairment of Long-Lived Assets: The Company complies with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Also, in general, long-
lived assets and certain identifiable intangibles to be disposed of should be
reported at the lower of carrying amount or fair value less cost to sell.
Comprehensive Income: In June 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for interim and annual periods beginning after December 15,
1997, although earlier adoption is permitted. This statement establishes
standards for reporting and display of comprehensive income and its components.
This statement requires only additional reporting, therefore its adoption in
fiscal 1999 will have no effect on the Company's results of operations or
financial position.
Disclosures about Segments of an Enterprise and Related Information: In
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Statement No. 131 revises existing
guidelines for financial disclosure of a Company's operations and is effective
for fiscal years beginning after December 15, 1997, although earlier
application is permitted. The adoption of this statement requires only
additional reporting and will not have any effect on the Company's consolidated
financial position or results of operations. The Company will adopt this
statement in fiscal 1999.
Pensions and Other Postretirement Benefits: In February 1998, the FASB
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." Although earlier adoption is permitted, this
statement is effective for periods beginning after December 15, 1997. SFAS No.
132 establishes new standards for the reporting of information about pension and
other postretirement benefits. Adoption of SFAS No. 132 should not result in
any significant changes in the Company's presentation of pension and other
postretirement benefits. The Company will adopt SFAS No. 132 in fiscal 1999.
Note B - Accrued Expenses
Accrued expenses consist of the following:
August 29, August 30,
1998 1997
-------------------------
(in thousands)
Medical and casualty
insurance claims $ 40,640 $ 35,121
Accrued compensation
and related payroll taxes 37,684 26,481
Property and sales taxes 38,506 27,161
Other 59,627 33,817
-------------------------
$176,457 $122,580
=========================
Note C - Income Taxes
At August 29, 1998, the Company has net operating loss carryforwards
(NOLs) of approximately $60 million that expire in years 2000 through 2018.
These carryforwards resulted from the Company's acquisition of ALLDATA
Corporation during fiscal 1996 and Chief Auto Parts Inc. and ADAP, Inc. (which
had been doing business as "Auto Palace") in fiscal 1998. The use of the NOLs is
limited to future taxable earnings of these companies and is subject to annual
limitations. A valuation allowance of $15,902,000 in fiscal 1998 and $5,247,000
in fiscal 1997 relates to those carryforwards.
The provision for income tax expense (benefit) consists of the following:
Year Ended
---------------------------------------
August 29, August 30, August 31,
1998 1997 1996
---------------------------------------
(in thousands)
Current:
Federal $103,810 $114,113 $86,469
State 12,149 11,168 7,249
---------------------------------------
115,959 125,281 93,718
Deferred:
Federal 19,665 (6,427) 5,531
State 576 (1,354) 551
---------------------------------------
20,241 (7,781) 6,082
---------------------------------------
$136,200 $117,500 $99,800
=======================================
Significant components of the Company's deferred tax assets and
liabilities are as follows:
August 29, August 30,
1998 1997
-----------------------
(in thousands)
Deferred tax assets:
Net operating loss and credit carryforwards $26,303 $ 5,247
Insurance reserves 13,847 12,078
Warranty reserves 7,778 7,171
Deferred lease expense 6,694
Accrued vacation 4,387 2,537
Other 29,690 9,823
-----------------------
88,699 36,856
Less valuation allowance 15,902 5,247
-----------------------
72,797 31,609
=======================
Deferred tax liabilities:
Property and equipment 4,104
Accrued property taxes 3,219 2,282
-----------------------
7,323 2,282
-----------------------
Net deferred tax assets $65,474 $29,327
=======================
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
is as follows:
Year Ended
--------------------------------------
August 29, August 30, August 31,
1998 1997 1996
--------------------------------------
(in thousands)
Expected tax at statutory rate $127,436 $109,378 $93,438
State income taxes, net 8,271 6,379 5,070
Other 493 1,743 1,292
--------------------------------------
$136,200 $117,500 $99,800
======================================
Note D - Financing Arrangements
The Company's long-term debt at the end of fiscal 1998 and 1997 consisted
of the following:
August 29, August 30,
1998 1997
-------------------------
(in thousands)
6.5% Debentures due July 15, 2008; redeemable
at any time at the option of the Company $200,000 $
Commercial paper, 5.7% weighted average rate 305,000
Unsecured bank loan, floating interest rate
averaging 5.8% at August 29, 1998 and
August 30, 1997; payable in December 2001 34,050 198,400
Other 6,017
-------------------------
Total long term debt $545,067 $198,400
=========================
In July 1998, the Company sold $200 million of 6.5% Debentures due July
15, 2008 at a discount. Interest on the Debentures is payable semi-annually on
January 15 and July 15 of each year, beginning January 15, 1999. Proceeds were
used to repay portions of the Company's long-term variable rate bank debt and
for general corporate purposes.
The Company has a commercial paper program that allows borrowing up to
$500 million. As of August 29, 1998, there were borrowings of $305 million
outstanding under the program. In connection with the program, the Company has
a credit facility with a group of banks for up to $350 million and a 364-day
$150 million credit facility with another group of banks. Borrowings under the
commercial paper program reduce availability under the credit facilities. There
were no amounts outstanding under the $150 million credit facility at August
29, 1998. Outstanding commercial paper and revolver borrowings at August 29,
1998 are classified as long-term debt as it is the Company's intention to
refinance them on a long-term basis.
The rate of interest payable under the revolving credit agreements is a
function of the London Interbank Offered Rate (LIBOR) or the lending bank's
base rate (as defined in the agreement) at the option of the Company. In
addition, the $350 million credit facility contains a competitive bid rate
option. Both of the revolving credit facilities contain a covenant limiting the
amount of debt the Company may incur relative to its total capitalization. These
facilities are available to support domestic commercial paper borrowings and to
meet cash requirements.
Maturities of long-term debt are $339 million for fiscal 2002 and $206
million thereafter.
Interest costs of $2,280,000 in fiscal 1998, $2,119,000 in fiscal 1997,
and $2,416,000 in fiscal 1996 were capitalized.
The estimated fair value of the 6.5% Debentures, which are publicly
traded, was approximately $199 million based on the market price at August 29,
1998. The estimated fair values of all other long-term borrowings approximates
their carrying value primarily because of their variable interest rates.
Note E - Employee Stock Plans
The Company has granted options to purchase common stock to certain
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 generally
exercisable over a three to seven year period, and generally expire in 10 years
after the grant. A summary of outstanding stock options is as follows:
Wtd. Avg. Number
Exercise Price of Shares
---------------------------
Outstanding August 26, 1995 $14.77 9,503,981
Assumed 4.46 221,841
Granted 28.50 1,621,395
Exercised 4.55 (1,332,588)
Canceled 24.38 (254,873)
---------------------------
Outstanding August 31, 1996 17.96 9,759,756
Granted 22.69 2,707,370
Exercised 4.93 (1,032,989)
Canceled 25.54 (834,883)
---------------------------
Outstanding August 30, 1997 19.84 10,599,254
Granted 31.13 1,692,272
Exercised 7.39 (1,738,882)
Canceled 25.40 (795,780)
---------------------------
Outstanding August 29, 1998 $23.56 9,756,864
===========================
The following table summarizes information about stock options outstanding
at August 29, 1998:
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
- - -----------------------------------------------------------------------------
$ 1.00 - 9.17 1,053,319 $ 4.47 2.44 1,044,403 $ 4.47
14.31 - 22.69 1,454,961 18.96 7.48 294,961 14.31
22.88 - 25.13 2,325,478 24.70 7.22 117,203 25.13
25.25 - 27.25 2,130,191 25.92 6.11 380,943 25.31
27.38 - 35.13 2,792,915 30.40 8.58 105,000 28.30
- - -----------------------------------------------------------------------------
$ 1.00 - 35.13 9,756,864 $23.56 6.89 1,942,510 $12.59
=============================================================================
Options to purchase 1,942,510 shares at August 29, 1998, and 2,619,363
shares at August 30, 1997, were exercisable. Shares reserved for future grants
were 2,699,468 shares at August 29, 1998, and 4,199,055 at August 30, 1997.
Pro forma information is required by SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with the provisions of SFAS No. 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 No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below. The
effects of applying SFAS No. 123 and the results obtained through the use of
the Black-Scholes option pricing model in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
fiscal 1996. Additional awards in future years are anticipated.
Year Ended
----------------------------------
August 29, August 30, August 31,
1998 1997 1996
Net Income ----------------------------------
($000) As reported $227,903 $195,008 $167,165
Pro forma $221,803 $191,118 $165,992
Basic Earnings
per share As reported $1.50 $1.29 $1.13
Pro forma $1.46 $1.27 $1.12
Diluted Earnings
per share As reported $1.48 $1.28 $1.11
Pro forma $1.44 $1.26 $1.10
The weighted-average fair value of the stock options granted during fiscal 1998
was $12.17, during fiscal 1997 was $9.26 and during fiscal 1996 was $12.25. 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 1998, 1997 and 1996: expected price volatility of
.34; risk-free interest rates ranging from 4.56 to 5.98 percent; and expected
lives between 3.75 and 8.0 years.
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 regular payroll deductions. Annual purchases are
limited to $4,000 per employee. Under the plan, 232,389 shares were sold in
fiscal 1998 and 308,141 shares were sold in fiscal 1997. The Company
re-purchased 275,526 shares in fiscal 1998 and 168,362 shares in fiscal 1997
for sale under the plan. A total of 1,567,611 shares of Common Stock is reserved
for future issuance under this plan.
During fiscal 1998, the Company adopted the 1998 Directors Stock Option
Plan. Under the stock option plan, each non-employee director was automatically
granted an option to purchase 1,000 shares of common stock on the plan's
adoption date. Each non-employee director will receive additional options to
purchase 1,000 shares of common stock on January 1 of each year. In addition,
so 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 1,000 shares as of December 31 of
each year.
In March 1998, the Company adopted the Directors Compensation Plan. Under
this 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 may be deferred in units with value
equivalent to the value of shares of common stock as of the grant date ("stock
appreciation rights").
Note F - 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.
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 plan's funded status and amounts
recognized in the Company's financial statements (in thousands):
August 29, August 30,
1998 1997
-------------------------
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$36,338 in 1998 and $22,005 in 1997 $43,600 $26,886
=========================
Projected benefit obligation
for service rendered to date $53,971 $42,687
Less plan assets at fair value, primarily stocks
and cash equivalents 54,565 39,598
-------------------------
Projected benefit obligation in excess of
(less than) plan assets (594) 3,089
Unrecognized prior service cost 5,934 (289)
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions (9,282) (3,721)
Unrecognized net asset 118
-------------------------
Accrued pension cost $(3,942) $ (803)
=========================
Net pension cost included the following components (in thousands):
Year Ended
---------------------------------
August 29, August 30, August 31,
1998 1997 1996
---------------------------------
Service cost of benefits earned
during the year $7,001 $6,034 $4,580
Interest cost on projected benefit
obligation 3,047 2,496 1,748
Actual return on plan assets (7,241) (5,616) (3,677)
Net amortization and deferral 2,741 2,820 2,518
---------------------------------
Net periodic pension cost $5,548 $5,734 $5,169
=================================
The actuarial present value of the projected benefit obligation was
determined using weighted-average discount rates of 6.93% and 7.94% at August
29, 1998 and August 30, 1997, respectively. The assumed increases in future
compensation levels were generally 5-10% based on age in fiscal 1998 and 6% in
fiscal 1997 and 1996. The expected long-term rate of return on plan assets was
9.5%, 9.5% and 7% at August 29, 1998, August 30, 1997 and August 31, 1996,
respectively. Prior service cost is amortized over the estimated average
remaining service lives of the plan participants, and the unrecognized net
experience gain or loss is amortized over five years.
During fiscal 1998, the Company established a defined contribution plan
("401(k)") pursuant to Section 401(k) of the Internal Revenue Code. The 401(k)
covers substantially all employees that meet certain service requirements. The
Company makes matching contributions, on an annual basis, up to specified
percentages of employees' contributions as approved by the Board of Directors.
Note G - Leases
A portion of the Company's retail stores and certain 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 $56,410,000 for fiscal 1998, $39,078,000 for fiscal
1997 and $30,626,000 for fiscal 1996. Percentage rentals were insignificant.
Minimum annual rental commitments under non-cancelable operating leases
are as follows (in thousands):
Year Amount
--------------------------
1999 $ 92,863
2000 85,232
2001 74,704
2002 60,080
2003 47,954
Thereafter 169,201
--------------------------
$530,034
==========================
Note H - Commitments and Contingencies
Construction commitments, primarily for new stores, totaled approximately
$76 million at August 29, 1998.
Chief, a wholly owned subsidiary of the Company, is a defendant in a class
action entitled "Doug Winfrey, et al. on their own behalf and on behalf of a
class and all others similarly situated, v. Chief Auto Parts Inc. et al." filed
in The Superior Court of California, County of San Joaquin on August 22, 1995
and then transferred to The Superior Court of California, County of San
Francisco on October 26, 1995. The Superior Court denied the plaintiff's motion
for class certification on December 7, 1996. On February 6, 1998, the Court of
Appeal reversed the Superior Court's order denying class certification. No
substantive proceedings regarding the merits of this lawsuit have yet occurred.
The plaintiffs allege that Chief had a policy and practice of denying
hourly employees in California mandated rest periods during their scheduled
hours of work. The plaintiffs are seeking damages, restitution, disgorgement of
profits, statutory penalties, declaratory relief, injunctive relief,
prejudgment interest, and reasonable attorneys fees, expenses and costs.
Management is unable to predict the outcome of this lawsuit at this time. The
Company believes that the potential damages recoverable by any single plaintiff
against Chief are minimal. However, if the plaintiff class were to prevail on
all their claims, the amount of damages could be substantial. Chief is
vigorously defending against this action.
The Company is a party to various claims and lawsuits arising in the
normal course of business which, in the opinion of management, are not,
singularly or in aggregate, material to the Company's financial position or
results of operations.
The Company is self-insured for workers' compensation, automobile, general
and product liability losses. The Company is also self-insured for health care
claims for eligible active employees. The Company maintains certain levels of
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.
Note I - Business Combinations
In February 1998, the Company acquired ADAP, Inc. ("Auto Palace"). The
acquisition added 112 automotive parts and accessories stores in the Northeast.
In May 1998, the Company acquired the assets and liabilities of TruckPro, L.P.,
including the service mark "TruckPro." The 43 TruckPro stores in 14 states
specialize in the sale of heavy duty truck parts.
Additionally, in June 1998, the Company acquired Chief Auto Parts Inc. for
approximately $280 million, including the assumption of approximately $205
million of indebtedness. Chief operated 560 auto parts stores primarily in
California. The purchase price for Chief has been preliminarily allocated in
the consolidated financial statements and the final adjustment may differ from
the preliminary allocation.
Results of operations for acquisitions are included with the Company since
each respective acquisition date. The purchase method of accounting for
acquisitions was utilized for all transactions and, therefore, the acquired
assets and liabilities were recorded at their estimated fair values at the date
of acquisition. The goodwill associated with these transactions is being
amortized over 40 years.
The fair value of the assets and liabilities recorded as a result of these
transactions is as follows (in thousands):
Cash and cash equivalents $ 267
Receivables 22,786
Inventories 209,829
Property and equipment 104,640
Goodwill 166,013
Deferred income taxes 56,388
Accounts payable (106,947)
Accrued liabilities (52,826)
Debt (271,273)
Other (28,846)
--------
Total cash purchase price $100,031
========
The following unaudited pro forma results of operations assume that the
acquisitions and the related financing transactions occurred at the beginning
of the periods presented.
Year Ended
-------------------------------------
August 29, August 30,
1998 1997
-------------------------------------
(in thousands, except per share data)
Net sales $3,758,700 $3,397,300
Net income $ 221,200 $ 189,200
Diluted earnings per share $ 1.44 $ 1.24
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the business combinations and related transactions been consummated
as of the above dates, nor is it necessarily indicative of future operating
results.
Note J - Subsequent Event
The Company announced an agreement to acquire real estate and real estate
leases for approximately 100 Express auto parts stores from Pep Boys for
approximately $108 million. The transaction is subject to various contingencies
and is anticipated to be closed by the end of the first quarter of fiscal 1999.
If consummated, the transaction would not have a material impact on the fiscal
1999 financial position or consolidated operating results.
REPORT OF INDEPENDENT AUDITORS
Stockholders
AutoZone, Inc.,
We have audited the accompanying consolidated balance sheets of AutoZone,
Inc. as of August 29, 1998 and August 30, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended August 29, 1998. 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 generally accepted auditing
standards. 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 29, 1998 and August 30, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended August 29, 1998 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 30, 1998