AUTOZONE,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in
thousands)
|
|
November
18,
2006
|
|
August
26,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
73,359
|
|
$
|
91,558
|
|
Accounts
receivable
|
|
|
73,832
|
|
|
80,363
|
|
Merchandise
inventories
|
|
|
1,883,348
|
|
|
1,846,650
|
|
Other
current assets
|
|
|
126,755
|
|
|
100,356
|
|
Total
current assets
|
|
|
2,157,294
|
|
|
2,118,927
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
3,262,683
|
|
|
3,183,808
|
|
Less:
Accumulated depreciation and amortization
|
|
|
1,166,306
|
|
|
1,132,500
|
|
|
|
|
2,096,377
|
|
|
2,051,308
|
|
Other
assets
|
|
|
|
|
|
|
|
Goodwill,
net of accumulated amortization
|
|
|
302,645
|
|
|
302,645
|
|
Deferred
income taxes
|
|
|
24,229 |
|
|
20,643 |
|
Other
long-term assets
|
|
|
31,140
|
|
|
32,783
|
|
|
|
|
358,014
|
|
|
356,071
|
|
|
|
$
|
4,611,685
|
|
$
|
4,526,306
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,649,633
|
|
$
|
1,699,667
|
|
Other
current liabilities
|
|
|
287,129
|
|
|
280,419
|
|
Income
taxes payable
|
|
|
58,464
|
|
|
24,378
|
|
Deferred
income taxes
|
|
|
52,063
|
|
|
50,104
|
|
Total
current liabilities
|
|
|
2,047,289
|
|
|
2,054,568
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,858,921
|
|
|
1,857,157
|
|
Other
long-term liabilities
|
|
|
167,637
|
|
|
145,053
|
|
Stockholders’
equity
|
|
|
537,838
|
|
|
469,528
|
|
|
|
$
|
4,611,685
|
|
$
|
4,526,306
|
|
See
Notes to Condensed Consolidated Financial Statements
AUTOZONE,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in
thousands, except per share amounts)
|
|
Twelve
Weeks Ended
|
|
|
|
November
18,
2006
|
|
November
19,
2005
|
|
|
|
|
|
|
|
|
|
$
|
1,393,069
|
|
$
|
1,338,076
|
|
Cost
of sales, including warehouse
|
|
|
|
|
|
|
|
and
delivery expenses
|
|
|
707,774
|
|
|
682,547
|
|
Operating,
selling, general and
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
462,299
|
|
|
450,236
|
|
Operating
profit
|
|
|
222,996
|
|
|
205,293
|
|
Interest
expense, net
|
|
|
27,093
|
|
|
23,739
|
|
Income
before income taxes
|
|
|
195,903
|
|
|
181,554
|
|
Income
taxes
|
|
|
72,014
|
|
|
67,180
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
123,889
|
|
$
|
114,374
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
for
basic earnings per share
|
|
|
71,082
|
|
|
76,588
|
|
Effect
of dilutive stock equivalents
|
|
|
731
|
|
|
564
|
|
Adjusted
weighted average shares
|
|
|
|
|
|
|
|
for
diluted earnings per share
|
|
|
71,813
|
|
|
77,152
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.74
|
|
$
|
1.49
|
|
Diluted
earnings per share
|
|
$
|
1.73
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
AUTOZONE,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
|
|
Twelve
Weeks Ended
|
|
|
|
November
18,
2006
|
|
November
19,
2005
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
123,889
|
|
$
|
114,374
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
cash provided by operating activities
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
35,554
|
|
|
30,816
|
|
Amortization
of debt origination fees
|
|
|
409
|
|
|
362
|
|
Income
tax benefit from exercise of options
|
|
|
(5,798
|
)
|
|
(2,731
|
)
|
Deferred
income taxes
|
|
|
(802
|
)
|
|
(2,658
|
)
|
Share-based
compensation expense
|
|
|
4,302
|
|
|
3,739
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
6,531
|
|
|
4,502
|
|
Merchandise
inventories
|
|
|
(36,698
|
)
|
|
(17,155
|
)
|
Accounts
payable and accrued expenses
|
|
|
(50,123
|
)
|
|
(23,021
|
)
|
Income
taxes payable
|
|
|
39,884
|
|
|
61,503
|
|
Other,
net
|
|
|
(5,185
|
)
|
|
(42,068
|
)
|
Net
cash provided by operating activities
|
|
|
111,963
|
|
|
127,663
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(52,198
|
)
|
|
(58,457
|
)
|
Purchase
of marketable securities
|
|
|
(27,770 |
) |
|
— |
|
Proceeds
from sale of short-term investments
|
|
|
8,790
|
|
|
— |
|
Disposal
of capital assets
|
|
|
282
|
|
|
568
|
|
Net
cash used in investing activities
|
|
|
(70,896
|
)
|
|
(57,889
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Net
proceeds (repayments) of commercial paper
|
|
|
6,200
|
|
|
(71,400
|
)
|
Net
proceeds from sale of common stock
|
|
|
26,109
|
|
|
15,248
|
|
Purchase
of treasury stock
|
|
|
(90,767
|
)
|
|
(9,787
|
)
|
Income
tax benefit from exercised options
|
|
|
5,798
|
|
|
2,731
|
|
Other,
net
|
|
|
(6,606
|
)
|
|
2
|
|
Net
cash used in financing activities
|
|
|
(59,266
|
)
|
|
(63,206
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(18,199
|
)
|
|
6,568
|
|
Cash
and cash equivalents at beginning of period
|
|
|
91,558
|
|
|
74,810
|
|
Cash
and cash equivalents at end of period
|
|
$
|
73,359
|
|
$
|
81,378
|
|
See
Notes to Condensed Consolidated Financial Statements
AUTOZONE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
for
interim financial information and with instructions to Form 10-Q and Article
10
of Regulation S-X. Accordingly, they do not include all of the information
and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, including
normal recurring accruals, considered necessary for a fair presentation have
been included. Certain prior year amounts have been reclassified to conform
to
current year presentations. For further information, refer to the consolidated
financial statements and footnotes included in the 2006 Annual Report to
Shareholders for AutoZone, Inc. (“AutoZone” or the “Company”), which is
incorporated by reference in its Annual Report on Form 10-K for the year
ended
August 26, 2006.
Operating
results for the twelve weeks ended November 18, 2006, are not necessarily
indicative of the results that may be expected for the fiscal year ending
August
25, 2007. Each of the first three quarters of our fiscal year consists of
12
weeks, and the fourth quarter consists of 16 or 17 weeks. Each of the fourth
quarters of fiscal 2006 and 2007 has 16 weeks. Additionally, the Company’s
business is somewhat seasonal in nature, with the highest sales generally
occurring in the summer months of June through August and the lowest sales
generally occurring in the winter months of December through
February.
Note
B-Share-Based Payments
Share-based
compensation transactions are accounted for in accordance with the provisions
of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based
Payment.” We recognize compensation expense for share-based payments based on
the fair value of the awards at the grant date. Share-based payments include
stock option grants and the discount on shares sold to employees under various
share purchase plans.
Total
share-based expense (a component of operating, selling, general and
administrative expenses) was $4.3 million for the twelve week period ended
November 18, 2006, and was $3.7 million for the comparable prior year period.
AutoZone
grants 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 are granted. Options have a term of 10 years or 10 years
and
one day from grant date. Director options generally vest three years from
the
grant date. Employee options generally vest in equal annual installments
on the
first, second, third and fourth anniversaries of the grant date. Employees
generally have 30 days after the employment relationship ends, or one year
after
death, to exercise all vested options. The fair value of each option grant
is
separately estimated for each vesting date. The fair value of each option
is
amortized into compensation expense on a straight-line basis between the
grant
date for the award and each vesting date. The Company has estimated the fair
value of all stock option awards as of the date of the grant by applying
the
Black-Scholes-Merton multiple-option pricing valuation model. The application
of
this valuation model involves assumptions that are judgmental and highly
sensitive in the determination of compensation expense. The weighted average
key
assumptions used in determining the fair value of options granted in the
twelve
week period ended November 18, 2006 are as follows:
Expected
price volatility
|
|
|
35.0
|
%
|
Risk-free
interest rate
|
|
|
4.1
|
%
|
Weighted
average expected lives in years
|
|
|
3.3
|
|
Forfeiture
rate
|
|
|
10.0
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
The
Company generally issues new shares when options are exercised. A summary
of
stock option activity since our most recent fiscal year end is as follows:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
August 26, 2006
|
|
|
3,355,542
|
|
$
|
70.73
|
|
Granted
|
|
|
651,220
|
|
|
103.44
|
|
Exercised
|
|
|
(397,714
|
)
|
|
67.12
|
|
Canceled
|
|
|
(14,015
|
)
|
|
73.53
|
|
Outstanding
November 18, 2006
|
|
|
3,595,033
|
|
$
|
77.04
|
|
At
November 18, 2006, the total compensation cost related to non-vested awards
not
yet recognized was $31.4 million with a weighted average expense recognition
period of 1.8 years.
There
have been no modifications to the Company’s share-based compensation plans
during the twelve week period ended November 18, 2006. On December 13, 2006,
stockholders approved the AutoZone, Inc. 2006 Stock Option Plan and the
AutoZone, Inc. Fourth Amended and Restated Executive Stock Purchase
Plan.
AUTOZONE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
C- 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. Due to price deflation on the Company’s merchandise purchases, the
Company’s inventory balances are effectively maintained under the first-in,
first-out method as the Company’s policy is not to write up inventory for
favorable LIFO adjustments, resulting in cost of sales being reflected at
the
higher amount. The cumulative balance of this unrecorded adjustment, which
would
be reduced upon experiencing price inflation on our merchandise purchases,
was
$204.5 million at November 18, 2006, and $198.3 million at August 26,
2006.
AutoZone
has entered into pay-on-scan (“POS”) arrangements with certain vendors, whereby
AutoZone will not purchase merchandise supplied by a vendor until just before
that merchandise is ultimately sold to AutoZone’s customers. Title and certain
risks of ownership remain with the vendor until the merchandise is sold to
AutoZone’s customers. Since the Company does not own merchandise under POS
arrangements until just before it is sold to a customer, such merchandise
is not
recorded on the Company’s balance sheet. Upon the sale of the merchandise to
AutoZone’s customers, AutoZone recognizes the liability for the goods and pays
the vendor in accordance with the agreed-upon terms. Although AutoZone does
not
hold title to the goods, AutoZone controls pricing and has credit collection
risk and therefore, gross revenues under POS arrangements are included in
net
sales in the income statement. AutoZone has financed the repurchase of existing
merchandise inventory by certain vendors in order to convert such vendors
to POS
arrangements. These receivables, reflected in accounts receivable, have
remaining durations up to 10 months and approximated $7.6 million at November
18, 2006, and $11.6 million at August 26, 2006. Merchandise under POS
arrangements was $85.1 million at November 18, 2006, and $92.1 million at
August
26, 2006.
Note
D-Pension 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 supplemental pension plan.
The
components of the Company’s net periodic benefit cost related to all of its
pension plans for all periods presented are as follows:
|
|
Twelve
Weeks Ended
|
|
(in
thousands)
|
|
November
18,
2006
|
|
November
19,
2005
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
2,214
|
|
$
|
2,121
|
|
Expected
return on plan assets
|
|
|
(2,387
|
)
|
|
(1,978
|
)
|
Amortization
of prior service cost
|
|
|
(12
|
)
|
|
(145
|
)
|
Amortization
of net loss
|
|
|
173
|
|
|
1,303
|
|
Net
periodic benefit cost
|
|
$
|
(12
|
)
|
$
|
1,301
|
|
The
Company makes contributions in amounts at least equal to the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. During
the
twelve week period ended November 18, 2006, the Company made approximately
$1.7
million in contributions to the plan and expects to fund another $5.0 million
to
$7.0 million during the remainder of this fiscal year.
AUTOZONE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
E-Long-Term Debt
The
Company’s long-term debt consisted of the following:
(in
thousands)
|
|
November
18,
2006
|
|
August
26,
2006
|
|
|
|
|
|
|
|
Bank
Term Loan due December 2009, effective interest rate of
4.55%
|
|
$
|
300,000
|
|
$
|
300,000
|
|
5.875%
Senior Notes due October 2012, effective interest rate of
6.33%
|
|
|
300,000
|
|
|
300,000
|
|
5.5%
Senior Notes due November 2015, effective interest rate of
4.86%
|
|
|
300,000
|
|
|
300,000
|
|
4.75%
Senior Notes due November 2010, effective interest rate of
4.17%
|
|
|
200,000
|
|
|
200,000
|
|
4.375%
Senior Notes due June 2013, effective interest rate of
5.65%
|
|
|
200,000
|
|
|
200,000
|
|
6.95%
Senior Notes due June 2016, effective interest rate of 7.09%
|
|
|
200,000
|
|
|
200,000
|
|
6.5%
Senior Notes due July 2008
|
|
|
190,000
|
|
|
190,000
|
|
Commercial
paper, weighted average interest rate of 5.4% at
November
18, 2006, and 5.3% at August 26, 2006
|
|
|
128,600
|
|
|
122,400
|
|
Other
|
|
|
40,321
|
|
|
44,757
|
|
|
|
$
|
1,858,921
|
|
$
|
1,857,157
|
|
On
June
20, 2006, the Company’s Mexican subsidiaries borrowed peso debt in the amount of
$43.3 million in U.S. dollars. The interest rates on these borrowings range
from
8.3% to 9.2% with an initial maturity of September 18, 2006. During September
2006, the Company repaid a portion of this indebtedness and extended the
maturity to March 2007 on the remaining unpaid balance. This indebtedness
is
reflected as a component of Other borrowings in the above table.
Note
F-Leases
The
Company has a fleet of vehicles used for delivery to our commercial customers,
travel for members of field management, and field maintenance technicians.
The
majority of these vehicles are leased under arrangements that have historically
been accounted for as operating leases. On September 1, 2006 the Company
modified its leasing arrangements with one of its leasing vendors. As a result
of these modifications, many of the vehicles are now accounted for as capital
leases. At November 18, 2006 the Company had capital lease assets of $26.2
million, net of accumulated depreciation of $2.1 million, and capital lease
obligations of $26.1 million. The $6.8 million current portion of these
obligations was recorded as a component of other current liabilities and
the
$19.3 million long-term portion was recorded as a component of other long-term
liabilities in the condensed consolidated balance sheets.
Note
G-Stock Repurchase Program
As
of
November 18, 2006, the Board of Directors had authorized the Company to
repurchase up to $4.9 billion of the Company’s common stock in the open market.
From January 1, 1998 to November 18, 2006, the Company has repurchased a
total
of 94.0 million shares at an aggregate cost of $4.8 billion; including 816,200
shares of its common stock at an aggregate cost of $90.8 million during the
twelve week period ended November 18, 2006. Considering cumulative repurchases
as of November 18, 2006, the Company has $129.4 million remaining under this
authorization to repurchase its common stock in the open market.
Note
H-Comprehensive Income
Comprehensive
income includes foreign currency translation adjustments; the impact from
certain derivative financial instruments designated and effective as cash
flow
hedges, including changes in fair value, as applicable, and the reclassification
of gains and/or losses from accumulated other comprehensive loss to net income
to offset the earnings impact of the underlying items being hedged; and changes
in the fair value of certain investments classified as available for sale.
Comprehensive income for all periods presented is as follows:
|
|
Twelve
Weeks Ended
|
|
(in
thousands)
|
|
November
18,
2006
|
|
November
19,
2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
123,889
|
|
$
|
114,374
|
|
Foreign
currency translation adjustment
|
|
|
630
|
|
|
1,567
|
|
Net
impact from derivative instruments
|
|
|
(1,715
|
)
|
|
2,403
|
|
Unrealized
gains from marketable securities
|
|
|
64
|
|
|
—
|
|
Comprehensive
income
|
|
$
|
122,868
|
|
$
|
118,344
|
|
The
Board
of Directors and Stockholders
AutoZone,
Inc.
We
have
reviewed the condensed consolidated balance sheet of AutoZone, Inc. as of
November 18, 2006, the related condensed consolidated statements of income
for
the twelve week periods ended November 18, 2006 and November 19, 2005, and
the
condensed consolidated statements of cash flows for the twelve week periods
ended November 18, 2006 and November 19, 2005. These financial statements
are
the responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It
is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective
of
which is the expression of an opinion regarding the financial statements
taken
as a whole. Accordingly, we do not express such an opinion.
Based
on
our review, we are not aware of any material modifications that should be
made
to the condensed consolidated financial statements referred to above for
them to
be in conformity with U.S. generally accepted accounting
principles.
We
have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
AutoZone, Inc. as of August 26, 2006, and the related consolidated statements
of
income, changes in stockholders’ equity, and cash flows for the year then ended,
not presented herein, and, in our report dated October 19, 2006, we expressed
an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of August 26, 2006 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
|
|
/s/ Ernst & Young LLP |
|
|
|
Memphis, Tennessee |
|
|
December 12, 2006 |
|
|
Overview
We
are
the nation’s leading retailer and distributor of automotive replacement parts
and accessories. As of November 18, 2006, we operated 3,912 stores including
100
stores in Mexico compared with 3,696 stores including 84 stores in Mexico
at
November 19, 2005. Excluded from the store counts are 3 stores at November
18,
2006, and 13 stores at November 19, 2005, that were closed as a result of
last
year’s hurricanes. Each of 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, accessories and
non-automotive products. Many of our stores also have a commercial sales
program
that provides commercial credit and prompt delivery of parts and other products
to local, regional and national repair garages, dealers and service stations.
We
also sell the ALLDATA brand diagnostic and repair software. On the web, we
sell
diagnostic and repair information and auto and light truck parts through
www.autozone.com. We do not derive revenue from automotive repair or
installation.
Operating
results for the twelve weeks ended November 18, 2006, are not necessarily
indicative of the results that may be expected for the fiscal year ending
August
25, 2007. Each of the first three quarters of our fiscal year consists of
12
weeks, and the fourth quarter consists of 16 or 17 weeks. Each of the fourth
quarters of fiscal 2006 and 2007 has 16 weeks. Additionally, our business
is
somewhat seasonal in nature, with the highest sales generally occurring in
the
summer months of June through August and the lowest sales generally occurring
in
the winter months of December through February.
Twelve
Weeks Ended November
18, 2006,
Compared
with Twelve Weeks Ended November
19, 2005
Net
sales
for the twelve weeks ended November
18, 2006,
increased $55.0 million, or 4.1%, over net sales of $1.338 billion for the
comparable prior year period. This increase in sales was primarily driven
by
sales from new stores, and to a lesser extent, by domestic comparable store
sales (sales for domestic stores opened at least one year) growth of 0.3%.
Domestic DIY sales increased 3.9%, domestic commercial sales increased 0.2%,
and
combined sales from our ALLDATA and Mexico operations increased 20.7%.
Gross
profit for the twelve weeks ended November
18, 2006,
was
$685.3 million, or 49.2% of net sales, compared with $655.5 million, or 49.0%
of
net sales, during the comparable prior year period. The
improvement in gross profit margin was primarily attributable to ongoing
category management initiatives, which have included continued optimization
of
merchandise assortment and pricing, and an increasing focus on direct importing
initiatives.
Operating,
selling, general and administrative expenses for the twelve weeks ended
November
18, 2006,
was
$462.3 million, or 33.2% of net sales, compared with $450.2 million, or 33.6%
of
net sales, during the comparable prior year period. A
substantial portion of the favorable variance in operating expenses reflects
a
$2.8 million hurricane related charge taken in last year’s quarter, our store
reset efforts initiated in last year’s first quarter, and an ongoing focus to
reduce expenditures throughout the organization.
Interest
expense, net for the twelve weeks ended November
18, 2006,
was
$27.1 million compared with $23.7 million during the comparable prior year
period. This increase was primarily due to higher average borrowing levels
and
rates over the comparable prior year period and the recognition of interest
expense on capital lease obligations. Average borrowings for the twelve weeks
ended November
18, 2006,
were
$1.955 billion, compared with $1.931 billion for the comparable prior year
period. Weighted average borrowing rates were 5.7% at November
18, 2006,
and
5.4% at November
19, 2005.
Our
effective income tax rate was 36.8% of pretax income for the twelve weeks
ended
November
18, 2006,
and
37.0% for the comparable prior year period. The actual annual rate for fiscal
2007 will depend on a number of factors, including the amount and source
of
operating income and the timing and nature of discrete income tax
events.
Net
income for the twelve week period ended November
18, 2006,
increased by $9.5 million to $123.9 million, and diluted earnings per share
increased by 16.4% to $1.73 from $1.48 in the comparable prior year period.
The
impact on current quarter diluted earnings per share from the stock repurchases
since the end of the comparable prior year period was an increase of
$0.08.
Liquidity
and Capital Resources
The
primary source of our liquidity is our cash flows realized through the sale
of
automotive parts and accessories. For the twelve weeks ended November 18,
2006,
our net cash flows from operating activities provided $112.0 million as compared
with $127.7 million during the comparable prior year period. The decrease
is
primarily due to changes in income tax accounts that are impacted by the
timing
and amounts of estimated income tax payments and increases in inventory levels.
Overall cash flows from operating activities continue to benefit from our
inventory purchases being largely financed by our vendors, as evidenced by
an
88% accounts payable to inventory ratio and the use of pay-on-scan (“POS”)
arrangements with certain vendors. Under POS arrangements, we do not purchase
merchandise supplied by a vendor until just before that merchandise is
ultimately sold to our customers. Title and certain risks of ownership remain
with the vendor until the merchandise is sold to our customer. Since we do
not
own merchandise under POS arrangements until just before it is sold to a
customer, such merchandise is not recorded on our balance sheet. Upon the
sale
of the merchandise to our customer, we recognize the liability for the goods
and
pay the vendor in accordance with the agreed upon terms. Although we do not
hold
title to the goods, we control pricing and have credit collection risk and
therefore, gross revenues under POS arrangements are included in net sales
in
the income statement. We have financed the repurchase of existing merchandise
inventory by certain vendors in order to convert such vendors to POS
arrangements. These receivables, reflected in accounts receivable, have
remaining durations up to 10 months and approximated $7.6 million at November
18, 2006, and $11.6 million at August 26, 2006. Merchandise under POS
arrangements was $85.1 million at November 18, 2006, and $92.1 million at
August
26, 2006.
Our
net
cash flows from investing activities for the twelve weeks ended November
18,
2006, used $70.9 million as compared with $57.9 million used in the comparable
prior year period. Capital expenditures for the twelve weeks ended November
18,
2006, were $52.2 million compared to $58.5 million for the comparable prior
year
period. During this twelve week period, we opened 41 domestic stores, including
one store that was closed as a result of hurricane damage in the prior year,
and
none in Mexico. In the comparable prior year period, we opened 36 new stores,
including 3 new stores in Mexico. We expect to invest in our business consistent
with historical rates during fiscal 2007, primarily related to our new store
development program and enhancements to existing stores and other
infrastructure. Investing cash flows were also impacted in the current year
by
our wholly-owned insurance captive, which purchased $27.8 million in marketable
securities and sold $8.8 million in short-term investments.
Our
net
cash flows from financing activities for the twelve weeks ended November
18,
2006, used $59.3 million compared to $63.2 million used in the comparable
prior
year period. Net proceeds from commercial paper borrowings was $6.2 million
versus $71.4 million in net repayments from commercial paper in the comparable
prior year period. Stock repurchases were $90.8 million in the current period
as
compared with $9.8 million in the comparable prior year period. For the twelve
weeks ended November 18, 2006, proceeds from the sale of common stock and
exercises of stock options provided $31.9 million, including $5.8 million
in
related tax benefits. In the comparable prior year period, proceeds from
the
sale of common stock and exercises of stock options provided $18.0 million,
including $2.7 million in related tax benefits.
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 and available borrowing capacity
to
support a majority of our capital expenditures, working capital requirements
and
stock repurchases. The balance may be funded through new 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
November 18, 2006, 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 November 18, 2006, Moody’s and
Standard & Poor’s had AutoZone listed as having a “stable” outlook. 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
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 $1.0 billion of revolving credit facilities with a group of banks
to
primarily support commercial paper borrowings, letters of credit and other
short-term unsecured bank loans. These facilities expire in May 2010, may
be
increased to $1.3 billion at AutoZone’s election, allow up to $200 million in
letters of credit, and allow up to $100 million in capital leases. As the
available balance is reduced by commercial paper borrowings and certain
outstanding letters of credit, the Company had $813.4 million in available
capacity under these facilities at November 18, 2006. The rate of interest
payable under the credit facilities is a function of Bank of America’s base rate
or a Eurodollar rate (each as defined in the facility agreements), or a
combination thereof.
On
June
20, 2006, our Mexican subsidiaries borrowed peso debt in the amount of $43.3
million in U.S. dollars. These funds were primarily used to recapitalize
certain
Mexican subsidiaries and to repay intercompany loans allowing the entities
to
claim value-added tax refunds from the Mexican authorities. The interest
rates
on these borrowings range from 8.3% to 9.2% and had an initial maturity of
September 18, 2006. During September 2006, we repaid a portion of this
indebtedness and extended the maturity to March 2007 on the remaining unpaid
balance.
Our
borrowings under our Senior Notes arrangements contain minimal covenants,
primarily restrictions on liens. Under our other borrowing arrangements,
covenants include limitations on total indebtedness, restrictions on liens,
a
minimum fixed charge coverage ratio and a provision where repayment obligations
may be accelerated if AutoZone experiences a change in control (as defined
in
the agreements) of AutoZone or its Board of Directors. All of the repayment
obligations under our borrowing arrangements may be accelerated and come
due
prior to the scheduled payment date if covenants are breached or an event
of
default occurs. As of November 18, 2006, we were in compliance with all
covenants and expect to remain in compliance with all covenants.
Stock
Repurchases
As
of
November 18, 2006, the Board of Directors had authorized the Company to
repurchase up to $4.9 billion of the Company’s common stock in the open market.
From
January 1, 1998 to November 18, 2006, the Company has repurchased a total
of
94.0 million shares at an aggregate cost of $4.8 billion; including 816,200
shares of its common stock at an aggregate cost of $90.8 million during the
twelve week period ended November 18, 2006. Considering cumulative repurchases
as of November 18, 2006, the Company has $129.4 million remaining under this
authorization to repurchase its common stock in the open market.
Off-Balance
Sheet Arrangements
In
conjunction with our commercial sales program, we offer credit to some of
our
commercial customers. Certain of the receivables related to the credit program
are sold to a third party at a discount for cash with limited recourse. We
have
established a reserve for this recourse. At November 18, 2006, the receivables
facility had an outstanding balance of $56.2 million and the balance of the
recourse reserve was approximately $1.4 million.
Since
fiscal year end, we have issued additional and increased existing stand-by
letters of credit that are primarily renewed on an annual basis to cover
premium
and deductible payments to our workers’ compensation carrier. Our total standby
letters of credit commitment at November 18, 2006 was $129.4 million compared
with $131.6 million at August 26, 2006, and our total surety bonds commitment
at
November 18, 2006, was $11.6 million compared with $12.8 million at August
26,
2006.
We
have
entered into pay-on-scan (“POS”) arrangements with certain vendors, whereby we
will not purchase merchandise supplied by a vendor until just before that
merchandise is ultimately sold to our customers. Title and certain risks
of
ownership remain with the vendor until the merchandise is sold to our customers.
Since we do not own merchandise under POS arrangements until just before
it is
sold to a customer, such merchandise is not recorded on our balance sheet.
Upon
the sale of the merchandise to our customers, we recognize the liability
for the
goods and pay the vendor in accordance with the agreed-upon terms. Although
we
do not hold title to the goods, we control pricing and credit collection
risk
and therefore, gross revenues under POS arrangements are included in net
sales
in the income statement. Sales of merchandise under POS approximated $65.2
million for the twelve weeks ended November 18, 2006, and $123.2 million
for the
twelve weeks ended November 19, 2005. Merchandise under POS arrangements
was
$85.1 million at November 18, 2006, and $92.1 million at August 26,
2006.
Critical
Accounting Policies
As
there
have been no changes to our critical accounting policies during fiscal 2007,
refer to our Annual Report to Shareholders, which is incorporated by reference
in our Annual Report on Form 10-K for the fiscal year ended August 26, 2006,
for
a summary of our policies.
Forward-Looking
Statements
Certain
statements contained in this Quarterly Report on Form 10-Q 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
assumptions and assessments made by our management in light of experience
and
perception of historical trends, current conditions, expected future
developments and other factors that we believe to be appropriate. These
forward-looking statements are subject to a number of risks and uncertainties,
including without limitation, competition; product demand; the economy; the
ability to hire and retain qualified employees; consumer debt levels; inflation;
weather; raw material costs of our suppliers; energy prices; war and the
prospect of war, including terrorist activity; availability of commercial
transportation; construction delays; access to available and feasible financing;
and changes in laws or regulations. Forward-looking statements are not
guarantees of future performance and actual 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 our Annual
Report
on Form 10-K for the fiscal year ended August 26, 2006, for more information
related to those risks.
At
November 18, 2006, the only material changes to our instruments and positions
that are sensitive to market risk since the disclosures in our 2006 Annual
Report to Shareholders, which is incorporated by reference in our Annual
Report
on Form 10-K,
was
the $4.2 million increase in commercial paper, the purchase of $27.8 million
in
marketable securities, partially off-set by the sale of $8.8 million in
short-term investments, to support the self-insurance reserves in our
wholly-owned insurance captive subsidiary, and the execution of a new
forward-starting fuel swap to economically hedge a portion of our diesel
fuel
exposure. Mark-to-market losses of $0.3 million are recorded in operating,
selling, general and administrative expenses and are then reclassed based
on
gallons used to cost of sales as a component of distribution costs.
The
fair
value of our debt was estimated at $1.855 billion as of November 18, 2006,
and
$1.825 billion as of August 26, 2006, based on the quoted market prices for
the
same or similar debt issues or on the current rates available to AutoZone
for
debt of the same remaining maturities. Such fair value is less than the carrying
value of debt by $3.5 million at November 18, 2006, and by $32.3 million
at
August 26, 2006. Considering the effect of any interest rate swaps designated
and effective as cash flow hedges, we had $168.9 million of variable rate
debt
outstanding at November 18, 2006, and $167.2 million of variable rate debt
outstanding at August 26, 2006. At these borrowing levels for variable rate
debt, a one percentage point increase in interest rates would have had an
unfavorable annual impact on our pre-tax earnings and cash flows of $1.7
million
in fiscal 2007 and fiscal 2006, which includes the effects of interest rate
swaps. The primary interest rate exposure on variable rate debt is based
on
LIBOR. Considering the effect of any interest rate swaps designated and
effective as cash flow hedges, we had outstanding fixed rate debt of $1.690
billion at November 18, 2006, and August 26, 2006. A one percentage point
increase in interest rates would reduce the fair value of our fixed rate
debt by
$68.5 million at November 18, 2006, and $68.3 million at August 26,
2006.
An
evaluation was performed under the supervision and with the participation
of our
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls
and
procedures as of November 18, 2006. Based on that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of November
18,
2006. During or subsequent to the quarter ended November 18, 2006, there
were no
changes in our internal controls that have materially affected or are reasonably
likely to materially affect, internal controls over financial
reporting.
As
of the
date of this filing, there have been no additional material legal proceedings
or
material developments in the legal proceedings disclosed in our 2006
Annual Report to Shareholders for AutoZone, Inc, which is incorporated by
reference in our Annual Report on Form 10-K for the year ended August 26,
2006.
As
of the
date of this filing, there have been no material changes in our risk factors
from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K
for
the fiscal year ended August 26, 2006.
Shares
of
common stock repurchased by the Company during the quarter ended November
18,
2006, were as follows:
Issuer
Repurchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
|
|
Maximum
Dollar Value that May Yet Be Purchased Under the Plans or Programs
|
|
August
27, 2006 to
September
23, 2006
|
|
|
—
|
|
$
|
—
|
|
|
93,222,109
|
|
$
|
220,168,283
|
|
September
24, 2006 to
October
21, 2006
|
|
|
144,200
|
|
|
110.45
|
|
|
93,366,309
|
|
|
204,241,095
|
|
October
22, 2006 to
November
18, 2006
|
|
|
672,000
|
|
|
111.37
|
|
|
94,038,309
|
|
|
129,401,552
|
|
Total
|
|
|
816,200
|
|
$
|
111.21
|
|
|
94,038,309
|
|
$
|
129,401,552
|
|
All
of
the above repurchases were part of publicly announced plans that were authorized
by the Company’s Board of Directors for a maximum of $4.9 billion in common
shares. The program was initially announced in January 1998, and was most
recently amended in March 2006, to increase the repurchase authorization
to $4.9
billion from $4.4 billion. The program does not have an expiration date.
Not
applicable.
Not
applicable.
Not
applicable.
The
following exhibits are filed as part of this report:
|
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.
|
|
12.1 |
Computation
of Ratio of Earnings to Fixed Charges.
|
|
15.1 |
Letter
Regarding Unaudited Interim Financial
Statements.
|
|
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.
|
|
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.
|
Pursuant
to the requirements 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/ WILLIAM
T. GILES |
|
William
T. Giles |
|
Executive
Vice
President, |
|
Chief Financial Officer, and Treasurer |
|
(Principal Financial
Officer) |
|
|
|
|
|
|
|
By: |
/s/ CHARLIE
PLEAS, III |
|
Charlie
Pleas, III |
|
Vice
President, Controller |
|
(Principal Accounting Officer) |
|
|
Dated: December 15, 2006 |
|
The
following exhibits are filed as part of this report:
|
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.
|
|
12.1 |
Computation
of Ratio of Earnings to Fixed Charges.
|
|
15.1 |
Letter
Regarding Unaudited Interim Financial
Statements.
|
|
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.
|
|
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.
|