FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 8, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to ________.
Commission file number 1-10714
AUTOZONE, INC.
(Exact name of registrant as specified in its charter)
Nevada 62-1482048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 South Front Street
Memphis, Tennessee 38103
(Address of principal executive offices) (Zip Code)
(901) 495-6500
Registrant's telephone number, including area code
(not applicable)
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
periods that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 148,831,823 shares as of June 18, 1999.
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTOZONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MAY 8, AUG. 29,
1999 1998
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,754 $ 6,631
Accounts receivable 36,238 42,252
Merchandise inventories 1,091,521 966,560
Prepaid expenses 26,910 37,532
Deferred income taxes 76,454 61,964
Income tax receivable 2,151
----------- -----------
Total current assets 1,236,877 1,117,090
Property and equipment:
Property and equipment 1,997,466 1,778,485
Less accumulated depreciation
and amortization 415,801 350,979
----------- -----------
1,581,665 1,427,506
Other assets:
Cost in excess of net assets acquired 313,374 181,315
Deferred income taxes 91,515 3,510
Other assets 7,079 18,692
----------- -----------
411,968 203,517
----------- -----------
$ 3,230,510 $ 2,748,113
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 714,613 $ 683,372
Accrued expenses 234,270 176,457
Income taxes payable 28,722
----------- ------------
Total current liabilities 977,605 859,829
Long-term debt 845,717 545,067
Other liabilities 80,705 41,160
Stockholders' equity 1,326,483 1,302,057
----------- -----------
$ 3,230,510 $ 2,748,113
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------ ------------------------
MAY 8, MAY 9, MAY 8, MAY 9,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 970,236 $ 743,661 $2,723,723 $2,026,032
Cost of sales, including warehouse
and delivery expenses 561,303 432,581 1,584,815 1,180,830
Operating, selling, general and
administrative expenses 304,621 220,623 877,508 618,015
-------- -------- --------- ---------
Operating profit 104,312 90,457 261,400 227,187
Interest expense, net 11,177 4,217 29,926 9,747
-------- -------- --------- ---------
Income before income taxes 93,135 86,240 231,474 217,440
Income taxes 34,400 32,300 85,400 81,600
-------- -------- --------- ---------
Net income $ 58,735 $ 53,940 $ 146,074 $ 135,840
========= ========= ========= =========
Weighted average shares
for basic earnings per share 149,132 152,366 149,941 152,042
Effect of dilutive stock options 1,597 1,958 1,381 1,907
-------- -------- -------- --------
Adjusted weighted average shares
for diluted earnings per share 150,729 154,324 151,322 153,949
======== ======== ======= ========
Basic earnings per share $0.39 $0.35 $0.97 $0.89
======== ======== ======= ========
Diluted earnings per share $0.39 $0.35 $0.97 $0.88 $
======== ======== ======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
AUTOZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
--------------------------
MAY 8, MAY 9,
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 146,074 $ 135,840
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 87,650 62,483
Net increase in merchandise inventories (162,070) (35,211)
Net increase in current liabilities 73,351 5,585
Other - net 1,251 (21,430)
-------- ----------
Net cash provided by operating activities 146,256 147,267
Cash flows from investing activities:
Cash outflows for property and equipment, net (326,135) (212,023)
Acquisitions of businesses, net of cash (87,319)
-------- ----------
Net cash used in investing activities (326,135) (299,342)
Cash flows from financing activities:
Net proceeds from debt 300,650 139,600
Purchase of treasury stock (131,020) (5,311)
Proceeds from sale of Common Stock,
including related tax benefit 9,372 18,987
-------- ---------
Net cash provided by financing activities 179,002 153,276
Net increase (decrease) in cash and cash equivalents (877) 1,201
Cash and cash equivalents at beginning of period 6,631 4,668
--------- ---------
Cash and cash equivalents at end of period $ 5,754 $ 5,869
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with 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
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the thirty-six weeks ended May
8, 1999, are not necessarily indicative of the results that may be
expected for the fiscal year ending August 28, 1999. For further
information, refer to the financial statements and footnotes included in
the Company's annual report on Form 10-K for the year ended August 29,
1998.
NOTE B-INVENTORIES
Inventories are stated at the lower of cost or market using the
last-in, first-out (LIFO) method. An actual valuation of inventory under
the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of
expected year-end inventory levels and costs.
NOTE C-FINANCING ARRANGEMENTS
The Company's long-term debt as of May 8, 1999, and August 29, 1998,
consisted of the following:
MAY 8, Aug. 29,
1999 1998
------- --------
6.5% Debentures due July 15, 2008 $ 200,000 $ 200,000
6% Notes due November 1, 2003 150,000
Commercial paper, weighted
average rate of 5% at May 8,
1999, and 5.7% at August 29, 1998 478,500 305,000
Unsecured bank loan,
floating interest rate averaging 11,750 34,050
4.9% at May 8, 1999 and
5.8% at August 29,1998
Other 5,467 6,017
-------- --------
$ 845,717 $ 545,067
========= =========
In October 1998, the Company sold $150 million of 6% Notes due
November 2003 at a discount. Interest on the Notes is payable semi-
annually on May 1 and November 1 each year, beginning May 1, 1999. In
July 1998, the Company sold $200 million of 6.5% Debentures due July 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 from the Notes and Debentures 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. In connection with the program, the Company has a credit
facility with a group of banks for up to $350 million which extends until
2001 and a 364-day $150 million credit facility with another group of
banks. The 364-day facility includes a renewal feature as well as an
option to extinguish the outstanding debt one year from the maturity
date. Borrowings under the commercial paper program reduce availability
under the credit facilities. Outstanding commercial paper and revolver
borrowings at May 8, 1999, are classified as long-term debt as it is the
Company's intention to refinance them on a long-term basis.
Additionally, the Company has a credit facility with a bank for up
to $100 million which extends until July 1999. The Company also has a
negotiated rate unsecured revolving credit agreement totaling $25 million
which extends until March 2000. At May 8, 1999, there were no amounts
outstanding under these agreements.
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. All of the revolving credit facilities
contain a covenant limiting the amount of debt the Company may incur
relative to its total capitalization.
NOTE D-STOCKHOLDERS' EQUITY
The Company presents basic and diluted earnings per share (EPS) in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". Basic EPS is computed as net earnings divided by
the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options.
In June 1999, the Company announced Board approval to repurchase up
to $150 million of common stock in the open market. This is in addition
to the $100 million repurchase approved in January 1998 and the $150
million repurchase approved in October 1998. From January 1998 to May 8,
1999, the Company had repurchased approximately $160 million of common
stock.
NOTE E-COMPREHENSIVE INCOME
As of August 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income is net
income, plus certain other items that are recorded directly to
stockholders' equity, bypassing net income. There are no such items
currently applicable to the Company and therefore comprehensive income
for the periods presented equals net income.
The adoption of this Statement had no effect on the Company's
results of operations or financial position.
NOTE F-BUSINESS COMBINATIONS
The Company continues to assess the fair value of the assets and
liabilities acquired during fiscal 1998 and 1999. The adjustment during
fiscal 1999,as a result of this analysis, is as follows (in thousands):
INCREASE
(DECREASE)
---------
Inventory $ (37,109)
Property and equipment (88,193)
Goodwill 134,996
Other assets (13,288)
Deferred income tax asset 92,746
Current liabilities (46,576)
Other liabilities (42,576)
The purchase price for Chief Auto Parts Inc. and the real estate and
related assets and leases acquired from Pep Boys has been preliminarily
allocated in the consolidated financial statements and the final
adjustment may differ from the preliminary allocation.
NOTE G-CONTINGENCIES
AutoZone, Inc., and Chief Auto Parts Inc. are defendants in a
purported class action lawsuit entitled "Paul D. Rusch, on behalf of all
other similarly situated, v. Chief Auto Parts Inc. and AutoZone, Inc."
filed in the Superior Court of California, County of Los Angeles, on May
4, 1999. The plaintiffs claim that the defendants have failed to pay
their store managers overtime pay from March 1997 to the present. The
plaintiffs are seeking back overtime pay, interest, an injunction against
the defendants committing such practices in the future, costs, and
attorneys' fees. The Company is unable to predict the outcome of this
lawsuit at this time. The Company will vigorously defend against this
action.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TWELVE WEEKS ENDED MAY 8, 1999 COMPARED TO
TWELVE WEEKS ENDED MAY 9, 1998
Net sales for the twelve weeks ended May 8, 1999 increased by $226.6
million, or 30.5%, over net sales for the comparable period of fiscal
1998. This increase was due to a comparable store sales increase of 3%,
and increases in net sales for stores opened or acquired since the
beginning of fiscal 1998. At May 8, 1999, the Company had 2,695 stores
in operation compared with 2,001 stores at May 9, 1998.
Gross profit for the twelve weeks ended May 8, 1999 was $408.9
million, or 42.1% of net sales, compared with $311.1 million, or 41.8% of
net sales, during the comparable period for fiscal 1998. The increase in
the gross profit percentage was due primarily to lower battery and
commodity gross margins, in the prior year.
Operating, selling, general and administrative expenses for the
twelve weeks ended May 8, 1999, increased by $84.0 million over such
expenses for the comparable period for fiscal 1998, and increased as a
percentage of net sales from 29.7% to 31.4%. The increase in the expense
ratio was due primarily to higher payroll and occupancy costs,
principally in recently acquired stores, and approximately $6 million in
remodeling and remerchandising activities in acquired stores.
Additionally, the Company incurred a $2 million pre-tax charge to reserve
for certain under-performing stores and sites disposed that were under
development.
Interest expense for the twelve weeks ended May 8, 1999 was $11.2
million compared with $4.2 million during the comparable period of 1998.
The increase in interest expense was primarily due to higher levels of
borrowings as a result of the acquisitions and stock repurchases.
The Company's effective income tax rate was 36.9% of pre-tax income
for the twelve weeks ended May 8, 1999 and 37.5% for the twelve weeks
ended May 9, 1998.
THIRTY-SIX WEEKS ENDED MAY 8, 1999, COMPARED TO
THIRTY-SIX WEEKS ENDED MAY 9, 1998
Net sales for the thirty-six weeks ended May 8, 1999, increased by
$697.7 million, or 34.4%, over net sales for the comparable period of
fiscal 1998. This increase was due to a comparable store sales increase
of 5%, and increases in net sales for stores opened or acquired since the
beginning of fiscal 1998.
Gross profit for the thirty-six weeks ended May 8, 1999, was
$1,138.9 million, or 41.8% of net sales, compared with $845.2 million, or
41.7% of net sales, during the comparable period for fiscal 1998.
Operating, selling, general and administrative expenses for the
thirty-six weeks ended May 8, 1999, increased by $259.5 million over such
expenses for the comparable period for fiscal 1998, and increased as a
percentage of net sales from 30.5% to 32.2%. The increase in the expense
ratio was due primarily to higher payroll and occupancy costs principally
in recently acquired stores and integration costs associated with
acquisitions.
The Company's effective income tax rate was 36.9% of pre-tax income
for the thirty-six weeks ended May 8, 1999, and 37.5% for the thirty-six
weeks ended May 9, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the thirty-six weeks ended May 8, 1999, net cash of $146.3
million was provided by the Company's operations versus $147.3 million
for the comparable period of fiscal year 1998.
Capital expenditures for the thirty-six weeks ended May 8, 1999,
were $326.1 million, including approximately $108 million for acquisition
of real estate for 100 Express auto parts stores from Pep Boys. The
Company anticipates that capital expenditures for fiscal 1999 will be
approximately $400 to $425 million. Year to date, the Company opened 219
gross new AutoZone stores in the U.S. and 4 in Mexico, including 96
former Pep Boys Express stores. Additionally, the Company replaced 44
stores and closed 181 auto parts stores in conjunction with its
acquisition integration activities. The Company expects to operate
between 2,700 and 2,750 auto parts stores at the end of the fiscal year.
The Company anticipates that it will continue to generate
significant operating cash flow. The Company foresees no difficulty in
obtaining long-term financing in view of its credit rating and favorable
experiences in the debt market in the past.
In October 1998, the Company sold $150 million of 6% Notes due
November 2003 at a discount. Interest on the Notes is payable semi-
annually on May 1 and November 1 each year, beginning May 1, 1999. In
July 1998, the Company sold $200 million of 6.5% Debentures due July 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 from the Notes and Debentures 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. In connection with the program, the Company has a credit
facility with a group of banks for up to $350 million which extends until
2001 and a 364-day $150 million credit facility with another group of
banks. The 364-day facility includes a renewal feature as well as an
option to extinguish the outstanding debt one year from the maturity
date. Borrowings under the commercial paper program reduce availability
under the credit facilities. Outstanding commercial paper and revolver
borrowings at May 8, 1999, of $490.3 million are classified as long-term
debt as it is the Company's intention to refinance them on a long-term
basis.
Additionally, the Company has a credit facility with a bank for up
to $100 million which extends until July 1999. The Company also has a
negotiated rate unsecured revolving credit agreement totaling $25 million
which extends until March 2000. At May 8, 1999, there were no amounts
outstanding under these agreements.
Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use". The
Company adopted this SOP beginning August 30, 1998. The SOP requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal-use. The adoption of SOP 98-1 did not
have a material impact on the Company's results of operations or
financial position.
YEAR 2000 READINESS DISCLOSURE
The Company began addressing the Year 2000 issue in June 1996 and
implemented a formal Year 2000 project office in May 1997. As of May 8,
1999, the Company anticipates completing the conversion and testing of
all known programs by July 31, 1999.
The total estimated cost of the Year 2000 project is $12 million,
which is being expensed as 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 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, implementing 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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
are forward-looking statements. These statements discuss, among other
things, expected growth, domestic and international development and
expansion strategy, and future performance. The forward-looking
statements are subject to risks, uncertainties and assumptions including,
without limitation, competition, product demand, domestic and
international economies, government approvals, inflation, the ability to
hire and retain qualified employees, the ability to convert acquired
stores in a profitable and timely manner, consumer debt levels and the
weather. Actual results may materially differ from anticipated results.
Please refer to the Risk Factors section in the Annual Report on Form 10-
K for fiscal year ended August 29, 1998, for more details.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
AutoZone, Inc., and Chief Auto Parts Inc. are defendants in a
purported class action lawsuit entitled "Paul D. Rusch, on behalf of all
other similarly situated, v. Chief Auto Parts Inc. and AutoZone, Inc."
filed in the Superior Court of California, County of Los Angeles, on May
4, 1999. The plaintiffs claim that the defendants have failed to pay
their store managers overtime pay from March 1997 to the present. The
plaintiffs are seeking back overtime pay, interest, an injunction against
the defendants committing such practices in the future, costs, and
attorneys' fees. The Company is unable to predict the outcome of this
lawsuit at this time. The Company will vigorously defend against this
action.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
1.1 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 Amended and Restated By-laws of AutoZone, Inc. Incorporated by
reference to Exhibit 3.3 to the Form 10-K for the fiscal year
ended August 29, 1998.
27.1 Financial Data Schedule (SEC Use Only).
(b) On March 4, 1999 AutoZone, Inc., filed a Current Report on Form 8-K
to announce its sales and earnings for the quarter ended February 13, 1999.
<PAGE>
SIGNATURES
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/ Robert J. Hunt
--------------------------------
Robert J. Hunt
Executive Vice President and
Chief Financial Officer-Customer Satisfaction
(Principal Financial Officer)
By: /s/ William C. Rhodes, III
---------------------------------
William C. Rhodes, III
Vice President, Finance-Customer Satisfaction
(Chief Accounting Officer)
Dated: June 22, 1999
<PAGE>
EXHIBIT INDEX
1.1 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 Amended and Restated By-laws of AutoZone, Inc. Incorporated by
reference to Exhibit 3.3 to the Form 10-K for the fiscal year
ended August 29, 1998.
27.1 Financial Data Schedule (SEC Use Only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements dated May 8, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-END> MAY-8-1999
<CASH> 5,754
<SECURITIES> 0
<RECEIVABLES> 36,238
<ALLOWANCES> 0
<INVENTORY> 1,091,521
<CURRENT-ASSETS> 1,236,877
<PP&E> 1,997,466
<DEPRECIATION> 415,801
<TOTAL-ASSETS> 3,230,510
<CURRENT-LIABILITIES> 977,605
<BONDS> 350,000
0
0
<COMMON> 1,538
<OTHER-SE> 1,324,945
<TOTAL-LIABILITY-AND-EQUITY> 3,230,510
<SALES> 2,723,723
<TOTAL-REVENUES> 2,723,723
<CGS> 1,584,815
<TOTAL-COSTS> 1,584,815
<OTHER-EXPENSES> 877,508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,926
<INCOME-PRETAX> 231,474
<INCOME-TAX> 85,400
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146,074
<EPS-BASIC> 0.97
<EPS-DILUTED> 0.97
</TABLE>
