Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting
company, and emerging growth company in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed
second fiscal quarter was $20,972,678,680.
The number of shares of Common Stock outstanding as of October 23, 2017, was 27,492,520.
Portions of the definitive Proxy Statement to be filed within 120 days of August 26, 2017, pursuant to Regulation 14A under the Securities Exchange Act
of 1934 for the Annual Meeting of Stockholders to be held December 20, 2017, are incorporated by reference into Part III.
Certain statements contained in this annual report 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: product demand; energy prices; weather; competition; credit market conditions; access to available and feasible financing; the impact of recessionary conditions;
consumer debt levels; changes in laws or regulations; war and the prospect of war, including terrorist activity; inflation; the ability to hire and retain qualified employees; construction delays; the compromising of confidentiality, availability or
integrity of information, including cyber attacks; and raw material costs of suppliers. Certain of these risks are discussed in more detail in the Risk Factors section contained in Item 1A under Part 1 of this Annual Report on Form
10-K for the year ended August 26, 2017, and these Risk Factors should be read carefully. 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 events described above and in the Risk Factors 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.
PART I
Item
1. Business
Introduction
AutoZone, Inc. (AutoZone, the Company, we, our or us) is the nations leading retailer, and a
leading distributor, of automotive replacement parts and accessories in the United States. We began operations in 1979 and at August 26, 2017, operated 5,465 AutoZone stores in the United States, including Puerto Rico; 524 stores in Mexico; 14
stores in Brazil; and 26 Interamerican Motor Corporation (IMC) branches. Each AutoZone store 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. At August 26, 2017, in 4,592 of our domestic AutoZone stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other
products to local, regional and national repair garages, dealers, service stations and public sector accounts. We also have commercial programs in AutoZone stores in Mexico and Brazil. IMC branches carry an extensive line of original equipment
quality import replacement parts. We also sell the ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com. Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive
products through www.autozone.com, and accessories, performance and replacement parts through www.autoanything.com, and our commercial customers can make purchases through www.autozonepro.com and www.imcparts.net. We do not derive revenue from
automotive repair or installation services.
At August 26, 2017, our AutoZone stores and IMC branches were in the following locations:
|
|
|
|
|
|
|
Location
Count
|
|
Alabama
|
|
|
110
|
|
Alaska
|
|
|
8
|
|
Arizona
|
|
|
136
|
|
Arkansas
|
|
|
64
|
|
California
|
|
|
585
|
|
Colorado
|
|
|
87
|
|
Connecticut
|
|
|
47
|
|
Delaware
|
|
|
16
|
|
Florida
|
|
|
318
|
|
Georgia
|
|
|
200
|
|
Hawaii
|
|
|
4
|
|
Idaho
|
|
|
28
|
|
Illinois
|
|
|
238
|
|
Indiana
|
|
|
155
|
|
Iowa
|
|
|
29
|
|
Kansas
|
|
|
50
|
|
Kentucky
|
|
|
95
|
|
Louisiana
|
|
|
123
|
|
Maine
|
|
|
13
|
|
Maryland
|
|
|
75
|
|
Massachusetts
|
|
|
81
|
|
Michigan
|
|
|
188
|
|
Minnesota
|
|
|
54
|
|
Mississippi
|
|
|
94
|
|
Missouri
|
|
|
112
|
|
Montana
|
|
|
13
|
|
Nebraska
|
|
|
20
|
|
Nevada
|
|
|
64
|
|
New Hampshire
|
|
|
23
|
|
New Jersey
|
|
|
96
|
|
4
|
|
|
|
|
New Mexico
|
|
|
62
|
|
New York
|
|
|
189
|
|
North Carolina
|
|
|
219
|
|
North Dakota
|
|
|
3
|
|
Ohio
|
|
|
259
|
|
Oklahoma
|
|
|
74
|
|
Oregon
|
|
|
43
|
|
Pennsylvania
|
|
|
177
|
|
Puerto Rico
|
|
|
43
|
|
Rhode Island
|
|
|
17
|
|
South Carolina
|
|
|
88
|
|
South Dakota
|
|
|
7
|
|
Tennessee
|
|
|
165
|
|
Texas
|
|
|
597
|
|
Utah
|
|
|
58
|
|
Vermont
|
|
|
2
|
|
Virginia
|
|
|
123
|
|
Washington
|
|
|
88
|
|
Washington, DC
|
|
|
5
|
|
West Virginia
|
|
|
44
|
|
Wisconsin
|
|
|
67
|
|
Wyoming
|
|
|
9
|
|
|
|
|
|
|
Total Domestic AutoZone stores
|
|
|
5,465
|
|
Mexico
|
|
|
524
|
|
Brazil
|
|
|
14
|
|
|
|
|
|
|
Total AutoZone stores
|
|
|
6,003
|
|
IMC branches
|
|
|
26
|
|
|
|
|
|
|
Total locations
|
|
|
6,029
|
|
|
|
|
|
|
Marketing and Merchandising Strategy
We are dedicated to providing customers with superior service and trustworthy advice as well as quality automotive parts and products at a great value in
conveniently located, well-designed stores. Key elements of this strategy are:
Customer Service
Customer service is the most important element in our marketing and merchandising strategy, which is based upon consumer marketing research. We emphasize that
our AutoZoners (employees) should always put customers first by providing prompt, courteous service and trustworthy advice. Our electronic parts catalog assists in the selection of parts as well as identifying any associated warranties that are
offered by us or our vendors. We sell automotive hard parts, maintenance items, accessories and non-automotive parts through www.autozone.com for pick-up in store or to be shipped directly to a customers home or business. Additionally, we
offer smartphone apps that provide customers with store locations, driving directions, operating hours, ability to purchase products and product availability.
Our stores generally open at 7:30 or 8 a.m. and close between 8 and 10 p.m. Monday through Saturday and typically open at 9 a.m. and close between 6 and 9
p.m. on Sunday. However, some stores are open 24 hours, and some have extended hours of 6 or 7 a.m. until midnight seven days a week.
We also provide
specialty tools through our Loan-A-Tool program. Customers can borrow a specialty tool, such as a steering wheel puller, for which a do-it-yourself (DIY) customer or a repair shop would have little or no use other than for a single job.
AutoZoners also provide other free services, including check engine light readings where allowed by law, battery charging, the collection of used oil for recycling, and the testing of starters, alternators and batteries.
5
Merchandising
The following tables show some of the types of products that we sell by major category of items:
|
|
|
|
|
Failure
|
|
Maintenance
|
|
Discretionary
|
A/C Compressors
Batteries & Accessories
Bearings
Belts & Hoses
Calipers
Carburetors
Chassis
Clutches
CV Axles
Engines
Fuel Pumps
Fuses
Ignition
Lighting
Mufflers
Radiators
Tire Repair
Thermostats
Starters & Alternators
Water Pumps
|
|
Antifreeze & Windshield Washer Fluid
Brake
Drums, Rotors, Shoes & Pads
Chemicals, including Brake & Power
Steering Fluid, Oil & Fuel Additives
Oil & Transmission Fluid
Oil, Air, Fuel & Transmission
Filters
Oxygen Sensors
Paint & Accessories
Refrigerant & Accessories
Shock Absorbers & Struts
Spark Plugs & Wires
Windshield Wipers
|
|
Air Fresheners
Cell Phone Accessories
Drinks & Snacks
Floor Mats & Seat Covers
Interior & Exterior Accessories
Mirrors
Performance Products
Protectants & Cleaners
Sealants & Adhesives
Steering Wheel Covers
Stereos & Radios
Tools
Wash & Wax
|
We believe that the satisfaction of our customers is often impacted by our ability to provide specific automotive products as
requested. Each store carries the same basic products, but we tailor our hard parts inventory to the makes and models of the vehicles in each stores trade area, and our sales floor products are tailored to the local stores demographics.
Our hub stores (including mega hubs, which carry an even broader assortment) carry a larger assortment of products that are delivered to local satellite stores. We are constantly updating the products we offer to ensure that our inventory matches
the products our customers need or desire.
Pricing
We want to be the value leader in our industry, by consistently providing quality merchandise at the right price, backed by a satisfactory warranty and
outstanding customer service. For many of our products, we offer multiple value choices in a good/better/best assortment, with appropriate price and quality differences from the good products to the better and
best products. A key differentiating component versus our competitors is our exclusive line of in-house brands, which includes the Valucraft, AutoZone, SureBilt, ProElite, Duralast, Duralast Max, Duralast Gold, Duralast Platinum,
Duralast ProPower and Duralast GT brands. We believe that our overall value compares favorably to that of our competitors.
Brand Marketing:
Advertising and Promotions
We believe that targeted advertising and promotions play important roles in succeeding in todays environment. We are
constantly working to understand our customers wants and needs so that we can build long-lasting, loyal relationships. We utilize promotions, advertising and loyalty programs primarily to highlight our great value and the availability of high
quality parts. Broadcast and internet media are our primary advertising methods of driving retail traffic to our stores, while we leverage a dedicated sales force and our ProVantage loyalty program to drive commercial sales. In the stores, we
utilize in-store signage, in-store circulars, and creative product placement and promotions to help educate customers about products that they need.
Store Design and Visual Merchandising
We design and
build stores for high visual impact. The typical AutoZone store utilizes colorful exterior and interior signage, exposed beams and ductwork and brightly lit interiors. Maintenance products, accessories and non-automotive items are attractively
displayed for easy browsing by customers. In-store signage and special displays promote products on floor displays, end caps and shelves.
6
Commercial
Our commercial sales program operates in a highly fragmented market, and we are one of the leading distributors of automotive parts and other products to
local, regional and national repair garages, dealers, service stations and public sector accounts in the United States, Puerto Rico and Mexico. As a part of the domestic store program, we offer credit and delivery to our customers, as well as online
ordering through www.autozonepro.com and www.imcparts.net. Through our hub stores, we offer a greater range of parts and products desired by professional technicians. We have dedicated sales teams focused on independent repair shops as well as
national, regional and public sector commercial accounts.
Store Operations
Store Formats
Substantially all AutoZone stores are based
on standard store formats, resulting in generally consistent appearance, merchandising and product mix. Approximately 85% to 90% of each stores square footage is selling space. In our satellite stores, approximately 40% to 45% of our space is
dedicated to hard parts inventory, while our hub stores and mega hubs have 75% to 85% of their space utilized for hard parts. The hard parts inventory area is generally fronted by counters or pods that run the depth or length of the store, dividing
the hard parts area from the remainder of the store. The remaining selling space contains displays of maintenance, accessories and non-automotive items.
We believe that our stores are destination stores, generating their own traffic rather than relying on traffic created by adjacent stores.
Therefore, we situate most stores on major thoroughfares with easy access and good parking.
Store Personnel and Training
We provide on-the-job training as well as formal training programs, including an annual national sales meeting, store meetings on specific sales and product
topics, standardized training manuals and computer based modules and a specialist program that provides training to AutoZoners in several areas of technical expertise from the Company, our vendors and independent certification agencies. All domestic
AutoZoners are encouraged to complete tests resulting in certifications by the National Institute for Automotive Service Excellence (ASE), which is broadly recognized for training certification in the automotive industry. Training is
supplemented with frequent store visits by management.
Store managers, sales representatives, commercial sales managers, and managers at various levels
across the organization receive financial incentives through performance-based bonuses. In addition, our growth has provided opportunities for the promotion of qualified AutoZoners. We believe these opportunities are important to attract, motivate
and retain high quality AutoZoners.
All store and branch support functions are centralized in our store support centers located in Memphis, Tennessee;
Monterrey, Mexico; Chihuahua, Mexico and Sao Paulo, Brazil, and our branch support center located in Canoga Park, California. We believe that this centralization enhances consistent execution of our merchandising and marketing strategies at the
store level, while reducing expenses and cost of sales.
Store Automation
All of our AutoZone stores have Z-net, our proprietary electronic catalog that enables our AutoZoners to efficiently look up the parts that our customers need
and to provide complete job solutions, advice and information for customer vehicles. Z-net provides parts information based on the year, make, model and engine type of a vehicle and also tracks inventory availability at the store, at other nearby
stores and through special order. The Z-net display screens are placed on the hard parts counter or pods, where both the AutoZoner and customer can view the screen.
Our AutoZone stores utilize our computerized proprietary Store Management System, which includes bar code scanning and point-of-sale data collection
terminals. The Store Management System provides administrative assistance and improved personnel scheduling at the store level, as well as enhanced merchandising information and improved inventory control. We believe the Store Management System also
enhances customer service through faster processing of transactions and simplified warranty and product return procedures.
7
Store Development
The following table reflects our location development during the past five fiscal years:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
5,814
|
|
|
|
5,609
|
|
|
|
5,391
|
|
|
|
5,201
|
|
|
|
5,006
|
|
Acquired
(1)
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
New
|
|
|
215
|
|
|
|
205
|
|
|
|
202
|
|
|
|
190
|
|
|
|
197
|
|
Closed
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new
|
|
|
215
|
|
|
|
205
|
|
|
|
201
|
|
|
|
190
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relocated
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
|
|
8
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
6,029
|
|
|
|
5,814
|
|
|
|
5,609
|
|
|
|
5,391
|
|
|
|
5,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
17 IMC branches acquired on September 27, 2014.
|
We believe that expansion opportunities exist in
markets that we do not currently serve, as well as in markets where we can achieve a larger presence. We undertake substantial research prior to entering new markets. The most important criteria for opening a new AutoZone store or IMC branch are the
projected future profitability and the ability to achieve our required investment hurdle rate. Key factors in selecting new site and market locations for AutoZone stores and IMC branches include population, demographics, vehicle profile, customer
buying trends, commercial businesses, number and strength of competitors stores and the cost of real estate. In reviewing the vehicle profile, we also consider the number of vehicles that are seven years old and older, or our kind of
vehicles; these vehicles are generally no longer under the original manufacturers warranties and require more maintenance and repair than newer vehicles. We seek to open new AutoZone stores in high visibility sites in high traffic
locations within or contiguous to existing market areas and attempt to cluster development in markets in a relatively short period of time. When selecting future sites and market locations for our IMC branches, we look for locations close to major
highways to support IMCs delivery schedule and also consider the population of AutoZone stores in the market. In addition to continuing to lease or develop our own locations, we evaluate and may make strategic acquisitions.
Purchasing and Supply Chain
Merchandise is selected and purchased for all AutoZone stores through our store support centers located in Memphis, Tennessee; Monterrey, Mexico and Sao Paulo,
Brazil. Additionally, we have an office in Shanghai, China to support our sourcing efforts in Asia. Merchandise is selected and purchased for all IMC branches through our branch support center located in Canoga Park, California. In fiscal 2017, one
class of similar products accounted for approximately 11 percent of our total sales, and one vendor supplied approximately 11 percent of our purchases. No other class of similar products accounted for 10 percent or more of our total sales, and no
other individual vendor provided more than 10 percent of our total purchases. We believe that alternative sources of supply exist, at similar costs, for most types of product sold. Most of our merchandise flows through our distribution centers to
our stores by our fleet of tractors and trailers or by third-party trucking firms.
We ended fiscal 2017 with 186 domestic hub stores, which have a larger
assortment of products as well as regular replenishment items that can be delivered to a store in its network within 24 hours. Hub stores are generally replenished from distribution centers multiple times per week. Hub stores have increased our
ability to distribute products on a timely basis to many of our stores and to expand our product assortment.
During fiscal 2014 and 2015, we tested two
new concepts of our domestic supply chain strategy, increased delivery frequency to our stores utilizing our distribution centers and significantly expanded parts assortments in select stores we call mega hubs. Our tests were concluded during fiscal
2015, and both initiatives were expanded to additional locations in fiscal 2016 and 2017.
8
Increased delivery frequency focuses on improving our in-stock position of our core store-stocked product by
providing deliveries to certain stores multiple times per week. We are continuing to test our new frequency of delivery for certain volume stores to ensure the model is producing sufficient benefit to justify the costs. We had roughly 2,300 stores
receiving more deliveries multiple times per week at the end of the third quarter of fiscal 2017. As the results have not been conclusive to date, we are continuing to test different scenarios to determine the optimal approach.
A mega hub store carries inventory of 80,000 to 100,000 unique SKUs, approximately twice what a hub store carries. Mega hubs provide coverage to both
surrounding stores and other hub stores multiple times a day or on an overnight basis. Currently, we have over 4,000 stores with access to mega hub inventory. A majority of these 4,000 stores receive their service on an overnight basis today, but as
we expand our mega hubs, more of them will receive this service same day and many will receive it multiple times per day. We ended fiscal 2017 with 16 mega hubs, an increase of five since fiscal 2016.
Competition
The sale of
automotive parts, accessories and maintenance items is highly competitive in many areas, including name recognition, product availability, customer service, store location and price. AutoZone competes in the aftermarket auto parts industry, which
includes both the retail DIY and commercial do-it-for-me (DIFM) auto parts and products markets.
Competitors include national, regional and
local auto parts chains, independently owned parts stores, online parts stores, wholesale distributors, jobbers, repair shops, car washes and auto dealers, in addition to discount and mass merchandise stores, department stores, hardware stores,
supermarkets, drugstores, convenience stores, home stores, and other online retailers that sell aftermarket vehicle parts and supplies, chemicals, accessories, tools and maintenance parts. AutoZone competes on the basis of customer service,
including the trustworthy advice of our AutoZoners; merchandise quality, selection and availability; price; product warranty; store layouts, location and convenience; and the strength of our AutoZone brand name, trademarks and service marks.
Trademarks and Patents
We have
registered several service marks and trademarks in the United States Patent and Trademark office as well as in certain other countries, including our service marks, AutoZone and Get in the Zone, and trademarks,
AutoZone, Duralast, Duralast Gold, Duralast Platinum, Duralast ProPower, Duralast ProPower Plus, Duralast ProPower Ultra, Duralast ProPower AGM,
Valucraft, ProElite, SureBilt, ALLDATA, AutoAnything, IMC, Loan-A-Tool and Z-net. We believe that these service marks and trademarks are important
components of our marketing and merchandising strategies.
Employees
As of August 26, 2017, we employed over 87,000 persons, approximately 61 percent of whom were employed full-time. About 90 percent of our AutoZoners were
employed in stores or in direct field supervision, approximately 6 percent in distribution centers and approximately 4 percent in store support and other functions. Included in the above numbers are approximately 8,200 persons employed in our Mexico
and Brazil operations.
We have never experienced any material labor disruption and believe that relations with our AutoZoners are good.
AutoZone Websites
AutoZones primary website is at http://www.autozone.com. We make available, free of charge, at our investor relations website,
http://www.autozoneinc.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, registration statements and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably feasible after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our
website and the information contained therein or linked thereto are not intended to be incorporated into this Annual Report or Form 10-K.
9
Executive Officers of the Registrant
The following list describes our executive officers. The title of each executive officer includes the words Customer Satisfaction which reflects
our commitment to customer service. Officers are elected by and serve at the discretion of the Board of Directors.
William C. Rhodes, III,
52Chairman, President and Chief Executive Officer, Customer Satisfaction
William C. Rhodes, III, was named Chairman of AutoZone during fiscal
2007 and has been President, Chief Executive Officer and a director since March 2005. Prior to his appointment as President and Chief Executive Officer, Mr. Rhodes was Executive Vice President Store Operations and Commercial. Previously,
he held several key management positions with the Company. Prior to 1994, Mr. Rhodes was a manager with Ernst & Young LLP. Mr. Rhodes is a member of the Board of Directors for Dollar General Corporation.
William T. Giles, 58
Chief Financial Officer and Executive Vice President Finance and Information Technology, Customer Satisfaction
William T. Giles was named Chief Financial Officer during May 2006. He has also held other responsibilities at various times including Executive
Vice President of Finance, Information Technology, ALLDATA and Store Development. From 1991 to May 2006, he held several positions with Linens N Things, Inc., most recently as the Executive Vice President and Chief Financial Officer. Prior to
1991, he was with Melville, Inc. and PricewaterhouseCoopers. Mr. Giles is a member of the Board of Directors for Brinker International.
Mark A.
Finestone
,
56
Executive Vice President Merchandising, Supply Chain and Marketing, Customer Satisfaction
Mark A. Finestone
was named Executive Vice President Merchandising, Supply Chain and Marketing during October 2015. Previously, he was Senior Vice President Merchandising and Store Development since 2014, Senior Vice President Merchandising from
2008 to 2014, and Vice President Merchandising from 2002 to 2008. Prior to joining AutoZone in 2002, Mr. Finestone worked for May Department Stores for 19 years where he held a variety of leadership roles which included Divisional Vice
President, Merchandising.
William W. Graves
,
57
Executive Vice President Mexico, Brazil, IMC and Store Development, Customer
Satisfaction
William W. Graves was named Executive Vice President Mexico, Brazil, IMC and Store Development during October 2015. Previously, he
was Senior Vice President Supply Chain and International since 2012. Prior thereto, he was Senior Vice President Supply Chain from 2006 to 2012 and Vice President Supply Chain from 2000 to 2006. From 1992 to 2000,
Mr. Graves served in various capacities within the Company.
Thomas B. Newbern, 55Executive Vice President Store Operations,
Commercial, Loss Prevention and ALLDATA, Customer Satisfaction
Thomas B. Newbern was named Executive Vice President Store Operations,
Commercial, Loss Prevention and ALLDATA during February 2017. Prior to that, he was Executive Vice President Store Operations, Commercial and Loss Prevention since October 2015. Previously, he held the titles Senior Vice President
Store Operations and Loss Prevention from 2014 to 2015, Senior Vice President Store Operations and Store Development from 2012 to 2014, Senior Vice President Store Operations from 2007 to 2012 and Vice President
Store Operations from 1998 to 2007. Prior thereto, he served in various capacities within the Company.
Philip B. Daniele, 48Senior Vice
President Commercial, Customer Satisfaction
Philip B. Daniele was elected Senior Vice President Commercial during November 2015. Prior
to that, he was Vice President Commercial since 2013 and Vice President Merchandising from 2008 to 2013. Previously, he was Vice President Store Operations from 2005 to 2008. From 1993 until 2008, Mr. Daniele served in
various capacities within the Company.
10
Ronald B. Griffin, 63
Senior Vice President and Chief Information Officer, Customer Satisfaction
Ronald B. Griffin was elected Senior Vice President and Chief Information Officer during June 2012. Prior to that, he was Senior Vice President,
Global Information Technology at Hewlett-Packard Company. During his tenure at Hewlett-Packard Company, he also served as the Chief Information Officer for the Enterprise Business Division. Prior to that, Mr. Griffin was Executive Vice
President and Chief Information Officer for Fleming Companies, Inc. He also spent over 12 years with The Home Depot, Inc., with the last eight years in the role of Chief Information Officer. Mr. Griffin also served at Deloitte & Touche
LLP and Delta Air Lines, Inc.
James C. Griffith, 52Senior Vice President Store Operations, Customer Satisfaction
James C. Griffith was named Senior Vice President Store Operations in November 2015. Prior to that, he was Vice President Store
Development since October 2010 and Vice President Store Operations since 2007. Prior thereto, he held several management positions within the Company.
William R. Hackney, 52Senior Vice President Merchandising, Customer Satisfaction
William R. Hackney was named Senior Vice President, Merchandising in October 2015. His career with AutoZone began in 1983, and he has held several key
management roles within the Company, including Vice President Store Operations Support and Vice President Merchandising.
Rodney C.
Halsell
,
49Senior Vice President
Supply Chain, Customer Satisfaction
Rodney C. Halsell was named Senior Vice President
Supply Chain during October 2015. Prior to that, he was Vice President Distribution since 2005. From 1985 to 2005, he held several management positions and served in various capacities within the Company.
Charlie Pleas, III, 52Senior Vice President and Controller, Customer Satisfaction
Charlie Pleas, III, was elected Senior Vice President and Controller during 2007. Prior to that, he was Vice President and Controller since 2003. Previously,
he was Vice President Accounting since 2000, and Director of General Accounting since 1996. Prior to joining AutoZone, Mr. Pleas was a Division Controller with Fleming Companies, Inc. where he served in various capacities since 1988.
Mr. Pleas is a member of the Board of Directors for Kirklands Inc.
Albert Saltiel, 53
Senior Vice President Marketing
and E-Commerce, Customer Satisfaction
Albert Saltiel was named Senior Vice President Marketing and E-Commerce during October 2014. Previously,
he was elected Senior Vice President Marketing since 2013. Prior to that, he was Chief Marketing Officer and a key member of the leadership team at Navistar International Corporation. Mr. Saltiel has also been with Sony Electronics as
General Manager, Marketing, and Ford Motor Company where he held multiple marketing roles.
Richard C. Smith, 53Senior Vice President
Human Resources, Customer Satisfaction
Richard C. Smith was elected Senior Vice President Human Resources in December 2015. He has been an
AutoZoner since 1985, previously holding the position of Vice President of Stores since 1997. Prior thereto, he served in various capacities within the Company.
Kristen C. Wright, 41Senior Vice President General Counsel & Secretary, Customer Satisfaction
Kristen C. Wright was named Senior Vice President General Counsel & Secretary effective January 2014. She previously held the title of Vice
President Assistant General Counsel & Assistant Secretary since January 2012. Before joining AutoZone, she was a partner with the law firm of Bass, Berry & Sims PLC.
11
Item 1A. Risk Factors
Our business is subject to a variety of risks. Set forth below are certain of the important risks that we face, the occurrence of which could have a material
adverse effect on our business. These risks are not the only ones we face. Our business could also be affected by additional factors that are presently unknown to us or that we currently believe to be immaterial to our business.
If demand for our products slows, then our business may be materially adversely affected.
Demand for the products we sell may be affected by a number of factors we cannot control, including:
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the number of older vehicles in service. Vehicles seven years old or older are generally no longer under the original vehicle manufacturers warranties and tend to need more maintenance and repair than newer
vehicles.
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rising energy prices. Increases in energy prices may cause our customers to defer purchases of certain of our products as they use a higher percentage of their income to pay for gasoline and other energy costs and may
drive their vehicles less, resulting in less wear and tear and lower demand for repairs and maintenance.
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the economy. In periods of declining economic conditions, consumers may defer vehicle maintenance or repair and discretionary spending. Additionally, such conditions may affect our customers ability to obtain
credit. During periods of expansionary economic conditions, more of our DIY customers may pay others to repair and maintain their vehicles instead of working on their own vehicles, or they may purchase new vehicles.
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the weather. Mild weather conditions may lower the failure rates of automotive parts, while wet conditions may cause our customers to defer maintenance and repair on their vehicles. Extremely hot or cold conditions may
enhance demand for our products due to increased failure rates of our customers automotive parts.
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technological advances. Advances in automotive technology and parts design can result in cars needing maintenance less frequently and parts lasting longer.
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For the long term, demand for our products may be affected by:
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the number of miles vehicles are driven annually. Higher vehicle mileage increases the need for maintenance and repair. Mileage levels may be affected by gas prices and other factors.
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the quality of the vehicles manufactured by the original vehicle manufacturers and the length of the warranties or maintenance offered on new vehicles.
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restrictions on access to telematics and diagnostic tools and repair information imposed by the original vehicle manufacturers or by governmental regulation, which may cause vehicle owners to rely on dealers to perform
maintenance and repairs.
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All of these factors could result in immediate and longer term declines in the demand for our products, which
could adversely affect our sales, cash flows and overall financial condition.
If we are unable to compete successfully against other businesses that
sell the products that we sell, we could lose customers and our sales and profits may decline.
The sale of automotive parts, accessories and
maintenance items is highly competitive, and sales volumes are dependent on many factors, including name recognition, product availability, customer service, store location and price. Competitors are opening locations near our existing locations.
AutoZone competes as a provider in both the DIY and DIFM auto parts and accessories markets.
12
Our competitors include national, regional and local auto parts chains, independently owned parts stores, online
automotive parts stores or marketplaces, wholesale distributors, jobbers, repair shops, car washes and auto dealers, in addition to discount and mass merchandise stores, hardware stores, supermarkets, drugstores, convenience stores, home stores, and
other retailers that sell aftermarket vehicle parts and supplies, chemicals, accessories, tools and maintenance parts. Although we believe we compete effectively on the basis of customer service, including the knowledge and expertise of our
AutoZoners; merchandise quality, selection and availability; product warranty; store layout, location and convenience; price; and the strength of our AutoZone brand name, trademarks and service marks, some of our competitors may gain competitive
advantages, such as greater financial and marketing resources allowing them to sell automotive products at lower prices, larger stores with more merchandise, longer operating histories, more frequent customer visits and more effective advertising.
Online and multi-channel retailers often focus on delivery services, offering customers faster, guaranteed delivery times and low-price or free shipping. Some online businesses have lower operating costs than we do and may not be required to collect
and remit sales taxes in all U.S. states, which may negatively impact our ability to be price-competitive on a tax-included basis. In addition, because our business strategy is based on offering superior levels of customer service to complement the
products we offer, our cost structure is higher than some of our competitors, which also puts pressure on our margins.
Consumers are embracing shopping
online and through mobile commerce applications. With the increasing use of digital tools and social media, and our competitors increased focus on optimizing customers online experience, our customers are quickly able to compare prices,
product assortment, and feedback from other customers before purchasing our products either online, in the physical stores, or through a combination of both offerings. We believe that we compete effectively on the basis of merchandise availability
as a result of investments in inventory available for immediate sale, the development of a robust hub and mega hub distribution network providing efficient access to obtain products required on-demand, options to order products online or by
telephone and pick them up in stores and options for special orders directly from our vendors. We also offer hassle-free returns to our customers. In addition, we believe that customers value the personal interaction with a salesperson that is
qualified to offer trustworthy advice and provide other free services such as parts testing.
We also utilize promotions, advertising and our loyalty
programs to drive customer traffic and compete more effectively, and we must regularly assess and adjust our efforts to address changes in the competitive marketplace. If we are unable to continue to manage readily-available inventory demand and
competitive delivery options as well as develop successful competitive strategies, including the maintenance of effective promotions, advertising and loyalty card programs, or if our competitors develop more effective strategies, we could lose
customers and our sales and profits may decline.
We may not be able to sustain our historic rate of sales growth.
We have increased our location count in the past five fiscal years, growing from 5,006 locations at August 25, 2012, to 6,029 locations at August 26,
2017, an average location increase per year of 4%. Additionally, we have increased annual revenues in the past five fiscal years from $8.604 billion in fiscal 2012 to $10.889 billion in fiscal 2017, an average increase per year of 5%. Annual revenue
growth is driven by the opening of new locations, the development of new commercial programs and increases in same store sales. We open new locations only after evaluating customer buying trends and market demand/needs, all of which could be
adversely affected by persistent unemployment, wage cuts, small business failures and microeconomic conditions unique to the automotive industry. Same store sales are impacted both by customer demand levels and by the prices we are able to charge
for our products, which can also be negatively impacted by the economic pressures mentioned above. We cannot provide any assurance that we will continue to open locations at historical rates or continue to achieve increases in same store sales.
Consolidation among our competitors may negatively impact our business.
Historically some of our competitors have merged. Consolidation among our competitors could enhance their market share and financial position, provide them
with the ability to achieve better purchasing terms and provide more competitive prices to customers for whom we compete, and allow them to utilize merger synergies and cost savings to increase advertising and marketing budgets to more effectively
compete for customers. Consolidation by our competitors could also increase their access to local market parts assortment.
13
These consolidated competitors could take sales volume away from us in certain markets, could achieve greater
market penetration, could cause us to change our pricing with a negative impact on our margins or could cause us to spend more money to maintain customers or seek new customers, all of which could negatively impact our business.
If we cannot profitably increase our market share in the commercial auto parts business, our sales growth may be limited.
Although we are one of the largest sellers of auto parts in the commercial market, we must effectively compete against national and regional auto parts chains,
independently owned parts stores, wholesalers and jobbers in order to increase our commercial market share. Although we believe we compete effectively in the commercial market on the basis of customer service, merchandise quality, selection and
availability, price, product warranty, distribution locations, and the strength of our AutoZone brand name, trademarks and service marks, some automotive aftermarket participants have been in business for substantially longer periods of time than we
have, and as a result have developed long-term customer relationships and have large available inventories. If we are unable to profitably develop new commercial customers, our sales growth may be limited.
A downgrade in our credit ratings or a general disruption in the credit markets could make it more difficult for us to access funds, refinance our debt,
obtain new funding or issue securities.
Our short-term and long-term debt is rated investment grade by the major rating agencies. These
investment-grade credit ratings have historically allowed us to take advantage of lower interest rates and other favorable terms on our short-term credit lines, in our senior debt offerings and in the commercial paper markets. To maintain our
investment-grade ratings, we are required to meet certain financial performance ratios. A change by the rating agencies in these ratios, an increase in our debt, and/or a decline in our earnings could result in downgrades in our credit ratings. A
downgrade in our credit ratings could limit our access to public debt markets, limit the institutions willing to provide credit facilities to us, result in more restrictive financial and other covenants in our public and private debt and would
likely significantly increase our overall borrowing costs and adversely affect our earnings.
Moreover, significant deterioration in the financial
condition of large financial institutions during the Great Recession resulted in a severe loss of liquidity and availability of credit in global credit markets and in more stringent borrowing terms. During brief time intervals, there was limited
liquidity in the commercial paper markets, resulting in an absence of commercial paper buyers and extraordinarily high interest rates. We can provide no assurance that such similar events that occurred during the Great Recession will not occur again
in the foreseeable future. Conditions and events in the global credit markets could have a material adverse effect on our access to short-term and long-term debt and the terms and cost of that debt.
Significant changes in macroeconomic and geo-political factors could adversely affect our financial condition and results of operations.
Macroeconomic conditions impact both our customers and our suppliers. Job growth in the U.S. was stagnated and unemployment was at historically high levels
during the Great Recession; however, in recent years, the unemployment rate has improved to pre-recession levels. Moreover, the United States government continues to operate under historically large deficits and debt burden. Continued distress in
global credit markets, business failures, inflation, foreign exchange rate fluctuations, significant geo-political conflicts, continued volatility in energy prices and other factors continue to affect the global economy. Moreover, rising energy
prices could impact our merchandise distribution, commercial delivery, utility and product costs. Over the short term, such factors could positively impact our business. Over a longer period of time, all of these macroeconomic and geo-political
conditions could adversely affect our sales growth, margins and overhead, which could adversely affect our financial condition and operations.
14
Our business depends upon hiring and retaining qualified employees.
We believe that much of our brand value lies in the quality of the more than 87,000 AutoZoners employed in our stores, distribution centers, store support
centers, ALLDATA, AutoAnything and IMC. Our workforce costs represent our largest operating expense, and our business is subject to employment laws and regulations, including requirements related to minimum wage and benefits. In addition, the
implementation of potential regulatory changes relating to overtime exemptions and benefits for certain employees under federal and state laws could result in increased labor costs to our business and negatively impact our operating results. We
cannot be assured that we can continue to hire and retain qualified employees at current wage rates since we operate in a competitive labor market and there is a risk of market increases in compensation.
If we are unable to hire, properly train and/or retain qualified employees, we could experience higher employment costs, reduced sales, losses of customers
and diminution of our brand, which could adversely affect our earnings. If we do not maintain competitive wages, our customer service could suffer due to a declining quality of our workforce or, alternatively, our earnings could decrease if we
increase our wage rates. A violation or change in employment laws and/or regulations could have a material adverse effect on our results of operations, financial condition and cash flows.
Inability to acquire and provide quality merchandise at competitive prices could adversely affect our sales and results of operations.
We are dependent upon our domestic and international vendors continuing to supply us with quality merchandise at favorable prices and payment terms. If our
merchandise offerings do not meet our customers expectations regarding quality and safety, we could experience lost sales, increased costs and exposure to legal and reputational risk. All of our vendors must comply with applicable product
safety laws, and we are dependent on them to ensure that the products we buy comply with all safety and quality standards. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement
action or private litigation and result in costly product recalls and other liabilities. To the extent our suppliers are subject to added government regulation of their product design and/or manufacturing processes, the cost of the merchandise we
purchase may rise. In addition, negative customer perceptions regarding the safety or quality of the products we sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances,
it may be difficult and costly for us to rebuild our reputation and regain the confidence of our customers. Moreover, our vendors are impacted by global economic conditions. Credit market and other macroeconomic conditions could have a material
adverse effect on the ability of our suppliers to finance and operate their businesses, resulting in increased product costs and difficulties in meeting our inventory demands. If any of our significant vendors experience financial difficulties or
otherwise are unable to deliver merchandise to us on a timely basis, or at all, we could have product shortages in our stores that could adversely affect customers perceptions of us and cause us to lose customers and sales.
We directly imported approximately 10% of our purchases in fiscal 2017, but many of our domestic vendors directly import their products or components of their
products. Disruptions in the price or flow of these goods for any reason, such as political unrest or acts of war, currency fluctuations, disruptions in maritime lanes, port labor disputes and economic conditions and instability in the countries in
which foreign suppliers are located, the financial instability of suppliers, suppliers failure to meet our standards, issues with labor practices of our suppliers or labor problems they may experience (such as strikes, stoppages or slowdowns,
which could also increase labor costs during and following the disruption), the availability and cost of raw materials to suppliers, increased import duties, merchandise quality or safety issues, transport availability and cost, increases in wage
rates and taxes, transport security, inflation and other factors relating to the suppliers and the countries in which they are located or from which they import, are beyond our control and could adversely affect our operations and profitability. In
addition, the United States foreign trade policies, tariffs and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain
materials from other countries and other factors relating to foreign trade and port labor agreements are beyond our control. These and other factors affecting our suppliers and our access to products could adversely affect our business and financial
performance. As we increase our imports of merchandise from foreign vendors, the risks associated with these imports will also increase.
15
Our ability to grow depends in part on new location openings, existing location remodels and expansions and
effective utilization of our existing supply chain and hub network.
Our continued growth and success will depend in part on our ability to open and
operate new locations and expand and remodel existing locations to meet customers needs on a timely and profitable basis. Accomplishing our new and existing location expansion goals will depend upon a number of factors, including the
ability to partner with developers and landlords to obtain suitable sites for new and expanded locations at acceptable costs, the hiring and training of qualified personnel and the integration of new locations into existing operations. There can be
no assurance we will be able to achieve our location expansion goals, manage our growth effectively, successfully integrate the planned new locations into our operations or operate our new, remodeled and expanded locations profitably.
In addition, we extensively utilize our hub network, our supply chain and logistics management techniques to efficiently stock our locations. We have made,
and plan to continue to make, significant investments in our supply chain to improve our ability to provide the best parts at the right price and to meet consumer product needs. If we fail to effectively utilize our existing hubs and/or supply
chains or if our investments in our supply chain initiatives, including directly sourcing some products from outside the United States, do not provide the anticipated benefits, we could experience sub-optimal inventory levels in our locations or
increases in our operating costs, which could adversely affect our sales volume and/or our margins.
Our failure to protect our reputation could have a
material adverse effect on our brand name and profitability.
We believe our continued strong sales growth is driven in significant part by our brand
name. The value in our brand name and its continued effectiveness in driving our sales growth are dependent to a significant degree on our ability to maintain our reputation for safety, high product quality, friendliness, service, trustworthy
advice, integrity and business ethics. Any negative publicity about these areas could damage our reputation and may result in reduced demand for our merchandise. The increasing use of technology also poses a risk as customers are able to quickly
compare products and prices and use social media to provide feedback in a manner that is rapidly and broadly dispersed. Our reputation could be impacted if customers have a bad experience and share it over social media.
Failure to comply with ethical, social, product, labor, environmental, and anti-corruption standards could also jeopardize our reputation and potentially lead
to various adverse actions by consumer or environmental groups, employees or regulatory bodies. Failure to comply with applicable laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial
statement information could also hurt our reputation. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition,
our capital and operating expenses could increase due to implementation of and compliance with existing and future laws and regulations or remediation measures that may be required if we are found to be noncompliant with any existing or future laws
or regulations. The inability to pass through any increased expenses through higher prices would have an adverse effect on our results of operations.
Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations
and financial condition, as well as require additional resources to rebuild our reputation.
Our success in international operations is dependent on
our ability to manage the unique challenges presented by international markets.
The various risks we face in our U.S. operations generally also exist
when conducting operations in and sourcing products and materials from outside of the U.S., in addition to the unique costs, risks and difficulties of managing international operations. Our expansion into international markets may be adversely
affected by local laws and customs, U.S. laws applicable to foreign operations, and political and socio-economic conditions.
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Risks inherent in international operations also include potential adverse tax consequences, potential changes to
trade policies and trade agreements, compliance with the Foreign Corrupt Practices Act and local anti-bribery and anti-corruption laws, greater difficulty in enforcing intellectual property rights, challenges to identify and gain access to local
suppliers, and possibly misjudging the response of consumers in foreign countries to our product assortment and marketing strategy.
In addition, our
operations in international markets are conducted primarily in the local currency of those countries. Since our consolidated financial statements are denominated in U.S. dollars, amounts of assets, liabilities, net sales, and other revenues and
expenses denominated in local currencies must be translated into U.S. dollars using exchange rates for the current period. As a result, foreign currency exchange rates and fluctuations in those rates may adversely impact our financial performance.
Failure to protect or effectively respond to a breach of the privacy and security of customers, suppliers, AutoZoners or Company
information could damage our reputation, subject us to litigation, and cause us to incur substantial costs.
Our business, like that of most retailers
and distributors, involves the receipt, storage and transmission of personal information about our customers, suppliers and AutoZoners, some of which is entrusted to third-party service providers and vendors. Failure to protect the security of our
customers, suppliers, employees and company information could subject us to costly regulatory enforcement actions, expose us to litigation and impair our reputation, which may have a negative impact on our sales. While we and our
third-party service providers and vendors take significant steps to protect customer, supplier, employee and other confidential information, including maintaining compliance with payment card industry standards, these security measures may be
breached in the future due to cyber-attack, employee error, system compromises, fraud, trickery, hacking or other intentional or unintentional acts, and unauthorized parties may obtain access to this data. Failure to effectively respond to system
compromises may undermine our security measures. The methods used to obtain unauthorized access are constantly evolving, and may be difficult to anticipate or detect for long periods of time. As the regulatory environment related to information
security, data collection and use, and privacy becomes increasingly rigorous, compliance with these requirements could also result in significant additional costs.
We accept payments using a variety of methods, including cash, checks, credit, debit and gift cards, and we may offer new payment options over time, which may
have information security risk implications. As a retailer accepting debit and credit cards for payment, we are subject to various industry data protection standards and protocols, such as the American National Standards Institute encryption
standards and payment network security operating guidelines and Payment Card Industry Data Security Standard. Even though we comply with these standards and protocols and other information security measures, we cannot be certain that the security
measures we maintain to protect all of our information technology systems are able to prevent, contain or detect any cyber-attacks, cyber terrorism, or security breaches from known cyber-attacks or malware that may be developed in the future. To the
extent that any cyber-attack or incursion in our or one of our third-party service providers information systems results in the loss, damage or misappropriation of information, we may be materially adversely affected by claims from customers,
financial institutions, regulatory authorities, payment card networks and others. In certain circumstances, payment card association rules and obligations to which we are subject under our contracts with payment card processors make us liable to
payment card issuers if information in connection with payment cards and payment card transactions that we hold is compromised, which liabilities could be substantial. In addition, the cost of complying with stricter and more complex data privacy,
data collection and information security laws and standards could be significant to us.
We rely heavily on our information technology systems for our
key business processes. Any failure or interruption in these systems could have a material adverse impact on our business.
We rely extensively on our
information technology systems, some of which are managed or provided by third-party service providers, to manage inventory, communicate with customers, process transactions and summarize results. Our systems and the third-party systems we rely on
are subject to damage or interruption from power outages, telecommunications failures, computer viruses, security breaches, malicious cyber-attacks, catastrophic events, and design or usage errors by our AutoZoners, contractors or third-party
service providers. Although we and our third-party service providers work diligently to maintain our respective systems, we may not be successful in doing so.
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If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace
them, and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process transactions, which could result in lost sales, inability to process purchase orders and/or a potential loss of customer
loyalty, which could adversely affect our results of operations.
Business interruptions may negatively impact our location hours, operability of our
computer and other systems, availability of merchandise and otherwise have a material negative effect on our sales and our business.
War or acts of
terrorism, political unrest, unusual weather conditions, hurricanes, tornadoes, windstorms, fires, earthquakes, floods and other natural or other disasters or the threat of any of them, may result in certain of our locations being closed for a
period of time or permanently or have a negative impact on our ability to obtain merchandise available for sale in our locations. Some of our merchandise is imported from other countries. If imported goods become difficult or impossible to bring
into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.
In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping
merchandise to our distribution centers and locations resulting in lost sales and/or a potential loss of customer loyalty. Transportation issues could also cause us to cancel purchase orders if we are unable to receive merchandise in our
distribution centers.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The following table reflects the square footage and number of leased and owned properties for our AutoZone stores as of August 26, 2017:
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No. of AZ
Stores
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AZ Store
Square Footage
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Leased
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3,115
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20,177,795
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Owned
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2,888
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19,506,505
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Total
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6,003
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39,684,300
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We have approximately 5.3 million square feet in distribution centers servicing our AutoZone stores, of which
approximately 1.8 million square feet is leased and the remainder is owned. Our 11 AutoZone distribution centers are located in Arizona, California, Georgia, Illinois, Ohio, Pennsylvania, Tennessee, Texas, Washington and two in Mexico. We
currently have one additional domestic distribution center under development. Of our 26 IMC branches, 25 branches, consisting of 854,804 square feet, are leased, and one branch, consisting of approximately 23 thousand square feet, is owned. Our
primary store support center is located in Memphis, Tennessee, and consists of approximately 260,000 square feet. We also have three additional AutoZone store support centers located in Monterrey, Mexico; Chihuahua, Mexico and Sao Paulo, Brazil, and
an IMC branch support center located in Canoga Park, California. The ALLDATA headquarters in Elk Grove, California and the AutoAnything headquarters space in San Diego, California are leased, and we also own or lease other properties that are not
material in the aggregate.
Item 3.
Legal Proceedings
In 2004, we acquired a store site in Mount Ephraim, New Jersey that had previously been the site of a gasoline service station and contained evidence of
groundwater contamination. Upon acquisition, we voluntarily reported the groundwater contamination issue to the New Jersey Department of Environmental Protection (NJDEP) and entered into a Voluntary Remediation Agreement providing for
the remediation of the contamination associated with the property. We have conducted and paid for (at an immaterial cost to us) remediation of contamination on the property.
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We have also voluntarily investigated and addressed potential vapor intrusion impacts in downgradient residences
and businesses. The NJDEP has asserted, in a Directive and Notice to Insurers dated February 19, 2013 and again in an Amended Directive and Notice to Insurers dated January 13, 2014 (collectively the Directives), that we are
liable for the downgradient impacts under a joint and severable liability theory. By letter dated April 23, 2015, NJDEP has demanded payment from us, and other parties, in the amount of approximately $296 thousand for costs incurred by NJDEP in
connection with contamination downgradient of the property. By letter dated January 29, 2016, we were informed that NJDEP has filed a lien against the property in connection with approximately $355 thousand in costs incurred by NJDEP in
connection with contamination downgradient of the property. We have contested, and will continue to contest, any such assertions due to the existence of other entities/sources of contamination, some of which are named in the Directives and the
April 23, 2015 demand, in the area of the property. Pursuant to the Voluntary Remediation Agreement, upon completion of all remediation required by the agreement, we believe we should be eligible to be reimbursed up to 75 percent of qualified
remediation costs by the State of New Jersey. We have asked the state for clarification that the agreement applies to off-site work, and the state is considering the request. Although the aggregate amount of additional costs that we may incur
pursuant to the remediation cannot currently be ascertained, we do not currently believe that fulfillment of our obligations under the agreement or otherwise will result in costs that are material to our financial condition, results of operations or
cash flow.
In July 2014, we received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial offices
in the state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste. We received notice that the District Attorney will seek injunctive and monetary relief. We are cooperating fully with the
request and cannot predict the ultimate outcome of these efforts, although we have accrued all amounts we believe to be probable and reasonably estimable. We do not believe the ultimate resolution of this matter will have a material adverse effect
on our consolidated financial position, results of operations or cash flows.
In April 2016, we received a letter from the California Air Resources Board
seeking payment for alleged violations of the California Health and Safety Code related to the sale of certain aftermarket emission parts in the State of California. We do not believe that any resolution of the matter will have a material adverse
effect on our consolidated financial position, results of operations or cash flows.
We are involved in various other legal proceedings incidental to the
conduct of our business, including several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices. We
do not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to our financial condition, results of operations or cash flows.
Item 4.
Mine Safety Disclosures
Not applicable.
19
Notes to Consolidated Financial Statements
Note A Significant Accounting Policies
Business:
AutoZone, Inc. and its wholly owned subsidiaries (AutoZone or the Company) are principally a retailer and distributor
of automotive replacement parts and accessories. At the end of fiscal 2017, the Company operated 5,465 AutoZone stores in the United States, including Puerto Rico; 524 stores in Mexico; 14 stores in Brazil; and 26 Interamerican Motor Corporation
(IMC) branches. Each AutoZone store 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. At the end of fiscal 2017, 4,592 of the domestic AutoZone stores had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers,
service stations and public sector accounts. The company also had commercial programs in AutoZone stores in Mexico and Brazil. IMC branches carry an extensive line of original equipment quality import replacement parts. The Company also sells the
ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com. Additionally, the Company sells automotive hard parts, maintenance items, accessories, and non-automotive products through www.autozone.com, and
accessories, performance and replacement parts through www.autoanything.com, and its commercial customers can make purchases through www.autozonepro.com and www.imcparts.net. The Company does not derive revenue from automotive repair or installation
services.
Fiscal Year:
The Companys fiscal year consists of 52 or 53 weeks ending on the last Saturday in August. Fiscal 2017, fiscal 2016
and fiscal 2015 represented 52 weeks.
Basis of Presentation:
The consolidated financial statements include the accounts of AutoZone, Inc. and its
wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the prior years Consolidated Statements of Cash Flows to conform to the
current years presentation due to the adoption of the new accounting guidance for share-based payments.
Use of Estimates:
Management of the
Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash equivalents consist of investments with original maturities of 90 days or less at the date of purchase. Cash
equivalents include proceeds due from credit and debit card transactions with settlement terms of less than five days. Credit and debit card receivables included within cash and cash equivalents were $48.3 million at August 26, 2017 and $46.8
million at August 27, 2016.
Cash balances are held in various locations around the world. Cash and cash equivalents of $148.4 million and $78.1
million were held outside of the U.S. as of August 26, 2017, and August 27, 2016, respectively, and were generally utilized to support liquidity needs in foreign operations. The Company intends to continue to permanently reinvest the cash
held outside of the U.S. in its foreign operations.
Accounts Receivable:
Accounts receivable consists of receivables from commercial customers and
vendors, and are presented net of an allowance for uncollectible accounts. AutoZone routinely grants credit to certain of its commercial customers. The risk of credit loss in its trade receivables is substantially mitigated by the Companys
credit evaluation process, short collection terms and sales to a large number of customers, as well as the low dollar value per transaction for most of its sales. Allowances for potential credit losses are determined based on historical experience
and current evaluation of the composition of accounts receivable. Historically, credit losses have been within managements expectations and the balance of the allowance for uncollectible accounts was $5.9 million at August 26, 2017, and
$7.4 million at August 27, 2016.
Merchandise Inventories:
Inventories are stated at the lower of cost or market. Merchandise inventories
include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (LIFO) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to
price deflation on the Companys merchandise purchases, the Company has exhausted its LIFO reserve balance. The Companys policy is to not write up inventory in excess of replacement cost. The difference between LIFO cost and replacement
cost, which will be reduced upon experiencing price inflation on the Companys merchandise purchases, was $414.9 million at August 26, 2017, and $364.1 million at August 27, 2016.
48
Marketable Securities:
The Company invests a portion of its assets held by the Companys wholly owned
insurance captive in marketable debt securities and classifies them as available-for-sale. The Company includes these securities within the Other current assets and Other long-term assets captions in the accompanying Consolidated Balance Sheets and
records the amounts at fair market value, which is determined using quoted market prices at the end of the reporting period. A discussion of marketable securities is included in Note E Fair Value Measurements and Note F
Marketable Securities.
Property and Equipment:
Property and equipment is stated at cost. Depreciation and amortization are computed
principally using the straight-line method over the following estimated useful lives: buildings, 40 to 50 years; building improvements, 5 to 15 years; equipment, 3 to 10 years; and leasehold improvements, over the shorter of the assets
estimated useful life or the remaining lease term, which includes any reasonably assured renewal periods. Depreciation and amortization include amortization of assets under capital lease.
Impairment of Long-Lived Assets:
The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted
expected future cash flows are less than the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of the assets exceeds the fair value of the assets. There were no material
impairment losses recorded in the three years ended August 26, 2017.
Goodwill:
The cost in excess of fair value of identifiable net assets of
businesses acquired is recorded as goodwill. Goodwill has not been amortized since fiscal 2001, but an analysis is performed at least annually to compare the fair value of the reporting unit to the carrying amount to determine if any impairment
exists. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. Refer to Note N Goodwill and Intangibles for additional disclosures
regarding the Companys goodwill and impairment assessment.
Intangible Assets:
Intangible assets consist of assets from the acquisitions of
IMC and AutoAnything and assets purchased relating to ALLDATA operations, and include technology, non-compete agreements, customer relationships and trade names. Amortizing intangible assets are amortized over periods ranging from 3 to 10 years.
Trade names are non-amortizing intangibles as their lives are indefinite. These non-amortizing assets are reviewed at least annually for impairment by comparing the carrying amount to fair value. The Company performs its annual impairment assessment
in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. Refer to Note N Goodwill and Intangibles for additional disclosures regarding the Companys intangible assets and impairment
assessment.
Derivative Instruments and Hedging Activities:
AutoZone is exposed to market risk from, among other things, changes in interest rates,
foreign exchange rates and fuel prices. From time to time, the Company uses various derivative instruments to reduce such risks. To date, based upon the Companys current level of foreign operations, no derivative instruments have been utilized
to reduce foreign exchange rate risk. All of the Companys hedging activities are governed by guidelines that are authorized by AutoZones Board of Directors (the Board). Further, the Company does not buy or sell derivative
instruments for trading purposes.
AutoZones financial market risk results primarily from changes in interest rates. At times, AutoZone reduces its
exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and forward-starting interest rate swaps.
All of the Companys interest rate hedge instruments are designated as cash flow hedges. Refer to Note H Derivative Financial
Instruments for additional disclosures regarding the Companys derivative instruments and hedging activities. Cash flows related to these instruments designated as qualifying hedges are reflected in the accompanying Consolidated
Statements of Cash Flows in the same categories as the cash flows from the items being hedged. Accordingly, cash flows relating to the settlement of interest rate derivatives hedging the forecasted issuance of debt have been reflected upon
settlement as a component of financing cash flows. The resulting gain
49
or loss from such settlement is deferred to Accumulated other comprehensive loss and reclassified to interest expense over the term of the underlying debt. This reclassification of the deferred
gains and losses impacts the interest expense recognized on the underlying debt that was hedged and is therefore reflected as a component of operating cash flows in periods subsequent to settlement.
Foreign Currency:
The Company accounts for its Mexican, Brazilian, Canadian, European, Chinese and British operations using the Mexican peso, Brazilian
real, Canadian dollar, euro, Chinese yuan renminbi and British pound as the functional currencies, respectively, and converts its financial statements from these currencies to U.S. dollars. The cumulative loss on currency translation is recorded as
a component of Accumulated other comprehensive loss (see Note G Accumulated Other Comprehensive Loss).
Self-Insurance
Reserves:
The Company retains a significant portion of the risks associated with workers compensation, employee health, general, products liability, property and vehicle insurance. Through various methods, which include analyses of
historical trends and utilization of actuaries, the Company estimates the costs of these risks. The costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported.
Estimates are based on calculations that consider historical lag and claim development factors. The long-term portions of these liabilities are recorded at the Companys estimate of their net present value.
Deferred Rent:
The Company recognizes rent expense on a straight-line basis over the course of the lease term, which includes any reasonably assured
renewal periods, beginning on the date the Company takes physical possession of the property (see Note O Leases). Differences between this calculated expense and cash payments are recorded as a liability within the Accrued
expenses and other and Other long-term liabilities captions in the accompanying Consolidated Balance Sheets, based on the terms of the lease. Deferred rent approximated $130.2 million as of August 26, 2017, and $121.7 million as of
August 27, 2016.
Financial Instruments:
The Company has financial instruments, including cash and cash equivalents, accounts receivable,
other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Companys debt is included in
Note I Financing, marketable securities is included in Note F Marketable Securities, and derivatives is included in Note H Derivative Financial Instruments.
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. Our effective tax rate is based on income by tax
jurisdiction, statutory rates, and tax saving initiatives available to the Company in the various jurisdictions in which we operate.
The Company
recognizes liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company must determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly
basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to
statutes and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.
The Company classifies interest related to income tax liabilities, and if applicable, penalties, as a component of Income tax expense. The income tax
liabilities and accrued interest and penalties that are expected to be payable within one year of the balance sheet date are presented within the Accrued expenses and other caption in the accompanying Consolidated Balance Sheets. The remaining
portion of the income tax liabilities and accrued interest and penalties are presented within the Other long-term liabilities caption in the accompanying Consolidated Balance Sheets because payment of cash is not anticipated within one year of the
balance sheet date. Refer to Note D Income Taxes for additional disclosures regarding the Companys income taxes.
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Sales and Use Taxes:
Governmental authorities assess sales and use taxes on the sale of goods and
services. The Company excludes taxes collected from customers in its reported sales results; such amounts are included within the Accrued expenses and other caption until remitted to the taxing authorities.
Dividends:
The Company currently does not pay a dividend on its common stock. The ability to pay dividends is subject to limitations imposed by Nevada
law. Under Nevada law, any future payment of dividends would be dependent upon the Companys financial condition, capital requirements, earnings and cash flow.
Revenue Recognition:
The Company recognizes sales at the time the sale is made and the product is delivered to the customer. Revenue from sales are
presented net of allowances for estimated sales returns, which are based on historical return rates.
A portion of the Companys transactions include
the sale of auto parts that contain a core component. The core component represents the recyclable portion of the auto part. Customers are not charged for the core component of the new part if a used core is returned at the point of sale of the new
part; otherwise the Company charges customers a specified amount for the core component. The Company refunds that same amount upon the customer returning a used core to the store at a later date. The Company does not recognize sales or cost of sales
for the core component of these transactions when a used part is returned or expected to be returned from the customer.
Vendor Allowances and
Advertising Costs:
The Company receives various payments and allowances from its vendors through a variety of programs and arrangements. Monies received from vendors include rebates, allowances and promotional funds. The amounts to be received
are subject to the terms of the vendor agreements, which generally do not state an expiration date, but are subject to ongoing negotiations that may be impacted in the future based on changes in market conditions, vendor marketing strategies and
changes in the profitability or sell-through of the related merchandise.
Rebates and other miscellaneous incentives are earned based on purchases or
product sales and are accrued ratably over the purchase or sale of the related product. These monies are generally recorded as a reduction of merchandise inventories and are recognized as a reduction to cost of sales as the related inventories are
sold.
For arrangements that provide for reimbursement of specific, incremental, identifiable costs incurred by the Company in selling the vendors
products, the vendor funds are recorded as a reduction to Operating, selling, general and administrative expenses in the period in which the specific costs were incurred.
The Company expenses advertising costs as incurred. Advertising expense, net of vendor promotional funds, was $93.1 million in fiscal 2017, $98.3 million in
fiscal 2016, and $98.0 million in fiscal 2015. Vendor promotional funds, which reduced advertising expense, amounted to $28.3 million in fiscal 2017, $21.4 million in fiscal 2016, and $22.0 million in fiscal 2015.
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Cost of Sales and Operating, Selling, General and Administrative Expenses:
The following illustrates the
primary costs classified in each major expense category:
Cost of Sales
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Total cost of merchandise sold, including:
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Freight expenses associated with moving merchandise inventories from the Companys vendors to the distribution centers;
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Vendor allowances that are not reimbursements for specific, incremental and identifiable costs
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Costs associated with operating the Companys supply chain, including payroll and benefit costs, warehouse occupancy costs, transportation costs and depreciation; and
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Operating, Selling, General and Administrative Expenses
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Payroll and benefit costs for store, field leadership and store support employees;
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Occupancy costs of store and store support facilities;
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Depreciation and amortization related to store and store support assets;
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Transportation costs associated with field leadership, commercial sales force and hub deliveries;
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Self insurance costs; and
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Other administrative costs, such as credit card transaction fees, legal costs, supplies, and travel and lodging
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Warranty Costs:
The Company or the vendors supplying its products provides the Companys customers limited warranties on certain products that
range from 30 days to lifetime. In most cases, the Companys vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty
obligations at the time of sale based on each products historical return rate. These obligations, which are often funded by vendor allowances, are recorded within the Accrued expenses and other caption in the Consolidated Balance Sheets. For
vendor allowances that are in excess of the related estimated warranty expense for the vendors products, the excess is recorded in inventory and recognized as a reduction to cost of sales as the related inventory is sold.
Shipping and Handling Costs:
The Company does not generally charge customers separately for shipping and handling. Substantially all the costs the
Company incurs to ship products to our stores are included in cost of sales.
Pre-opening Expenses:
Pre-opening expenses, which consist primarily
of payroll and occupancy costs, are expensed as incurred.
Earnings per Share:
Basic earnings per share is based on the weighted average
outstanding common shares. Diluted earnings per share is based on the weighted average outstanding common shares adjusted for the effect of common stock equivalents, which are primarily stock options. There were 620,915 stock options excluded from
the diluted earnings per share calculation because they would have been anti-dilutive as of August 26, 2017. There were 329,900 stock options excluded for the year ended August 27, 2016, and 778 stock options excluded for the year ended
August 29, 2015, because they would have been anti-dilutive.
Share-Based Payments:
Share-based payments include stock option grants and
certain other transactions under the Companys stock plans. The Company recognizes compensation expense for its share-based payments over the requisite service period based on the fair value of the awards. See Note B Share-Based
Payments for further discussion.
Risk and Uncertainties:
In fiscal 2017, one class of similar products accounted for approximately 11
percent of the Companys total revenues, and one vendor supplied approximately 11 percent of the Companys total purchases. No other class of similar products accounted for 10 percent or more of total revenues, and no other individual
vendor provided more than 10 percent of total purchases.
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Recently Adopted Accounting Pronouncements:
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-09,
Compensation
Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting
. ASU 2016-09 simplifies several aspects of accounting for share-based payments transactions, including income tax consequences, classification of awards as
either equity or liabilities and classification on the statement of cash flows. The Company adopted this standard on August 28, 2016. The Company has applied the amendment requiring recognition of excess tax deficiencies and tax benefits in the
income statement prospectively. The adoption of the new standard increased earnings per share for the year ended August 26, 2017 by $0.81, driven by a lower effective tax rate of 162 basis points (a $1.08 benefit to earnings per share),
partially offset by a change to the dilutive outstanding shares calculation (a $0.27 reduction to earnings per share). The Company has applied the amendment relating to the presentation of the excess tax benefits on the Consolidated Statements of
Cash Flows retrospectively, resulting in the reclassification of $63.7 million and $47.9 million of excess tax benefits from cash flows from financing activities to cash flows from operating activities for the years ended August 27, 2016 and
August 29, 2015, respectively. The Company will continue to estimate forfeitures of share-based awards.
In January 2017, the FASB issued ASU
2017-04,
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. ASU 2017-04 eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim,
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value, not to
exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption. Early adoption is permitted. The Company early adopted ASU 2017-04 in the fourth quarter of fiscal 2017, and it had no
material impact on the consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements
Going Concern (Subtopic 2015-40), Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
. ASU 2014-15 requires management to perform two steps. Management must first evaluate whether there are conditions and
events that raise substantial doubt about the entitys ability to continue as a going concern (Step 1). If management concludes that substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt
(Step 2). Management must perform a going concern evaluation to assess whether it is probable that both managements plans will be effectively implemented and those plans will mitigate the relevant conditions and events within one year after
the financial statements are issued (or available to be issued, when applicable). The Company adopted ASU 2014-15 in fiscal 2017, concluding no significant conditions or events are present to raise substantial doubt about the Companys ability
to continue as a going concern.
Recently Issued Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers.
Under ASU 2014-09, an entity will recognize revenue to depict the
transfer of promised goods or services to customers at an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This update will be effective for the Company at the beginning of its fiscal 2019 year. The Company established a cross-functional implementation team to
evaluate and identify the impact of
ASU 2014-09
on the Companys financial position, results of operations and cash flows. The Company is currently in the process of identifying changes to its business processes, systems and controls to
support adoption of the new standard. The Company is considering the possible implications of the new standard on the Companys revenue streams at each of the business units, the application of the Companys loyalty programs and all
applicable financial statement disclosures required by the new guidance. At this time, the team has not completed its full analysis or means of adoption for the new guidance; however, the Company does not expect the adoption of the new standard to
have a material impact on its consolidated financial condition, results of operations or cash flows.
In February 2016, the FASB issued
ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of
expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption is permitted. The updated guidance requires a modified
retrospective adoption. This update will be effective for the Company beginning with its fiscal 2020 first quarter. The Company established a cross-
53
functional implementation team to evaluate and identify the impact of
ASU 2016-02
on the Companys financial position, results of operations and cash flows. The Company is currently
in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard. The Company is considering the possible implications of the new standard on determining the valuation of new and existing
leases, procedural and operational changes that may be necessary to comply with the provisions of the accounting update and all applicable financial statement disclosures required by the new guidance. At this time, the team has not completed its
full analysis and is unable to quantify the impact; however, the Company believes the adoption of the new guidance will have a material impact on the total assets and total liabilities reported on the Companys consolidated balance sheets.
In May 2016, the FASB issued ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives Hedging (Topic 815): Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)
. ASU 2016-11 rescinds certain SEC Staff Observer comments under Topic 605, Revenue Recognition and Topic 932,
Extractive Activities-Oil and Gas. This guidance clarifies that the registrants should not rely on the rescinded SEC Staff Observer comments upon adoption of ASU 2014-09. The Company does not expect ASU 2016-11 to have a material impact on its
consolidated financial statements. This update will be effective for the Company at the beginning of its fiscal 2019 year.
In October 2016, the FASB
issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory
. ASU 2016-16 requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than
inventory when the transfer occurs. The guidance must be applied using the modified retrospective basis. The Company does not expect the provisions of ASU 2016-16 to have a material impact on its financial statements. This update will be
effective for the Company at the beginning of fiscal 2019.
In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers
. ASU 2016-20 provides correction or improvement to the guidance previously issued in ASU 2014-09,
Revenue from Contracts with Customers
. Under ASU 2014-09, an entity will recognize revenue
to depict the transfer of promised goods or services to customers at an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the
nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company is in the process of evaluating the impact of the provisions of the ASUs on its consolidated financial statements. This update will
be effective for the Company at the beginning of its fiscal 2019 year.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
. ASU 2017-01 provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires a
prospective adoption. Early adoption is permitted. The Company does not expect the provisions of ASU 2017-01 to have a material impact on its consolidated financial statements. This update will be effective for the Company beginning with its fiscal
2019 first quarter.
In March 2017, the FASB issued ASU 2017-07,
Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. ASU 2017-07 requires an employer to separate the service cost component from other components of net benefit cost. It also provides specific guidance on the presentation of the
service cost component and other components of net benefit in the income statement; only the service cost component of net benefit cost is eligible for capitalization. The Company is in the process of evaluating the effects of the provisions of ASU
2017-07 on its consolidated financial statements. This update will be effective for the Company beginning with its fiscal 2019 first quarter.
Note B
Share-Based Payments
Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $38.2
million for fiscal 2017, $39.8 million for fiscal 2016, and $41.0 million for fiscal 2015. As of August 26, 2017, share-based compensation expense for unvested awards not yet recognized in earnings is $37.9 million and will be recognized over a
weighted average period of 1.98 years. As a result of the adoption of the new accounting guidance for share-based payments, cash flows related to tax deductions in excess of recognized
54
compensation cost are classified as operating cash flows for each period presented. Retrospective application of the cash flow presentation resulted in increases to both net cash provided by
operations and net cash required for financing activities of $63.7 million and $47.9 million for fiscal 2016 and 2015, respectively.
On December 15,
2010, the Companys stockholders approved the 2011 Equity Incentive Award Plan (the 2011 Plan), allowing the Company to provide equity-based compensation to non-employee directors and employees for their service to AutoZone or its
subsidiaries or affiliates. Prior to the Companys adoption of the 2011 Plan, equity-based compensation was provided to employees under the 2006 Stock Option Plan and to non-employee directors under the 2003 Director Compensation Plan (the
2003 Comp Plan) and the 2003 Director Stock Option Plan (the 2003 Option Plan).
During fiscal 2016, the Companys
stockholders approved the Amended and Restated AutoZone, Inc. 2011 Equity Incentive Award Plan (the Amended 2011 Equity Plan). The Amended 2011 Equity Plan imposes a maximum limit on the compensation, measured as the sum of any cash
compensation and the aggregate grant date fair value of awards granted under the Amended 2011 Equity Plan, which may be paid to non-employee directors for such service during any calendar year. The Amended 2011 Equity Plan also applies a ten-year
term on the Amended 2011 Equity Plan through December 16, 2025 and extends the Companys ability to grant incentive stock options through October 7, 2025.
The Company grants options to purchase common stock to certain of its employees under its plan at prices equal to the market value of the stock on the date of
grant. Options have a term of 10 years or 10 years and one day from grant date. Employee options generally vest in equal annual installments on the first, second, third and fourth anniversaries of the grant date and generally have 30 or 90 days
after the service 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.
In addition to the 2011 Plan, on December 15, 2010, the Company
adopted the 2011 Director Compensation Program (the 2011 Program), which stated that non-employee directors would receive their compensation in awards of restricted stock units under the 2011 Plan. Under the 2011 Program, restricted
stock units are granted the first day of each calendar quarter. The number of restricted stock units granted each quarter is determined by dividing one-fourth of the amount of the annual retainer by the fair market value of the shares of common
stock as of the grant date. The restricted stock units are fully vested on the date they are issued and are paid in shares of the Companys common stock subsequent to the non-employee director ceasing to be a member of the Board.
The 2011 Program replaced the 2003 Comp Plan and the 2003 Option Plan. Under the 2003 Comp Plan, non-employee directors could receive no more than one-half of
their director fees immediately in cash, and the remainder of the fees was required to be taken in common stock or stock appreciation rights. The director had the option to elect to receive up to 100% of the fees in stock or defer all or part of the
fees in units with value equivalent to the value of shares of common stock as of the grant date. At August 26, 2017, the Company had $9.5 million accrued related to 17,990 outstanding units issued under the 2003 Comp Plan and prior plans, and
there was $13.6 million accrued related to 17,990 outstanding units issued as of August 27, 2016. No additional shares of stock or units will be issued in future years under the 2003 Comp Plan.
Under the 2003 Option Plan, each non-employee director received an option grant on January 1 of each year, and each new non-employee director received an
option to purchase 3,000 shares upon election to the Board, plus a portion of the annual directors option grant prorated for the portion of the year actually served. These stock option grants were made at the fair market value as of the grant
date and generally vested three years from the grant date. There were 19,000 and 24,000 outstanding options under the 2003 Option Plan as of August 26, 2017 and August 27, 2016, respectively. No additional shares of stock will be issued in
future years under the 2003 Option Plan.
During the second quarter of fiscal 2014, the Company adopted the 2014 Director Compensation Program (the
Program), which states that non-employee directors will receive their compensation in awards of restricted stock units under the 2011 Equity Incentive Award Plan, with an option for a certain portion of a directors compensation to
be paid in cash at the non-employee directors election. The Program replaces the 2011 Director Compensation Program. Under the Program, restricted stock units are granted January 1 of each year (the Grant
55
Date). The number of restricted stock units is determined by dividing the amount of the annual retainer by the fair market value of the shares of common stock as of the Grant
Date. The restricted stock units are fully vested on January 1 of each year and are paid in shares of the Companys common stock on the earlier to occur of the fifth anniversary of the Grant Date or the date the non-employee director
ceases to be a member of the Board (Separation from Service). Non-employee directors may elect to defer receipt of the restricted stock units until their Separation from Service. The cash portion of the award, if elected, is paid ratably
over the remaining calendar quarters.
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 following table presents the
weighted average for key assumptions used in determining the fair value of options granted and the related share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Expected price volatility
|
|
|
18%
|
|
|
|
18%
|
|
|
|
20%
|
|
Risk-free interest rates
|
|
|
1.2%
|
|
|
|
1.5%
|
|
|
|
1.4%
|
|
Weighted average expected lives (in years)
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
5.1
|
|
Forfeiture rate
|
|
|
10%
|
|
|
|
10%
|
|
|
|
9%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
The following methodologies were applied in developing the assumptions used in determining the fair value of options granted:
Expected price volatility
This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The
Company uses actual historical changes in the market value of its stock to calculate the volatility assumption as it is managements belief that this is the best indicator of future volatility. The Company calculates daily market value changes
from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.
Risk-free interest rate
This is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the
option. An increase in the risk-free interest rate will increase compensation expense.
Expected lives
This is the period of
time over which the options granted are expected to remain outstanding and is based on historical experience. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Options
granted have a maximum term of ten years or ten years and one day. An increase in the expected life will increase compensation expense.
Forfeiture rate
This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming
fully vested. This estimate is based on historical experience at the time of valuation and reduces expense ratably over the vesting period. An increase in the forfeiture rate will decrease compensation expense. This estimate is evaluated
periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Dividend
yield
The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.
The weighted average grant date fair value per share of options granted was $139.80 during fiscal 2017, $156.20 during fiscal 2016, and $106.27 during fiscal
2015. The intrinsic value of options exercised was $93.9 million in fiscal 2017, $178.0 million in fiscal 2016, and $154.8 million in fiscal 2015. The total fair value of options vested was $34.7 million in fiscal 2017, $32.2 million in fiscal 2016,
and $30.6 million in fiscal 2015.
56
The Company generally issues new shares when options are exercised. The following table summarizes information
about stock option activity for the year ended August 26, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding August 27, 2016
|
|
|
1,759,408
|
|
|
$
|
428.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
290,805
|
|
|
|
744.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(207,069
|
)
|
|
|
263.02
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(45,089
|
)
|
|
|
657.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding August 26, 2017
|
|
|
1,798,055
|
|
|
|
493.18
|
|
|
|
6.17
|
|
|
$
|
199,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
1,041,933
|
|
|
|
362.38
|
|
|
|
4.76
|
|
|
|
189,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest
|
|
|
680,510
|
|
|
|
673.42
|
|
|
|
8.10
|
|
|
|
8,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grants
|
|
|
898,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $1.8 million in expense related to the discount on the selling of shares to employees and executives
under various share purchase plans in fiscal 2017, $2.0 million in fiscal 2016 and $2.1 million in fiscal 2015. The Sixth Amended and Restated AutoZone, Inc. Employee Stock Purchase Plan (the Employee Plan), which is qualified under
Section 423 of the Internal Revenue Code, permits all eligible employees to purchase AutoZones common stock at 85% of the lower of the market price of the common stock on the first day or last day of each calendar quarter through payroll
deductions. Maximum permitted annual purchases are $15,000 per employee or 10 percent of compensation, whichever is less. Under the Employee Plan, 14,205 shares were sold to employees in fiscal 2017, 12,662 shares were sold to employees in fiscal
2016, and 14,222 shares were sold to employees in fiscal 2015. The Company repurchased 12,455 shares at market value in fiscal 2017, 12,460 shares in fiscal 2016 and 15,594 shares in fiscal 2015 from employees electing to sell their stock. Issuances
of shares under the Employee Plan are netted against repurchases and such repurchases are not included in share repurchases disclosed in Note K Stock Repurchase Program. At August 26, 2017, 178,300 shares of common stock were
reserved for future issuance under the Employee Plan.
Once executives have reached the maximum purchases under the Employee Plan, the Fifth Amended and
Restated Executive Stock Purchase Plan (the Executive Plan) permits all eligible executives to purchase AutoZones common stock up to 25 percent of his or her annual salary and bonus. Purchases under the Executive Plan were 1,865
shares in fiscal 2017, 1,943 shares in fiscal 2016 and 2,229 shares in fiscal 2015. At August 26, 2017, 239,888 shares of common stock were reserved for future issuance under the Executive Plan.
Note C Accrued Expenses and Other
Accrued
expenses and other consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Accrued compensation, related payroll taxes and benefits
|
|
$
|
181,591
|
|
|
$
|
180,012
|
|
Property, sales, and other taxes
|
|
|
98,829
|
|
|
|
95,293
|
|
Medical and casualty insurance claims (current portion)
|
|
|
84,756
|
|
|
|
78,458
|
|
Capital lease obligations
|
|
|
48,134
|
|
|
|
44,834
|
|
Accrued interest
|
|
|
41,047
|
|
|
|
34,179
|
|
Accrued gift cards
|
|
|
24,192
|
|
|
|
24,129
|
|
Accrued sales and warranty returns
|
|
|
19,520
|
|
|
|
19,527
|
|
Other
|
|
|
65,281
|
|
|
|
75,193
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
563,350
|
|
|
$
|
551,625
|
|
|
|
|
|
|
|
|
|
|
57
The Company retains a significant portion of the insurance risks associated with workers compensation,
employee health, general, products liability, property and vehicle insurance. A portion of these self-insured losses is managed through a wholly owned insurance captive. The Company maintains certain levels for stop-loss coverage for each
self-insured plan in order to limit its liability for large claims. The limits are per claim and are $1.5 million for workers compensation, $2.0 million for vehicles, $21.5 million for property, $0.7 million for employee health, and $1.0
million for general and products liability.
Note D Income Taxes
The components of income from continuing operations before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Domestic
|
|
$
|
1,737,401
|
|
|
$
|
1,737,727
|
|
|
$
|
1,676,640
|
|
International
|
|
|
188,088
|
|
|
|
174,987
|
|
|
|
125,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,925,489
|
|
|
$
|
1,912,714
|
|
|
$
|
1,802,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
487,492
|
|
|
$
|
534,621
|
|
|
$
|
522,073
|
|
State
|
|
|
31,733
|
|
|
|
39,223
|
|
|
|
41,921
|
|
International
|
|
|
50,493
|
|
|
|
52,844
|
|
|
|
42,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569,718
|
|
|
|
626,688
|
|
|
|
606,400
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
72,208
|
|
|
|
48,509
|
|
|
|
38,299
|
|
State
|
|
|
7,769
|
|
|
|
9,453
|
|
|
|
941
|
|
International
|
|
|
(5,075
|
)
|
|
|
(12,943
|
)
|
|
|
(3,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,902
|
|
|
|
45,019
|
|
|
|
35,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
644,620
|
|
|
$
|
671,707
|
|
|
$
|
642,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Federal tax at statutory U.S. income tax rate
|
|
|
35.0%
|
|
|
|
35.0%
|
|
|
|
35.0%
|
|
State income taxes, net
|
|
|
1.3%
|
|
|
|
1.6%
|
|
|
|
1.5%
|
|
Other
|
|
|
(2.8%
|
)
|
|
|
(1.5%
|
)
|
|
|
(0.9%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.5%
|
|
|
|
35.1%
|
|
|
|
35.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Significant components of the Companys deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
48,062
|
|
|
$
|
50,859
|
|
Accrued benefits
|
|
|
96,664
|
|
|
|
93,212
|
|
Other
|
|
|
56,052
|
|
|
|
68,600
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
200,778
|
|
|
|
212,671
|
|
Less: Valuation allowances
|
|
|
(13,501
|
)
|
|
|
(13,338
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
187,277
|
|
|
|
199,333
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(117,580
|
)
|
|
|
(93,943
|
)
|
Inventory
|
|
|
(333,422
|
)
|
|
|
(315,563
|
)
|
Prepaid Expenses
|
|
|
(60,920
|
)
|
|
|
(27,395
|
)
|
Other
|
|
|
(11,158
|
)
|
|
|
(10,077
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(523,080
|
)
|
|
|
(446,978
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(335,803
|
)
|
|
$
|
(247,645
|
)
|
|
|
|
|
|
|
|
|
|
Deferred taxes are not provided for temporary differences of approximately $712.6 million at August 26, 2017, and $572.0
million at August 27, 2016, representing earnings of non-U.S. subsidiaries that are intended to be permanently reinvested. If a deferred tax liability associated with these undistributed earnings had been recorded it would have been
approximately $37.5 million and $35.0 million at August 26, 2017 and August 27, 2016, respectively.
At August 26, 2017 and August 27,
2016, the Company had deferred tax assets of $30.8 million and $25.2 million, respectively, from net operating loss (NOL) carryforwards available to reduce future taxable income totaling approximately $198.2 million and $122.0 million,
respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2018 through 2037. At August 26, 2017 and August 27, 2016, the Company had deferred tax assets for income tax credit
carryforwards of $17.2 million and $25.7 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2023 through 2027.
At August 26, 2017 and August 27, 2016, the Company had a valuation allowance of $13.5 million and $13.3 million, respectively, on deferred tax
assets associated with NOL and tax credit carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. Management believes it is more likely than not that the remaining deferred tax
assets will be fully realized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Beginning balance
|
|
$
|
27,726
|
|
|
$
|
28,434
|
|
Additions based on tax positions related to the current year
|
|
|
7,089
|
|
|
|
7,172
|
|
Additions for tax positions of prior years
|
|
|
278
|
|
|
|
95
|
|
Reductions for tax positions of prior years
|
|
|
(6,954
|
)
|
|
|
(2,405
|
)
|
Reductions due to settlements
|
|
|
(1,964
|
)
|
|
|
(858
|
)
|
Reductions due to statute of limitations
|
|
|
(3,974
|
)
|
|
|
(4,712
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,201
|
|
|
$
|
27,726
|
|
|
|
|
|
|
|
|
|
|
Included in the August 26, 2017 and the August 27, 2016 balances are $9.9 million and $15.5 million, respectively,
of unrecognized tax benefits that, if recognized, would reduce the Companys effective tax rate.
The Company accrues interest on unrecognized tax
benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. The Company had $1.2 million and $2.8 million accrued for the payment of interest and penalties associated with
unrecognized tax benefits at August 26, 2017 and August 27, 2016, respectively.
59
The Company files U.S. federal, U.S. state and local, and international income tax returns. With few exceptions,
the Company is no longer subject to state and local or Non-U.S. examinations by tax authorities for fiscal year 2013 and prior. The Company is typically engaged in various tax examinations at any given time by U.S. federal, U.S. state and local, and
Non-U.S. taxing jurisidictions. As of August 26, 2017, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $2.3 million over the next twelve months as a result of tax audit settlements. While the
Company believes that it has adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.
Note E Fair Value Measurements
The Company has
adopted ASC Topic 820,
Fair Value Measurement
, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure requirements about fair value measurements. This standard defines fair value as the price
received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a framework for measuring fair value by creating a hierarchy of valuation inputs
used to measure fair value, and although it does not require additional fair value measurements, it applies to other accounting pronouncements that require or permit fair value measurements.
The hierarchy prioritizes the inputs into three broad levels:
Level 1 inputs
unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to
access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information.
Level 2 inputs
inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for
the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other
than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.
Level 3 inputs
unobservable inputs for the asset or liability.
Financial Assets & Liabilities Measured at Fair Value on a Recurring Basis
The Companys assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2017
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair
Value
|
|
Other current assets
|
|
$
|
18,453
|
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
18,573
|
|
Other long-term assets
|
|
|
53,319
|
|
|
|
28,981
|
|
|
|
|
|
|
|
82,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71,772
|
|
|
$
|
29,101
|
|
|
$
|
|
|
|
$
|
100,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2016
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair
Value
|
|
Other current assets
|
|
$
|
7,326
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,326
|
|
Other long-term assets
|
|
|
65,350
|
|
|
|
25,675
|
|
|
|
|
|
|
|
91,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,676
|
|
|
$
|
25,675
|
|
|
$
|
|
|
|
$
|
98,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
At August 26, 2017, the fair value measurement amounts for assets and liabilities recorded in the
accompanying Consolidated Balance Sheet consisted of short-term marketable securities of $18.6 million, which are included within Other current assets and long-term marketable securities of $82.3 million, which are included in Other long-term
assets. The Companys marketable securities are typically valued at the closing price in the principal active market as of the last business day of the quarter or through the use of other market inputs relating to the securities, including
benchmark yields and reported trades.
A discussion on how the Companys cash flow hedges are valued is included in Note H Derivative
Financial Instruments, while the fair value of the Companys pension plan assets are disclosed in Note L Pension and Savings Plans.
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
Non-financial assets are required to be measured at fair value on a non-recurring basis in certain circumstances, including the event of impairment. The assets
could include assets acquired in an acquisition as well as property, plant and equipment that are determined to be impaired. During fiscal 2017 and fiscal 2016, the Company did not have any significant non-financial assets measured at fair value on
a non-recurring basis in periods subsequent to initial recognition.
Financial Instruments not Recognized at Fair Value
The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying
amounts of these financial instruments approximate fair value because of their short maturities. The fair value of the Companys debt is disclosed in Note I Financing.
Note F Marketable Securities
The Companys
basis for determining the cost of a security sold is the Specific Identification Model. Unrealized gains (losses) on marketable securities are recorded in Accumulated other comprehensive loss. The Companys available-for-sale
marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2017
|
|
(in thousands)
|
|
Amortized
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Corporate securities
|
|
$
|
39,917
|
|
|
$
|
73
|
|
|
$
|
(13
|
)
|
|
$
|
39,977
|
|
Government bonds
|
|
|
31,076
|
|
|
|
49
|
|
|
|
(74
|
)
|
|
|
31,051
|
|
Mortgage-backed securities
|
|
|
4,850
|
|
|
|
2
|
|
|
|
(42
|
)
|
|
|
4,810
|
|
Asset-backed securities and other
|
|
|
25,042
|
|
|
|
28
|
|
|
|
(35
|
)
|
|
|
25,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,885
|
|
|
$
|
152
|
|
|
$
|
(164
|
)
|
|
$
|
100,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2016
|
|
(in thousands)
|
|
Amortized
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Corporate securities
|
|
$
|
37,789
|
|
|
$
|
198
|
|
|
$
|
(6
|
)
|
|
$
|
37,981
|
|
Government bonds
|
|
|
33,497
|
|
|
|
24
|
|
|
|
(35
|
)
|
|
|
33,486
|
|
Mortgage-backed securities
|
|
|
6,865
|
|
|
|
18
|
|
|
|
(29
|
)
|
|
|
6,854
|
|
Asset-backed securities and other
|
|
|
20,015
|
|
|
|
26
|
|
|
|
(11
|
)
|
|
|
20,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98,166
|
|
|
$
|
266
|
|
|
$
|
(81
|
)
|
|
$
|
98,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The debt securities held at August 26, 2017, had effective maturities ranging from less than one year to approximately
three years. The Company did not realize any material gains or losses on its marketable securities during fiscal 2017, 2016 or 2015.
The Company holds 51
securities that are in an unrealized loss position of approximately $164 thousand at August 26, 2017. The Company has the intent and ability to hold these investments until recovery of fair value or maturity, and does not deem the investments
to be impaired on an other than temporary basis. In evaluating
61
whether the securities are deemed to be impaired on an other than temporary basis, the Company considers factors such as the duration and severity of the loss position, the credit worthiness of
the investee, the term to maturity and its intent and ability to hold the investments until maturity or until recovery of fair value.
Included above in
total marketable securities are $85.4 million and $61.8 million of marketable securities transferred by the Companys insurance captive to a trust account to secure its obligations to an insurance company related to future workers
compensation and casualty losses as of August 26, 2017 and August 27, 2016, respectively.
Note G Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes certain adjustments to pension liabilities, foreign currency translation adjustments, certain activity
for interest rate swaps and treasury rate locks that qualify as cash flow hedges and unrealized gains (losses) on available-for-sale securities. Changes in Accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Liability
|
|
|
Foreign
Currency
(3)
|
|
|
Net
Unrealized
Gain (Loss)
on Securities
|
|
|
Derivatives
|
|
|
Total
|
|
Balance at August 29, 2015
|
|
$
|
(70,795
|
)
|
|
$
|
(171,488
|
)
|
|
$
|
(26
|
)
|
|
$
|
(7,209
|
)
|
|
$
|
(249,518
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(24,542
|
)
|
|
|
(39,524
|
)
|
|
|
206
|
|
|
|
(2,687
|
)
|
|
|
(66,547
|
)
|
Amounts reclassified from Accumulated other comprehensive loss
(1)
|
|
|
6,447
|
(2)
|
|
|
|
|
|
|
(60
|
)
(4)
|
|
|
2,149
|
(5)
|
|
|
8,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 27, 2016
|
|
|
(88,890
|
)
|
|
|
(211,012
|
)
|
|
|
120
|
|
|
|
(7,747
|
)
|
|
|
(307,529
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
8,046
|
|
|
|
35,198
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
43,184
|
|
Amounts reclassified from Accumulated other comprehensive loss
(1)
|
|
|
8,468
|
(2)
|
|
|
|
|
|
|
(71
|
)
(4)
|
|
|
1,391
|
(5)
|
|
|
9,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 26, 2017
|
|
$
|
(72,376
|
)
|
|
$
|
(175,814
|
)
|
|
$
|
(11
|
)
|
|
$
|
(6,356
|
)
|
|
$
|
(254,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts in parentheses indicate debits to Accumulated other comprehensive loss.
|
(2)
|
Represents amortization of pension liability adjustments, net of taxes of $5,406 in fiscal 2017 and $4,059 in fiscal 2016, which is recorded in Operating, selling, general and administrative expenses on the
Consolidated Statements of Income. See Note L Pension and Savings Plans for further discussion.
|
(3)
|
Foreign currency is not shown net of additional U.S. tax as earnings of non-U.S. subsidiaries are intended to be permanently reinvested.
|
(4)
|
Represents realized losses on marketable securities, net of taxes of $38 in fiscal 2017 and $33 in fiscal 2016, which is recorded in Operating, selling, general, and administrative expenses on the Consolidated
Statements of Income. See Note F Marketable Securities for further discussion.
|
(5)
|
Represents gains and losses on derivatives, net of taxes of $814 in fiscal 2017 and $315 in fiscal 2016, which is recorded in Interest expense, net, on the Consolidated Statements of Income. See Note H
Derivative Financial Instruments for further discussion.
|
The 2017 pension actuarial gain of $8.0 million and the 2016 pension
actuarial loss of $24.5 million include amounts not yet reflected in periodic pension costs primarily driven by changes in the discount rate.
62
Note H Derivative Financial Instruments
The Company periodically uses derivatives to hedge exposures to interest rates. The Company does not hold or issue financial instruments for trading purposes.
For transactions that meet the hedge accounting criteria, the Company formally designates and documents the instrument as a hedge at inception and quarterly thereafter assesses the hedges to ensure they are effective in offsetting changes in the
cash flows of the underlying exposures. Derivatives are recorded in the Companys Consolidated Balance Sheet at fair value, determined using available market information or other appropriate valuation methodologies. In accordance with ASC Topic
815,
Derivatives and Hedging
, the effective portion of a financial instruments change in fair value is recorded in Accumulated other comprehensive loss for derivatives that qualify as cash flow hedges and any ineffective portion of an
instruments change in fair value is recognized in earnings.
At August 26, 2017, the Company had $10.1 million recorded in Accumulated other
comprehensive loss related to net realized losses associated with terminated interest rate swap and treasury rate lock derivatives which were designated as hedging instruments. Net losses are amortized into Interest expense over the remaining life
of the associated debt. During the fiscal year ended August 26, 2017, the Company reclassified $2.2 million of net losses from Accumulated other comprehensive loss to Interest expense. In the fiscal year ended August 27, 2016, the Company
reclassified $1.8 million of net losses from Accumulated other comprehensive loss to Interest expense. The Company expects to reclassify $2.2 million of net losses from Accumulated other comprehensive loss to Interest expense over the next 12
months.
Note I Financing
The Companys
debt consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
1.300% Senior Notes due January 2017, effective interest rate of 1.43%
|
|
$
|
|
|
|
$
|
400,000
|
|
7.125% Senior Notes due August 2018, effective interest rate of 7.28%
|
|
|
250,000
|
|
|
|
250,000
|
|
1.625% Senior Notes due April 2019, effective interest rate of 1.77%
|
|
|
250,000
|
|
|
|
250,000
|
|
4.000% Senior Notes due November 2020, effective interest rate of 4.43%
|
|
|
500,000
|
|
|
|
500,000
|
|
2.500% Senior Notes due April 2021, effective interest rate of 2.62%
|
|
|
250,000
|
|
|
|
250,000
|
|
3.700% Senior Notes due April 2022, effective interest rate of 3.85%
|
|
|
500,000
|
|
|
|
500,000
|
|
2.875% Senior Notes due January 2023, effective interest rate of 3.21%
|
|
|
300,000
|
|
|
|
300,000
|
|
3.125% Senior Notes due July 2023, effective interest rate of 3.26%
|
|
|
500,000
|
|
|
|
500,000
|
|
3.250% Senior Notes due April 2025, effective interest rate 3.36%
|
|
|
400,000
|
|
|
|
400,000
|
|
3.125% Senior Notes due April 2026, effective interest rate of 3.28%
|
|
|
400,000
|
|
|
|
400,000
|
|
3.750% Senior Notes due June 2027, effective interest rate of 3.83%
|
|
|
600,000
|
|
|
|
|
|
Commercial paper, weighted average interest rate of 1.44% and 0.72% at August 26, 2017 and
August 27, 2016, respectively
|
|
|
1,155,100
|
|
|
|
1,197,500
|
|
|
|
|
|
|
|
|
|
|
Total debt before discounts and debt issuance costs
|
|
|
5,105,100
|
|
|
|
4,947,500
|
|
Less: Discounts and debt issuance costs
|
|
|
23,862
|
|
|
|
23,381
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
5,081,238
|
|
|
$
|
4,924,119
|
|
|
|
|
|
|
|
|
|
|
As of August 26, 2017, the commercial paper borrowings and the $250 million 7.125% Senior Notes due August 2018 are
classified as long-term in the accompanying Consolidated Balance Sheets as the Company has the ability and intent to refinance on a long-term basis through available capacity in its revolving credit facilities. As of August 26, 2017, the
Company had $1.997 billion of availability under its $2.0 billion revolving credit facilities, which would allow it to replace these short-term obligations with long-term financing facilities.
On November 18, 2016, the Company amended and restated its existing Multi-Year revolving credit facility (the New Multi-Year Revolving Credit
Agreement) by increasing the committed credit amount from $1.25 billion to $1.6 billion, extending the expiration date by two years and renegotiating other terms and conditions. This credit facility is available to primarily support commercial
paper borrowings, letters of credit and other short-term unsecured bank loans. The capacity of the credit facility may be increased to $2.1 billion prior to the maturity date at the Companys election and subject to bank credit capacity and
approval, and may include up to $200 million in letters of credit. Under the revolving credit facility, the Company may borrow funds consisting of Eurodollar
63
loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the revolving
credit facility, depending upon the Companys senior, unsecured, (non-credit enhanced) long-term debt rating. Interest accrues on base rate loans as defined in the credit facility. The Company also has the option to borrow funds under the terms
of a swingline loan subfacility. The revolving credit facility expires on November 18, 2021, but the Company may, by notice to the administrative agent, make up to two requests to extend the termination date for an additional period of one
year. The first such request must be made no earlier than 60 days, and no later than 45 days, prior to November 18, 2017, while the second request must be made no earlier than 60 days, and no later than 45 days, prior to November 18,
2018.
On November 18, 2016, the Company amended and restated its existing 364-Day revolving credit facility (the New 364-Day Credit
Agreement) by decreasing the committed credit amount from $500 million to $400 million, extending the expiration date by one year and renegotiating other terms and conditions. The credit facility is available to primarily support commercial
paper borrowings and other short-term unsecured bank loans. Under the credit facility, the Company may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined
Eurodollar rate, defined as LIBOR plus the applicable margin, as defined in the revolving credit facility, depending upon the Companys senior, unsecured, (non-credit enhanced) long-term debt rating. Interest accrues on base rate loans as
defined in the credit facility. The New 364-Day Credit Agreement expires on November 17, 2017, but the Company may request an extension of the termination date for 364 days no later than 45 days prior to November 17, 2017, subject to bank
approval. In addition, at least 15 days prior to November 17, 2017, the Company has the right to convert the credit facility to a term loan for up to one year from the termination date, subject to a 1% penalty.
The revolving credit facility agreements require that the Companys consolidated interest coverage ratio as of the last day of each quarter shall be no
less than 2.5:1. This ratio is defined as the ratio of (i) consolidated earnings before interest, taxes and rents to (ii) consolidated interest expense plus consolidated rents. The Companys consolidated interest coverage ratio as of
August 26, 2017 was 6.0:1.
As of August 26, 2017, the Company had no outstanding borrowings under each of the revolving credit facilities, and
$3.3 million of outstanding letters of credit under the New Multi-Year Revolving Credit Agreement.
The Company also maintains a letter of credit facility
that allows it to request the participating bank to issue letters of credit on its behalf up to an aggregate amount of $75 million. The letter of credit facility is in addition to the letters of credit that may be issued under the New Multi-Year
Revolving Credit Agreement. As of August 26, 2017, the Company had $74.9 million in letters of credit outstanding under the letter of credit facility.
In addition to the outstanding letters of credit issued under the committed facilities discussed above, the Company had $10.4 million in letters of credit
outstanding as of August 26, 2017. These letters of credit have various maturity dates and were issued on an uncommitted basis.
On April 18,
2017, the Company issued $600 million in 3.750% Senior Notes due June 2027 under its shelf registration statement filed with the SEC on April 15, 2015 (the 2015 Shelf Registration). The 2015 Shelf Registration allows the Company to
sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new location openings, stock repurchases and
acquisitions. Proceeds from the debt issuance were used for general corporate purposes.
On April 21, 2016, the Company issued $400 million in 3.125%
Senior Notes due April 2026 and $250 million in 1.625% Senior Notes due April 2019 under its 2015 Shelf Registration. Proceeds from the debt issuances were used for general corporate purposes.
On April 29, 2015, we issued $400 million in 3.250% Senior Notes due April 2025 and $250 million in 2.500% Notes due April 2021 under the 2015 Shelf
Registration. Proceeds from the debt issuances were used to repay a portion of the outstanding commercial paper borrowings, which were used to repay the $500 million in 5.750% Senior Notes due in January 2015, and for general corporate purposes.
64
All senior notes are subject to an interest rate adjustment if the debt ratings assigned to the senior notes are
downgraded (as defined in the agreements). Further, the senior notes contain a provision that repayment of the senior notes may be accelerated if the Company experiences a change in control (as defined in the agreements).
The Companys borrowings under its senior notes contain minimal covenants, primarily restrictions on liens. Under its revolving credit facilities,
covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances. All of the
repayment obligations under its 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 August 26, 2017, the Company was in compliance with all covenants related to its borrowing arrangements. All of the Companys debt is
unsecured. Scheduled maturities of debt are as follows:
|
|
|
|
|
(in thousands)
|
|
Scheduled
Maturities
|
|
2018
|
|
$
|
1,405,100
|
|
2019
|
|
|
250,000
|
|
2020
|
|
|
|
|
2021
|
|
|
750,000
|
|
2022
|
|
|
500,000
|
|
Thereafter
|
|
|
2,200,000
|
|
|
|
|
|
|
Subtotal
|
|
|
5,105,100
|
|
Discount and debt issuance costs
|
|
|
23,862
|
|
|
|
|
|
|
Total Debt
|
|
$
|
5,081,238
|
|
|
|
|
|
|
The fair value of the Companys debt was estimated at $5.171 billion as of August 26, 2017, and $5.117 billion as of
August 27, 2016, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same terms (Level 2). Such fair value is greater than the carrying value of debt by $90.3 million
at August 26, 2017 and $192.7 million at August 27, 2016, which reflect their face amount, adjusted for any unamortized debt issuance costs and discounts.
Note J Interest Expense
Net interest expense
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Interest expense
|
|
$
|
159,329
|
|
|
$
|
150,961
|
|
|
$
|
153,007
|
|
Interest income
|
|
|
(3,502
|
)
|
|
|
(2,371
|
)
|
|
|
(1,605
|
)
|
Capitalized interest
|
|
|
(1,247
|
)
|
|
|
(909
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
154,580
|
|
|
$
|
147,681
|
|
|
$
|
150,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Note K Stock Repurchase Program
During 1998, the Company announced a program permitting the Company to repurchase a portion of its outstanding shares not to exceed a dollar maximum
established by the Board. The program was last amended on March 21, 2017 to increase the repurchase authorization to $18.65 billion from $17.9 billion. From January 1998 to August 26, 2017, the Company has repurchased a total of
142.3 million shares at an aggregate cost of $17.826 billion.
The Companys share repurchase activity consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Amount
|
|
$
|
1,071,649
|
|
|
$
|
1,452,462
|
|
|
$
|
1,271,416
|
|
Shares
|
|
|
1,495
|
|
|
|
1,903
|
|
|
|
2,010
|
|
During fiscal year 2017, the Company retired 1.8 million shares of treasury stock which had previously been repurchased
under the Companys share repurchase program. The retirement increased Retained deficit by $1.321 billion and decreased Additional paid-in capital by $64.9 million. During the comparable prior year period, the Company retired 2.1 million
shares of treasury stock, which increased Retained deficit by $1.424 billion and decreased Additional paid-in capital by $67.0 million.
Note L
Pension and Savings Plans
Prior to January 1, 2003, substantially all full-time employees were covered by a defined benefit pension plan. The
benefits under the plan were based on years of service and the employees 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 Companys supplemental defined benefit pension
plan for certain highly compensated employees was also frozen. Accordingly, plan participants will earn no new benefits under the plan formula and no new participants will join the pension plan.
The Company has recognized the unfunded status of the defined pension plans in its Consolidated Balance Sheets, which represents the difference between the
fair value of pension plan assets and the projected benefit obligations of its defined benefit pension plans. The net unrecognized actuarial losses and unrecognized prior service costs are recorded in Accumulated other comprehensive loss. These
amounts will be subsequently recognized as net periodic benefit cost pursuant to the Companys historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized
as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts previously
recognized in Accumulated other comprehensive loss.
The Companys investment strategy for pension plan assets is to utilize a diversified mix of
domestic and international equity and fixed income portfolios to earn a long-term investment return that meets the Companys pension plan obligations. The pension plan assets are invested primarily in listed securities, and the pension plans
may hold only a minimal investment in AutoZone common stock that is entirely at the discretion of third-party pension fund investment managers. The Companys largest holding classes, fixed income bonds and U.S. equities, are invested with a
fund manager that holds diversified portfolios. Accordingly, the Company does not have any significant concentrations of risk in particular securities, issuers, sectors, industries or geographic regions. Alternative investment strategies were fully
liquidated during fiscal 2016. The Companys investment managers are prohibited from using derivatives for speculative purposes and are not permitted to use derivatives to leverage a portfolio.
66
The following is a description of the valuation methodologies used for the Companys investments measured at
fair value:
U.S., international, emerging, and high yield equities
These investments are commingled funds and are valued
using the net asset values, which are determined by valuing investments at the closing price or last trade reported on the major market on which the individual securities are traded. These investments are subject to annual audits.
Alternative investments
This category represents a hedge fund of funds made up of various investments in limited partnerships,
limited liability companies and corporations. The fair value of the hedge fund of funds is determined using valuations provided by third party administrators for each of the underlying funds.
Fixed income securities
The fair values of corporate, U.S. government securities and other fixed income securities are estimated
by using bid evaluation pricing models or quoted prices of securities with similar characteristics.
Cash and cash equivalents
These investments include cash equivalents valued using exchange rates provided by an industry pricing vendor and commingled funds valued using the net asset value. These investments also include cash.
The fair values of investments by level and asset category and the weighted-average asset allocations of the Companys pension plans at the measurement
date are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2017
|
|
|
|
Fair
|
|
|
Asset Allocation
|
|
|
|
|
Fair Value Hierarchy
|
|
(in thousands)
|
|
Value
|
|
|
Actual
|
|
|
Target
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
U.S. equities
|
|
$
|
50,125
|
|
|
|
15.8
|
%
|
|
|
17.0
|
%
|
|
|
|
$
|
|
|
|
$
|
50,125
|
|
|
$
|
|
|
International equities
|
|
|
33,696
|
|
|
|
10.7
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
33,696
|
|
|
|
|
|
Emerging equities
|
|
|
19,027
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
19,027
|
|
|
|
|
|
High yield securities
|
|
|
17,063
|
|
|
|
5.4
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
17,063
|
|
|
|
|
|
Alternative investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
178,650
|
|
|
|
56.5
|
|
|
|
60.0
|
|
|
|
|
|
|
|
|
|
178,650
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
17,706
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
316,267
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
$
|
|
|
|
$
|
316,267
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2016
|
|
|
|
Fair
|
|
|
Asset Allocation
|
|
|
|
|
Fair Value Hierarchy
|
|
(in thousands)
|
|
Value
|
|
|
Actual
|
|
|
Target
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
U.S. equities
|
|
$
|
66,008
|
|
|
|
22.9
|
%
|
|
|
26.0
|
%
|
|
|
|
$
|
|
|
|
$
|
66,008
|
|
|
$
|
|
|
International equities
|
|
|
42,023
|
|
|
|
14.5
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
42,023
|
|
|
|
|
|
Emerging equities
|
|
|
22,848
|
|
|
|
7.9
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
22,848
|
|
|
|
|
|
High yield securities
|
|
|
21,445
|
|
|
|
7.4
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
21,445
|
|
|
|
|
|
Alternative investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
99,336
|
|
|
|
34.3
|
|
|
|
40.0
|
|
|
|
|
|
|
|
|
|
99,336
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
37,726
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
289,386
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
$
|
|
|
|
$
|
289,386
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The asset allocations in the charts above include $17.5 million and $48.0 million in cash contributions made in the last month
prior to the balance sheet date of August 26, 2017, and August 27, 2016, respectively. Subsequent to August 26, 2017, and August 27, 2016, these cash contributions were allocated to the pension plan investments in accordance with
the targeted asset allocation.
In January 2017, the Companys Investment Committee approved a revised asset allocation target for the investments
held by the pension plan. Based on the revised asset allocation target, the expected long-term rate of return on plan assets changed from 7.0% for the year ended August 26, 2017 to 6.0% for the year ending August 25, 2018.
67
The following table sets forth the plans funded status and amounts recognized in the Companys
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
328,511
|
|
|
$
|
296,123
|
|
Interest cost
|
|
|
10,335
|
|
|
|
11,272
|
|
Actuarial (gains) losses
|
|
|
(8,746
|
)
|
|
|
39,842
|
|
Benefits paid
|
|
|
(15,376
|
)
|
|
|
(18,726
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligations at end of year
|
|
$
|
314,724
|
|
|
$
|
328,511
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
289,386
|
|
|
$
|
238,755
|
|
Actual return on plan assets
|
|
|
24,496
|
|
|
|
16,636
|
|
Employer contributions
|
|
|
17,761
|
|
|
|
52,721
|
|
Benefits paid
|
|
|
(15,376
|
)
|
|
|
(18,726
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
316,267
|
|
|
$
|
289,386
|
|
|
|
|
|
|
|
|
|
|
Amount Recognized in the Statement of Financial Position:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
(283
|
)
|
|
$
|
(276
|
)
|
Long-term assets
|
|
|
8,686
|
|
|
|
|
|
Long-term liabilities
|
|
|
(6,860
|
)
|
|
|
(38,849
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,543
|
|
|
$
|
(39,125
|
)
|
|
|
|
|
|
|
|
|
|
Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic
Benefit Cost:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
(118,889
|
)
|
|
$
|
(145,948
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(118,889
|
)
|
|
$
|
(145,948
|
)
|
|
|
|
|
|
|
|
|
|
Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic
Benefit Cost and expected to be amortized in next years Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
(10,736
|
)
|
|
$
|
(13,874
|
)
|
|
|
|
|
|
|
|
|
|
Amount recognized
|
|
$
|
(10,736
|
)
|
|
$
|
(13,874
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Interest cost
|
|
$
|
10,335
|
|
|
$
|
11,272
|
|
|
$
|
12,338
|
|
Expected return on plan assets
|
|
|
(20,056
|
)
|
|
|
(16,512
|
)
|
|
|
(16,281
|
)
|
Recognized net actuarial losses
|
|
|
13,873
|
|
|
|
10,506
|
|
|
|
8,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
4,152
|
|
|
$
|
5,266
|
|
|
$
|
4,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The blended actuarial assumptions used in determining the projected benefit obligation include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Discount rate to determine benefit obligation
|
|
|
3.86
|
%
|
|
|
3.72
|
%
|
|
|
4.50
|
%
|
Discount rate to determine net interest cost
|
|
|
3.21
|
%
|
|
|
3.90
|
%
|
|
|
4.28
|
%
|
Expected long-term rate of return on plan assets
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
68
As the plan benefits are frozen, increases in future compensation levels no longer impact the calculation and
there is no service cost.
The discount rate to determine the projected benefit obligation is determined as of the measurement date and is based on the
calculated yield of a portfolio of high-grade corporate bonds with cash flows that generally match the Companys expected benefit payments in future years.
During fiscal 2016, the Company changed the method used to estimate the interest cost component of net periodic benefit cost. Previously, the Company
estimated interest cost using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The Company elected to utilize a spot rate approach by applying specific spot rates along the yield curve to
calculate interest costs instead of a single weighted-average discount rate. This calculation is believed to be more refined under the applicable accounting standard. The impact of this change to net periodic benefit cost was a reduction of $1.8
million in fiscal 2016. The Company accounted for this change as a change in accounting estimate and accounted for it prospectively.
The expected
long-term rate of return on plan assets is based on the historical relationships between the investment classes and the capital markets, updated for current conditions.
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 Company contributed $17.8 million to the plans in fiscal 2017, $52.7 million to the plans in fiscal 2016 and $17.1 million to the plans in fiscal 2015. The Company expects to contribute approximately $20.3 million to the plans in fiscal 2018;
however, a change to the expected cash funding may be impacted by a change in interest rates or a change in the actual or expected return on plan assets or through other plans initiated by management.
Based on current assumptions about future events, benefit payments are expected to be paid as follows for each of the following fiscal years. Actual benefit
payments may vary significantly from the following estimates:
|
|
|
|
|
(in thousands)
|
|
Benefit
Payments
|
|
2018
|
|
$
|
13,608
|
|
2019
|
|
|
13,139
|
|
2020
|
|
|
13,817
|
|
2021
|
|
|
14,538
|
|
2022
|
|
|
14,917
|
|
2023 2027
|
|
|
79,742
|
|
The Company has a 401(k) plan that covers all domestic employees who meet the plans participation requirements. The plan
features include Company matching contributions, immediate 100% vesting of Company contributions and a savings option up to 25% of qualified earnings. The Company makes matching contributions, per pay period, up to a specified percentage of
employees contributions as approved by the Board. The Company made matching contributions to employee accounts in connection with the 401(k) plan of $21.0 million in fiscal 2017, $19.7 million in fiscal 2016, and $17.7 million in fiscal 2015.
Note M Acquisition
Effective
September 27, 2014, the Company acquired the outstanding stock of Interamerican Motor Corporation (IMC), the second largest distributor of quality import replacement parts in the United States, for $75.7 million, net of cash. IMC
specializes in parts coverage for European and Asian cars. With this acquisition, the Company continues to grow its share in the aftermarket import car parts market. The results of operations from IMC have been included in the Companys Auto
Parts Locations business activities since the date of acquisition.
69
Note N Goodwill and Intangibles
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Auto Parts
Locations
|
|
|
Other
|
|
|
Total
|
|
Net balance as of August 29, 2015
|
|
$
|
326,703
|
|
|
$
|
65,184
|
|
|
$
|
391,887
|
|
Goodwill added through acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of August 27, 2016
|
|
|
326,703
|
|
|
|
65,184
|
|
|
|
391,887
|
|
Goodwill added through acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of August 26, 2017
|
|
$
|
326,703
|
|
|
$
|
65,184
|
|
|
$
|
391,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performs its annual goodwill and intangibles impairment test in the fourth quarter of each fiscal year. In the
fourth quarter of fiscal 2017 and 2016, the Company concluded that its goodwill was not impaired. Total accumulated goodwill impairment for both August 26, 2017 and August 27, 2016 is $18.3 million.
The carrying amounts of intangible assets are included in Other long-term assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2017
|
|
(in thousands)
|
|
Estimated
Useful
Life
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
3-5 years
|
|
|
$
|
10,570
|
|
|
$
|
(9,994
|
)
|
|
$
|
576
|
|
Noncompete agreements
|
|
|
5 years
|
|
|
|
1,300
|
|
|
|
(1,223
|
)
|
|
|
77
|
|
Customer relationships
|
|
|
3-10 years
|
|
|
|
49,676
|
|
|
|
(24,730
|
)
|
|
|
24,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,546
|
|
|
$
|
(35,947
|
)
|
|
|
25,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizing intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2016
|
|
(in thousands)
|
|
Estimated
Useful
Life
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
3-5 years
|
|
|
$
|
10,570
|
|
|
$
|
(7,988
|
)
|
|
$
|
2,582
|
|
Noncompete agreements
|
|
|
5 years
|
|
|
|
1,300
|
|
|
|
(963
|
)
|
|
|
337
|
|
Customer relationships
|
|
|
3-10 years
|
|
|
|
49,676
|
|
|
|
(18,514
|
)
|
|
|
31,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,546
|
|
|
$
|
(27,465
|
)
|
|
|
34,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizing intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2014, the Company purchased $30.2 million of intangible assets relating to the rights to certain customer
relationships and technology assets relating to its ALLDATA operations. Additionally, during fiscal 2016 and 2015, the Company made an installment payment of $10 million in each year related to certain customer relationships purchased during 2014
relating to its ALLDATA operations.
70
As part of its annual impairment test, the Company evaluates the AutoAnything and IMC trade names for impairment
in the fourth quarter of each fiscal year. In the fourth quarter of fiscal 2017 and 2016, the Company concluded that AutoAnythings and IMCs trade names were not impaired. Trade names at August 26, 2017 and August 27, 2016
reflect a total accumulated impairment of $4.1 million.
Amortization expense of intangible assets for the years ended August 26, 2017 and
August 27, 2016 was $8.5 million and $8.7 million, respectively.
Total future amortization expense for intangible assets that have finite lives,
based on the existing intangible assets and their current estimated useful lives as of August 26, 2017, is estimated as follows:
|
|
|
|
|
(in thousands)
|
|
Total
|
|
2018
|
|
$
|
6,855
|
|
2019
|
|
|
6,203
|
|
2020
|
|
|
6,203
|
|
2021
|
|
|
3,474
|
|
2022
|
|
|
2,030
|
|
Thereafter
|
|
|
834
|
|
|
|
|
|
|
|
|
$
|
25,599
|
|
|
|
|
|
|
Note O Leases
The
Company leases some of its retail stores, distribution centers, facilities, land and equipment, including vehicles. Other than vehicle leases, most of the leases are operating leases, which include renewal options made at the Companys election
and provisions for percentage rent based on sales. Rental expense was $302.9 million in fiscal 2017, $280.5 million in fiscal 2016, and $269.5 million in fiscal 2015. Percentage rentals were insignificant.
The Company records rent for all operating leases on a straight-line basis over the lease term, including any reasonably assured renewal periods and the
period of time prior to the lease term that the Company is in possession of the leased space for the purpose of installing leasehold improvements. Differences between recorded rent expense and cash payments are recorded as a liability in Accrued
expenses and other and Other long-term liabilities in the accompanying Consolidated Balance Sheets, based on the terms of the lease. The deferred rent approximated $130.2 million on August 26, 2017, and $121.7 million on August 27, 2016.
The Company has a fleet of vehicles used for delivery to its commercial customers and stores and travel for members of field management. The majority of
these vehicles are held under capital leases. At August 26, 2017, the Company had capital lease assets of $152.0 million, net of accumulated amortization of $70.2 million, and capital lease obligations of $150.5 million, of which $48.1 million
is classified as Accrued expenses and other as it represents the current portion of these obligations. At August 27, 2016, the Company had capital lease assets of $148.5 million, net of accumulated amortization of $59.5 million, and capital
lease obligations of $147.3 million, of which $44.8 million is classified as Accrued expenses and other as it represents the current portion of these obligations.
71
Future minimum annual rental commitments under non-cancelable operating leases and capital leases were as follows
at the end of fiscal 2017:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2018
|
|
$
|
293,826
|
|
|
$
|
48,134
|
|
2019
|
|
|
284,523
|
|
|
|
49,808
|
|
2020
|
|
|
262,782
|
|
|
|
36,610
|
|
2021
|
|
|
237,241
|
|
|
|
21,217
|
|
2022
|
|
|
213,399
|
|
|
|
3,307
|
|
Thereafter
|
|
|
861,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments required
|
|
$
|
2,153,180
|
|
|
|
159,076
|
|
|
|
|
|
|
|
|
|
|
Less: Interest
|
|
|
|
|
|
|
(8,620
|
)
|
|
|
|
|
|
|
|
|
|
Present value of minimum capital lease payments
|
|
|
|
|
|
$
|
150,456
|
|
|
|
|
|
|
|
|
|
|
Note P Commitments and Contingencies
Construction commitments, primarily for new stores and new distribution centers, totaled approximately $69.9 million at August 26, 2017.
The Company had $88.6 million in outstanding standby letters of credit and $28.8 million in surety bonds as of August 26, 2017, which all have expiration
periods of less than one year. A substantial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to cover reimbursement obligations to our workers compensation
carriers. There are no additional contingent liabilities associated with these instruments as the underlying liabilities are already reflected in the consolidated balance sheet. The standby letters of credit and surety bonds arrangements have
automatic renewal clauses.
Note Q Litigation
In July 2014, the Company received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial offices in the
state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste. The Company received notice that the District Attorney will seek injunctive and monetary relief. The Company is cooperating
fully with the request and cannot predict the ultimate outcome of these efforts, although the Company has accrued all amounts it believes to be probable and reasonably estimable. The Company does not believe the ultimate resolution of this matter
will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
In April 2016, the Company received a
letter from the California Air Resources Board seeking payment for alleged violations of the California Health and Safety Code related to the sale of certain aftermarket emission parts in the State of California. The Company does not believe that
any resolution of the matter will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
The Company
is involved in various other legal proceedings incidental to the conduct of its business, including, but not limited to, several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried
employees who allege various wage and hour violations and unlawful termination practices. The Company does not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Companys
financial condition, results of operations or cash flows.
72
Note R Segment Reporting
Four of the Companys operating segments (Domestic Auto Parts, Mexico, Brazil, and IMC) are aggregated as one reportable segment: Auto Parts Locations.
The criteria the Company used to identify the reportable segment are primarily the nature of the products the Company sells and the operating results that are regularly reviewed by the Companys chief operating decision maker to make decisions
about the resources to be allocated to the business units and to assess performance. The accounting policies of the Companys reportable segment are the same as those described in Note A.
The Auto Parts Locations segment is a retailer and distributor of automotive parts and accessories through the Companys 6,029 locations in the United
States, Puerto Rico, Mexico and Brazil. Each location 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.
The Other category reflects business activities of three operating segments that are not separately reportable due to the
materiality of these operating segments. The operating segments include ALLDATA, which produces, sells and maintains diagnostic and repair information software used in the automotive repair industry; E-commerce, which includes direct sales to
customers through www.autozone.com; and AutoAnything, which includes direct sales to customers through www.autoanything.com.
The Company evaluates its
reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. The following table shows segment results for the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
(in thousands)
|
|
August 26,
2017
|
|
|
August 27,
2016
|
|
|
August 29,
2015
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations
|
|
$
|
10,523,272
|
|
|
$
|
10,261,112
|
|
|
$
|
9,824,876
|
|
Other
|
|
|
365,404
|
|
|
|
374,564
|
|
|
|
362,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,888,676
|
|
|
$
|
10,635,676
|
|
|
$
|
10,187,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations
|
|
$
|
5,544,494
|
|
|
$
|
5,410,477
|
|
|
$
|
5,132,624
|
|
Other
|
|
|
195,126
|
|
|
|
198,259
|
|
|
|
194,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,739,620
|
|
|
|
5,608,736
|
|
|
|
5,327,031
|
|
Operating, selling, general and administrative expenses
|
|
|
(3,659,551
|
)
|
|
|
(3,548,341
|
)
|
|
|
(3,373,980
|
)
|
Interest expense, net
|
|
|
(154,580
|
)
|
|
|
(147,681
|
)
|
|
|
(150,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,925,489
|
|
|
$
|
1,912,714
|
|
|
$
|
1,802,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations
|
|
$
|
8,964,371
|
|
|
$
|
8,351,883
|
|
|
$
|
7,883,720
|
|
Other
|
|
|
295,410
|
|
|
|
247,904
|
|
|
|
218,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,259,781
|
|
|
$
|
8,599,787
|
|
|
$
|
8,102,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations
|
|
$
|
533,304
|
|
|
$
|
470,631
|
|
|
$
|
464,246
|
|
Other
|
|
|
20,528
|
|
|
|
18,160
|
|
|
|
16,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
553,832
|
|
|
$
|
488,791
|
|
|
$
|
480,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations Sales by Product Grouping:
|
|
|
|
|
|
|
|
|
|
|
|
|
Failure
|
|
$
|
5,100,702
|
|
|
$
|
4,913,423
|
|
|
$
|
4,650,271
|
|
Maintenance items
|
|
|
3,774,386
|
|
|
|
3,721,240
|
|
|
|
3,618,779
|
|
Discretionary
|
|
|
1,648,184
|
|
|
|
1,626,449
|
|
|
|
1,555,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations net sales
|
|
$
|
10,523,272
|
|
|
$
|
10,261,112
|
|
|
$
|
9,824,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Note S Quarterly Summary
(1)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Sixteen Weeks
Ended
|
|
(in thousands, except per share data)
|
|
November 19,
2016
|
|
|
February 11,
2017
|
|
|
May 6,
2017
|
|
|
August 26,
2017
(2)
|
|
Net sales
|
|
$
|
2,467,845
|
|
|
$
|
2,289,219
|
|
|
$
|
2,619,007
|
|
|
$
|
3,512,605
|
|
Gross profit
|
|
|
1,301,542
|
|
|
|
1,205,536
|
|
|
|
1,378,418
|
|
|
|
1,854,125
|
|
Operating profit
|
|
|
458,902
|
|
|
|
383,969
|
|
|
|
529,570
|
|
|
|
707,628
|
|
Income before income taxes
|
|
|
425,596
|
|
|
|
349,771
|
|
|
|
493,895
|
|
|
|
656,227
|
|
Net income
(3)
|
|
|
278,125
|
|
|
|
237,145
|
|
|
|
331,700
|
|
|
|
433,899
|
|
Basic earnings per share
(3)
|
|
|
9.61
|
|
|
|
8.28
|
|
|
|
11.70
|
|
|
|
15.52
|
|
Diluted earnings per share
(3)
|
|
|
9.36
|
|
|
|
8.08
|
|
|
|
11.44
|
|
|
|
15.27
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
|
Sixteen
Weeks Ended
|
|
(in thousands, except per share data)
|
|
November 21,
2015
|
|
|
February 13,
2016
|
|
|
May 7,
2016
|
|
|
August 27,
2016
(2)
|
|
Net sales
|
|
$
|
2,386,043
|
|
|
$
|
2,257,192
|
|
|
$
|
2,593,672
|
|
|
$
|
3,398,769
|
|
Gross profit
|
|
|
1,252,934
|
|
|
|
1,190,596
|
|
|
|
1,370,458
|
|
|
|
1,794,748
|
|
Operating profit
|
|
|
437,995
|
|
|
|
382,660
|
|
|
|
536,374
|
|
|
|
703,366
|
|
Income before income taxes
|
|
|
402,985
|
|
|
|
349,828
|
|
|
|
502,323
|
|
|
|
657,577
|
|
Net income
|
|
|
258,112
|
|
|
|
228,613
|
|
|
|
327,515
|
|
|
|
426,768
|
|
Basic earnings per share
|
|
|
8.46
|
|
|
|
7.58
|
|
|
|
10.99
|
|
|
|
14.58
|
|
Diluted earnings per share
|
|
|
8.29
|
|
|
|
7.43
|
|
|
|
10.77
|
|
|
|
14.30
|
|
(1)
|
The sum of quarterly amounts may not equal the annual amounts reported due to rounding. In addition, the earnings per share amounts are computed independently for each quarter while the full year is based on the
annual weighted average shares outstanding.
|
(2)
|
The fourth quarter for fiscal 2017 and fiscal 2016 are based on a 16-week period. All other quarters presented are based on a 12-week period.
|
(3)
|
As discussed in Note A, the Company adopted the new accounting guidance for shared-based payments on August 28, 2016. These amounts include the impact of the adoption. For the twelve week period ended
November 19, 2016, this increased net income by $3.1 million, basic earnings per share by $0.11 and diluted earnings per share by $0.03. For the twelve week period ended February 11, 2017, this increased net income by $12.5 million, basic
earnings per share by $0.43 and diluted earnings per share by $0.37. For the twelve week period ended May 6, 2017, this increased net income by $11.4 million, basic earnings per share by $0.40 and diluted earnings per share by $0.32. For the
sixteen week period ended August 26, 2017, this increased net income by $4.1 million, basic earnings per share by $0.15 and diluted earnings per share by $0.09. Prior period net income, basic earnings per share and diluted earnings per share
amounts were not restated.
|
Note T Subsequent Event
(Unaudited)
Subsequent to August 26, 2017, several storms
made landfall and have resulted in extensive damage and flooding in Texas, Florida, Louisiana and Puerto Rico. The damage to the Companys stores in Texas, Florida and Louisiana did not have a material impact on its consolidated financial
statements. A full assessment of the extent of the damage to stores in Puerto Rico is expected to be completed in the weeks ahead. Currently, there is uncertainty as to the magnitude of the losses associated with this event and whether such losses
would have a material effect on the Companys consolidated financial statements.