AUTOZONE, INC.

AZO
Delayed Quote. Delayed  - 11/27 01:10:00 pm
1119.24USD -0.92%

AUTOZONE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

10/26/2020 | 04:28pm


We are the leading retailer, and a leading distributor, of automotive
replacement parts and accessories in the Americas. We began operations in 1979
and at August 29, 2020, operated 5,885 stores in the U.S., 621 stores in Mexico
and 43 stores in Brazil. Each store carries an extensive product line for cars,
sport utility vehicles, vans and light trucks, including new and remanufactured
automotive hard parts, maintenance items, accessories and non-automotive
products. At August 29, 2020, in 5,007 of our domestic 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 all stores in Mexico and Brazil. 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 our
commercial customers can make purchases through www.autozonepro.com. We also
provide product information on our Duralast branded products through
www.duralastparts.com. We do not derive revenue from automotive repair or
installation services.

COVID-19 Impact



The outbreak of a novel strain of the coronavirus ("COVID-19"), which was
declared a global pandemic on March 11, 2020 by the World Health Organization,
has led to adverse impacts on the national and global economy. We have been able
to keep our stores open and operating in the U.S. Initially, we reduced the
hours of operation in most stores, but subsequently have returned to more normal
operating hours. We have also taken numerous measures to ensure the health,
safety and well-being of our customers and employees. We provided new Emergency
Time-Off benefit enhancements for both full-time and part-time eligible hourly
employees in the U.S. We invested in supplies for the protection of our
employees and customers, increased the frequency of cleaning and disinfecting,
and introduced new service options for customers, such as curbside pickup, among
other things. These expanded benefits, supply costs and other COVID-19 related
costs resulted in approximately $83.9 million of expense included in Operating,
selling, general and administrative expenses in the Condensed Consolidated
Statements of Income for the year ended August 29, 2020.



In March 2020, we issued $1.250 billion in Senior Notes and closed on a new
364-day Senior unsecured revolving credit facility to strengthen our financial
position and our ability to be responsive during this ever-changing environment.
We have also experienced challenges in recruiting and hiring employees in
certain of our retail stores and distribution centers.



While sales were initially negatively impacted, they have since increased to
record levels. However, we are unable to accurately predict the impact that
COVID-19 will have due to numerous uncertainties, including the severity of the
disease, the duration of the outbreak, actions that may be taken by governmental
authorities intended to minimize the spread of the pandemic or to stimulate the
economy or other unintended consequences. Accordingly, continued business
disruption related to the COVID-19 outbreak may continue to cause significant
fluctuations in our business, unusually impacting demand for our products, our
store hours and our workforce availability and magnify risks associated with
sourcing quality merchandise domestically and outside the U.S. at competitive
prices, some of which would adversely impact our business and results of
operations. Further, a resurgence of the outbreak or other unforeseen
developments may impede our ability to complete construction and open new stores
at our desired pace.




Our business is impacted by various factors within the economy that affect both
our consumer and our industry, including but not limited to fuel costs, wage
rates and other economic conditions, including for fiscal 2020, COVID-19. Given
the nature of these macroeconomic factors, we cannot predict whether or for how
long certain trends will continue, nor can we predict to what degree these
trends will impact us in the future.



28

?

Executive Summary

For fiscal 2020, we achieved record net income of $1.733 billion, a 7.2%
increase over the prior year, and sales growth of $768.2 million, a 6.5%
increase over the prior year. Domestic commercial sales increased 6.4%, which
represents 21.6% of our total sales. Fiscal 2020 consisted of 52 weeks whereas
fiscal 2019 consisted of 53 weeks. Both our retail sales and commercial sales
grew this past year as we continue to make progress on our initiatives that are
aimed at improving our ability to say "Yes" to our customers more frequently,
drive traffic to our stores and accelerate our commercial growth.

Our business is impacted by various factors within the economy that affect both
our consumer and our industry, including but not limited to fuel costs, wage
rates and other economic conditions, including for fiscal 2020, the effects of,
and responses to, COVID-19. Given the nature of these macroeconomic factors, we
cannot predict whether or for how long certain trends will continue, nor can we
predict to what degree these trends will impact us in the future.

One macroeconomic factor affecting our customers and our industry during fiscal
2020 was gas prices. During fiscal 2020, the average price per gallon of
unleaded gasoline in the U.S. was $2.32 per gallon, compared to $2.63 per gallon
during fiscal 2019. We believe fluctuations in gas prices impact our customers'
level of disposable income. With approximately 12 billion gallons of unleaded
gas consumption each month across the U.S., each $1 decrease at the pump
contributes approximately $12 billion of additional spending capacity to
consumers each month. Given the unpredictability of gas prices, we cannot
predict whether gas prices will increase or decrease, nor can we predict how any
future changes in gas prices will impact our sales in future periods.

We have also experienced continued accelerated pressure on wages in the U.S.
during fiscal 2020. Some of this is attributed to regulatory changes in certain
states and municipalities, while the larger portion is being driven by general
market pressures and some specific actions taken in recent years by other
retailers. The regulatory changes are expected to continue, as evidenced by the
areas that have passed legislation to increase employees' wages substantially
over the next few years, but we are still assessing to what degree these changes
will impact our earnings growth in future periods.

During fiscal 2020, failure and maintenance related categories represented the
largest portion of our sales mix, at approximately 84% of total sales, with
failure related categories continuing to comprise our largest set of categories.
While we have not experienced any fundamental shifts in our category sales mix
as compared to previous years, in our domestic stores we did experience a slight
increase in mix of sales of the discretionary category as compared to last year.
We believe the improvement in this sales category resulted from the pandemic as
many of our customers had more time to work on projects. The two statistics we
believe have the closest correlation to our market growth over the long-term are
miles driven and the number of seven year old or older vehicles on the road.


Miles Driven




We believe that as the number of miles driven increases, consumers' vehicles are
more likely to need service and maintenance, resulting in an increase in the
need for automotive hard parts and maintenance items. While over the long-term
we have seen a close correlation between our net sales and the number of miles
driven, we have also seen certain time frames of minimal correlation in sales
performance and miles driven. During the periods of minimal correlation between
net sales and miles driven, we believe net sales have been positively impacted
by other factors, including macroeconomic factors and the number of seven year
old or older vehicles on the road. Since the beginning of the fiscal year and
through July 2020 (latest publicly available information), miles driven in the
U.S. decreased by 8.8% compared to the same period in the prior year. We believe
this decrease is a result of the pandemic, but we are unable to predict if this
decline will continue and are uncertain if it continues the impact it will



have
to our business.

29

?



Seven Year Old or Older Vehicles




New vehicles sales decreased 0.8% during 2020 as compared to the prior
calendar year. We estimate vehicles are driven an average of approximately
12,500 miles each year. In seven years, the average miles driven equates to
approximately 87,500 miles. Our experience is that at this point in a vehicle's
life, most vehicles are not covered by warranties and increased maintenance is
needed to keep the vehicle operating.


According to the latest data provided by the Auto Care Association, as of
January 1, 2020, the average age of vehicles on the road was 11.9 years. For the
ninth consecutive year, the average age of vehicles has exceeded 11 years.



We expect the aging vehicle population to continue to increase as consumers keep
their cars longer in an effort to save money. As the number of seven year old or
older vehicles on the road increases, we expect an increase in demand for the
products we sell.

Results of Operations



Fiscal 2020 Compared with Fiscal 2019



For the fiscal year ended August 29, 2020, we reported net sales of $12.632
billion
compared with $11.864 billion for the year ended August 31, 2019, a 6.5%
increase from fiscal 2019. This growth was driven primarily by a domestic same
store sales increase of 7.4% and net sales of $244.7 million from new stores.
Same store sales are computed on a 52-week basis. Domestic commercial sales
increased $164.9 million, or 6.4%, over domestic commercial sales for fiscal
2019.

At August 29, 2020, we operated 5,885 domestic stores, 621 in Mexico and 43 in
Brazil, compared with 5,772 domestic stores, 604 in Mexico and 35 in Brazil at
August 31, 2019. We reported a total auto parts segment (domestic, Mexico and
Brazil) sales increase of 6.5% for fiscal 2020.

Gross profit for fiscal 2020 was $6.771 billion, or 53.6% of net sales, a 5
basis point decrease compared with $6.365 billion, or 53.7% of net sales for
fiscal 2019. The decrease in gross margin was primarily attributable to lower
merchandise margins driven primarily by a shift in mix.


Operating, selling, general and administrative expenses for fiscal 2020
increased to $4.353 billion, or 34.5% of net sales, from $4.149 billion, or
35.0% of net sales for fiscal 2019. The decrease in operating expenses, as
a percentage of sales, was primarily due to leverage from higher sales growth,
partially offset by $83.9 million of costs incurred in response to COVID-19.




Interest expense, net for fiscal 2020 was $201.2 million compared with $184.8
million
during fiscal 2019. This increase was primarily due to higher debt
levels. Average borrowings for fiscal 2020 were $5.393 billion, compared with
$5.097 billion for fiscal 2019. Weighted average borrowing rates were 3.3% for
fiscal 2020 and 3.2% for fiscal 2019.

Our effective income tax rate was 21.8% of pre-tax income for fiscal 2020
compared to 20.4% for fiscal 2019. The increase in the tax rate was primarily
attributable to a reduced benefit from stock options exercised during fiscal
2020 compared to fiscal 2019. The benefit of stock options exercised for fiscal
2020 was $20.9 million compared to $46.0 million for fiscal 2019 (see "Note D -
Income Taxes" in the Notes to Consolidated Financial Statements).

Net income for fiscal 2020 increased by 7.2% to $1.733 billion, and diluted
earnings per share increased 13.4% to $71.93 from $63.43 in fiscal 2019. Net
income and diluted earnings per share for fiscal 2019 benefitted from an
additional week of sales. The impact on the fiscal 2020 diluted earnings per
share from stock repurchases was an increase of $1.59.

30

?


Fiscal 2019 Compared with Fiscal 2018




A discussion of changes in our results of operations from fiscal 2018 to fiscal
2019 has been omitted from this Form 10-K, but may be found in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Form 10-K for the fiscal year ended August 31, 2019, filed
with the SEC on October 28, 2019, which is available free of charge on the SECs
website at www.sec.gov and at www.autozone.com, by clicking "Investor Relations"
located at the bottom of the page.


Quarterly Periods




Each of the first three quarters of our fiscal year consists of 12 weeks, and
the fourth quarter consisted of 16 weeks in 2020, 17 weeks in 2019 and 16 weeks
in 2018. Because the fourth quarter contains seasonally high sales volume and
consists of 16 or 17 weeks, compared with 12 weeks for each of the first three
quarters, our fourth quarter represents a disproportionate share of our annual
net sales and net income. The fourth quarter of fiscal year 2020 represented
36.0% of annual sales and 42.7% of net income; the fourth quarter of fiscal year
2019 represented 33.6% of annual sales and 35.0% of net income; and the fourth
quarter of fiscal year 2018 represented 31.7% of annual sales and 29.9% of



net
income.

Income Taxes



On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform") was enacted into
law. Tax Reform significantly revises the U.S. federal corporate income tax by,
among other things, lowering the statutory federal corporate rate from 35% to
21%, eliminating certain deductions, imposing a mandatory one-time transition
tax on accumulated earnings of foreign subsidiaries, and changing how foreign
earnings are subject to U.S. federal tax. Also, in December 2017, the SEC issued
Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP
in situations when the registrant does not have the necessary information
available, prepared or analyzed in reasonable detail to complete the accounting
for certain income tax effects of Tax Reform.

During the year ended August 25, 2018, we recorded provisional tax benefit of
$131.5 million related to Tax Reform, comprised of $157.3 million remeasurement
of its net Deferred Tax Asset ("DTA"), offset by $25.8 million of transition
tax. During the year ended August 31, 2019, we completed our analysis of Tax
Reform and recorded adjustments to the previously-recorded provisional amounts,
resulting in an $8.8 million tax benefit, primarily related to transition tax on
accumulated earnings of foreign subsidiaries.

Beginning with the year ending August 31, 2019, we are subject to a new tax on
global intangible low-taxed income ("GILTI") that is imposed on foreign
earnings. We have made the election to record this tax as a period cost and
therefore, have not adjusted the deferred tax assets or liabilities of our
foreign subsidiaries for the new tax. Net impacts for GILTI are included in the
provision for income taxes for the years ended August 29, 2020 and August 31,
2019
.


Liquidity and Capital Resources



The primary source of our liquidity is our cash flows realized through the sale
of automotive parts, products and accessories. Net cash provided by operating
activities was $2.720 billion in 2020, $2.129 billion in 2019 and $2.080 billion
in 2018. Cash flows from operations are favorable compared to last year
primarily due to growth in net income due to accelerated sales growth as a



result of the pandemic.

31

?

Our net cash flows used in investing activities were $497.9 million in fiscal
2020, $491.8 million in fiscal 2019 and $521.9 million in fiscal 2018. The
increase in net cash used in investing activities in fiscal 2020, compared to
fiscal 2019, was the result of an investment in a tax credit equity investment,
partially offset by a decrease in capital expenditures. We invested $457.7
million
in capital assets in fiscal 2020, $496.1 million in fiscal 2019 and
$521.8 million in fiscal 2018. We had 138 new location openings for fiscal 2020,
209 for fiscal 2019 and 201 for fiscal 2018. The decrease in capital
expenditures from fiscal 2019 to fiscal 2020 was attributable to delayed store
openings in response to COVID-19. We invest a portion of our assets held by our
wholly owned insurance captive in marketable debt securities. We purchased $90.9
million
in marketable debt securities in fiscal 2020, $55.5 million in fiscal
2019 and $104.5 million in fiscal 2018. We had proceeds from the sale of
marketable debt securities of $84.2 million in fiscal 2020, $53.1 million in
fiscal 2019 and $69.6 million in fiscal 2018.

Net cash used in financing activities was $643.6 million in fiscal 2020, $1.674
billion
in fiscal 2019 and $1.632 billion in fiscal 2018. The net cash used in
financing activities reflected purchases of treasury stock, which totaled $930.9
million
for fiscal 2020, $2.005 billion for fiscal 2019 and $1.592 billion for
fiscal 2018. The decrease in purchases of treasury stock for fiscal 2020 was due
to the temporary suspension of the share repurchase program in order to conserve
liquidity in response to the uncertainty related to COVID-19. The treasury stock
purchases in fiscal 2020, 2019 and 2018 were primarily funded by cash flows from
operations. The Company issued $1.850 billion of new debt in 2020, $750 million
in fiscal 2019 and none in fiscal 2018. In fiscal 2020 the proceeds from the
issuance of debt were used for general corporate purposes, repayment of our
outstanding commercial paper and repayment of our $500 million Senior Notes due
in November 2020 which were callable at par in August 2020 . In fiscal 2019 the
proceeds from the issuance of debt were used to repay a portion of our
outstanding commercial paper borrowings, our $250 million Senior Notes due in
April 2019 and for general corporate purposes. In fiscal 2018, we used
commercial paper borrowings to repay our $250 million Senior Notes due in
August 2018.

In fiscal 2020, we made net repayments of commercial paper and short term
borrowings in the amount of $1.030 billion. Net repayments of commercial paper
and short term borrowings for fiscal 2019 were $295.3 million and net proceeds
from the issuance of commercial paper and short-term borrowings for fiscal 2018
were $170.2 million.

During fiscal 2021, we expect to increase the investment in our business as
compared to fiscal 2020. The expected increase is driven by delays in capital
spending for the third and fourth quarter of fiscal 2020 related to COVID-19.
Our investments are expected to be directed primarily to new locations, supply
chain infrastructure, enhancements to existing locations and investments in
technology. The amount of investments in our new locations is impacted by
different factors, including such factors as whether the building and land are
purchased (requiring higher investment) or leased (generally lower investment),
located in the United States, Mexico or Brazil, or located in urban or rural
areas. During fiscal 2020, 2019 and 2018 our capital expenditures decreased from
the prior fiscal year by approximately 8%, 5% and 6%, respectively.

In addition to building and land costs, our new locations require working
capital, predominantly for inventories. Historically, we have negotiated
extended payment terms from suppliers, reducing the working capital required and
resulting in a high accounts payable to inventory ratio. We plan to continue
leveraging our inventory purchases; however, our ability to do so may be limited
by our vendors' capacity to factor their receivables from us. Certain vendors
participate in arrangements with financial institutions whereby they factor
their AutoZone receivables, allowing them to receive early payment from the
financial institution on our invoices at a discounted rate. The terms of these
agreements are between the vendor and the financial institution. Upon request
from the vendor, we confirm to the vendor's financial institution the balances
owed to the vendor, the due date and agree to waive any right of offset to the
confirmed balances. A downgrade in our credit or changes in the financial
markets may limit the financial institutions' willingness to participate in
these arrangements, which may result in the vendor wanting to renegotiate
payment terms. A reduction in payment terms would increase the working capital
required to fund future inventory investments. Extended payment terms from our
vendors have allowed us to continue our high accounts payable to inventory
ratio. We had an accounts payable to inventory ratio of 115.3% at August 29,
2020
and 112.6% at August 31, 2019. The increase from fiscal 2019 was primarily
due to accelerated sales growth.

32

?

Depending on the timing and magnitude of our future investments (either in the
form of leased or purchased properties or acquisitions), we anticipate that we
will rely primarily on internally generated funds and available borrowing
capacity to support a majority of our capital expenditures, working capital
requirements and stock repurchases. The balance may be funded through new
borrowings. We anticipate that we will be able to obtain such financing in view
of our credit ratings and favorable experiences in the debt markets in the past.

Our cash balances are held in various locations around the world. As of August
29, 2020
, and August 31, 2019, cash and cash equivalents of $62.4 million and
$49.9 million, respectively, were held outside of the U.S. and were generally
utilized to support the liquidity needs in our foreign operations.

For the fiscal year ended August 29, 2020, our after-tax return on invested
capital ("ROIC") was 38.1% as compared to 35.7% for the comparable prior year
period. ROIC is calculated as after-tax operating profit (excluding rent
charges) divided by invested capital (which includes a factor to capitalize
operating leases). For fiscal 2020, ROIC was presented net of average excess
cash of $374.2 million. For fiscal 2019, after-tax operating profit was adjusted
for the Tax Reform's impact on the revaluation of deferred tax liabilities, net
of the repatriation tax. We use ROIC to evaluate whether we are effectively
using our capital resources and believe it is an important indicator of our
overall operating performance. Refer to the "Reconciliation of Non-GAAP
Financial Measures" section for further details of our calculation.


Debt Facilities



We entered into a Master Extension, New Commitment and Amendment Agreement dated
as of November 18, 2017 (the "Extension Amendment") to the Third Amended and
Restated Credit Agreement dated as of November 18, 2016, as amended, modified,
extended or restated from time to time (the "Revolving Credit Agreement"). Under
the Extension Amendment: (i) our borrowing capacity under the Revolving Credit
Agreement was increased from $1.6 billion to $2.0 billion; (ii) the maximum
borrowing under the Revolving Credit Agreement may, at our option, subject to
lenders approval, be increased from $2.0 billion to $2.4 billion; (iii) the
termination date of the Revolving Credit Agreement was extended from
November 18, 2021 until November 18, 2022; and (iv) we have the option to make
one additional written request of the lenders to extend the termination date
then in effect for an additional year. Under the Revolving Credit Agreement, we
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 percentage, as defined in
the Revolving Credit Agreement, depending upon our senior, unsecured,
(non-credit enhanced) long-term debt ratings. Interest accrues on base rate
loans as defined in the Revolving Credit Agreement.

On April 3, 2020, we entered into a 364-Day Credit Agreement (the "364-Day
Credit Agreement") to augment our access to liquidity due to current
macroeconomic conditions, specifically the pandemic, and supplement our existing
Revolving Credit Agreement. The 364-Day Credit Agreement provides for loans in
the aggregate principal amount of up to $750 million. The 364-Day Credit
Agreement will terminate, and all amounts borrowed under the 364-Day Credit
Agreement will be due and payable, on April 2, 2021. Revolving loans under the
364-Day Credit Agreement may be base rate loans, Eurodollar loans, or a
combination of both, at our election.


As of August 29, 2020, we had no outstanding borrowings under each of our
revolving credit agreements and had $1.7 million of outstanding letters of
credit under the Revolving Credit Agreement.




Under our revolving credit agreements, 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.

The Revolving Credit Agreement requires that our 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. Our
consolidated interest coverage ratio as of August 29, 2020 was 6.1:1.

33

?

As of August 29, 2020, the $250 million 2.500% Senior Notes due April 2021 are
classified as long-term in the accompanying Consolidated Balance Sheets as we
have the ability and intent to refinance them on a long-term basis through
available capacity in our revolving credit agreements. As of August 29, 2020, we
had $2.748 billion of availability, before giving effect to commercial paper
borrowings, under our $2.750 billion revolving credit agreements which would
allow us to replace these short-term obligations with long-term financing
facilities.

We also maintain a letter of credit facility that allows us to request the
participating bank to issue letters of credit on our behalf up to an aggregate
amount of $25 million. The letter of credit facility is in addition to the
letters of credit that may be issued under the Revolving Credit Agreement. As of
August 29, 2020, we had $25.0 million in letters of credit outstanding under the
letter of credit facility which expires in June 2022.


In addition to the outstanding letters of credit issued under the committed
facilities discussed above, we had $220.3 million in letters of credit
outstanding as of August 29, 2020. These letters of credit have various maturity
dates and were issued on an uncommitted basis.




On August 14, 2020, we issued $600 million in 1.650% Senior Notes due January
2031
under our automatic shelf registration statement on Form S-3, filed with
the SEC on April 4, 2019 (File No. 333-230719) (the "2019 Shelf Registration").
The 2019 Shelf Registration allows us 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
store openings, stock repurchases and acquisitions. Proceeds from the debt
issuance were used for general corporate purposes, including the repayment of
the $500 million in 4.000% Senior Notes due in November 2020 that were callable
at par in August 2020.

On March 30, 2020, we issued $500 million in 3.625% Senior Notes due April 2025
and $750 million in 4.000% Senior Notes due April 2030 under the 2019 Shelf
Registration. Proceeds from the debt issuance were used to repay a portion of
the outstanding commercial paper borrowings and for other general corporate
purposes.

On April 18, 2019, we issued $300 million in 3.125% Senior Notes due April 2024
and $450 million in 3.750% Senior Notes due April 2029 under the 2019 Shelf
Registration. Proceeds from the debt issuance were used to repay a portion of
our outstanding commercial paper borrowings, the $250 million in 1.625% Senior
Notes due in April 2019 and for other general corporate purposes.

All Senior Notes are subject to an interest rate adjustment if the debt ratings
assigned are downgraded (as defined in the agreements). Further, the Senior
Notes contain a provision that repayment may be accelerated if we experience a
change in control (as defined in the agreements). Our borrowings under our
Senior Notes contain minimal covenants, primarily restrictions on liens, sale
and leaseback transactions and consolidations, mergers and the sale of assets.
All of the repayment obligations under our borrowing arrangements may be
accelerated and come due prior to the applicable scheduled payment date if
covenants are breached or an event of default occurs.


As of August 29, 2020, we were in compliance with all covenants and expect to
remain in compliance with all covenants under our borrowing arrangements.




For the fiscal year ended August 29, 2020, our adjusted debt to earnings before
interest, taxes, depreciation, amortization, rent and share-based compensation
expense ("EBITDAR") ratio was 1.9:1 as compared to 2.5:1 as of the comparable
prior year end. We calculate adjusted debt as the sum of total debt, finance
lease liabilities and rent times six; and we calculate EBITDAR by adding
interest, taxes, depreciation, amortization, rent and share-based compensation
expense to net income. For fiscal 2020, debt was presented net of excess cash,
which ended the year at $1.6 billion. We target our debt levels to a specified
ratio of adjusted debt to EBITDAR in order to maintain our investment grade
credit ratings and believe this is important information for the management of
our debt levels.

To the extent EBITDAR continues to grow in future years, we expect our debt
levels to increase; conversely, if EBITDAR declines, we would expect our debt
levels to decrease. Refer to the "Reconciliation of Non-GAAP Financial Measures"
section for further details of our calculation.

34

?

Stock Repurchases

During 1998, we announced a program permitting us to repurchase a portion of our
outstanding shares not to exceed a dollar maximum established by our Board of
Directors (the "Board"). On October 7, 2019, the Board voted to authorize the
repurchase of an additional $1.25 billion of our common stock in connection with
our ongoing share repurchase program. Since the inception of the repurchase
program in 1998, the Board has authorized $23.15 billion in share repurchases.
From January 1998 to August 29, 2020, we have repurchased a total of 147.7
million shares at an aggregate cost of $22.354 billion. We repurchased 826
thousand shares of common stock at an aggregate cost of $930.9 million during
fiscal 2020, 2.2 million shares of common stock at an aggregate cost of $2.005
billion
during fiscal 2019 and 2.4 million shares of common stock at an
aggregate cost of $1.592 billion during fiscal 2018. The decrease in purchases
of treasury stock for fiscal 2020 was due to the temporary suspension of the
share repurchase program in order to preserve cash as a result of the
uncertainty related to the pandemic. Considering cumulative repurchases as of
August 29, 2020, we had $795.9 million remaining under the Board's authorization
to repurchase our common stock.

For the fiscal year ended August 29, 2020, cash flow before share repurchases
and changes in debt was $2.185 billion as compared to $1.759 billion during the
comparable prior year period. Cash flow before share repurchases and changes in
debt is calculated as the net increase or decrease in cash and cash equivalents
less net increases or decreases in debt plus share repurchases. We use cash flow
before share repurchases and changes in debt to calculate the cash flows
remaining and available. We believe this is important information regarding our
allocation of available capital where we prioritize investments in the business
and utilize the remaining funds to repurchase shares, while maintaining debt
levels that support our investment grade credit ratings. Refer to the
"Reconciliation of Non-GAAP Financial Measures" section for further details of
our calculation.

During fiscal 2020, we temporarily ceased share repurchases under our share
repurchase program to conserve liquidity in response to the uncertainty related
to COVID-19. While we have restarted share repurchases during the first quarter
of fiscal year 2021, we will continue to evaluate current and expected business
conditions and adjust the level of share repurchases under our share repurchase
program as we deem appropriate.


Subsequent to August 29, 2020, we have repurchased 269,795 shares of common
stock at an aggregate cost of $314.4 million. Considering the cumulative
repurchases subsequent to August 29, 2020, we have $481.5 million remaining
under the Board's authorization to repurchase its common stock.



Financial Commitments




The following table shows our significant contractual obligations as of
August 29, 2020:


Total Payment Due by Period
Contractual Less than Between Between Over
(in thousands) Obligations 1 year 1­3 years 3­5 years 5 years

Debt(1) $ 5,550,000 $ 250,000 $ 1,300,000 $ 1,200,000 $ 2,800,000



Interest payments(2) 1,093,138 181,275 327,238 255,175 329,450
Operating leases(3) 3,534,369 302,890 632,719 543,395 2,055,365
Finance leases(4) 251,380 69,013 102,565 35,037 44,765
Self-insurance reserves(5) 249,273 87,209 85,529 36,532 40,003
Construction commitments 50,863 50,863 -



- -
$ 10,729,023 $ 941,250 $ 2,448,051 $ 2,070,139 $ 5,269,583





(1) Debt balances represent principal maturities, excluding interest, discounts,



and debt issuance costs.



(2) Represents obligations for interest payments on long-term debt.



We adopted ASU 2016-02, Leases (Topic 842), beginning with our first quarter
(3) ended November 23, 2019 which resulted in us recognizing a right-of-use asset



("ROU asset") and a corresponding lease liability on the balance sheet. See



"Note A - Significant Accounting Policies" of Item 8.



(4) Finance lease obligations include related interest.





35

?



Self-insurance reserves reflect estimates based on actuarial calculations and



are presented net of insurance receivables. Although these obligations do not
(5) have scheduled maturities, the timing of future payments are predictable



based upon historical patterns. Accordingly, we reflect the net present value



of these obligations in our Consolidated Balance Sheets.





Our tax liability for uncertain tax positions, including interest and penalties,
was $23.0 million at August 29, 2020. Approximately $2.0 million is classified
as current liabilities and $21.0 million is classified as long-term liabilities.
We did not reflect these obligations in the table above as we are unable to make
an estimate of the timing of payments of the long-term liabilities due to
uncertainties in the timing and amounts of the settlement of these tax
positions.


Off-Balance Sheet Arrangements




The following table reflects outstanding letters of credit and surety bonds as
of August 29, 2020:


Total
Other
(in thousands) Commitments

Standby letters of credit $ 246,921
Surety bonds 56,655
$ 303,576





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 our Consolidated Balance
Sheets. The standby letters of credit and surety bond arrangements expire within
one year but have automatic renewal clauses.


Reconciliation of Non-GAAP Financial Measures




"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" include certain financial measures not
derived in accordance with generally accepted accounting principles ("GAAP").
These non-GAAP financial measures provide additional information for determining
our optimum capital structure and are used to assist management in evaluating
performance and in making appropriate business decisions to maximize
stockholders' value.

Non-GAAP financial measures should not be used as a substitute for GAAP
financial measures, or considered in isolation, for the purpose of analyzing our
operating performance, financial position or cash flows. However, we have
presented the non-GAAP financial measures, as we believe they provide additional
information that is useful to investors as it indicates more clearly our
comparative year-to-year operating results. Furthermore, our management and
Compensation Committee of the Board use the above-mentioned non-GAAP financial
measures to analyze and compare our underlying operating results and use select
measurements to determine payments of performance-based compensation. We have
included a reconciliation of this information to the most comparable GAAP
measures in the following reconciliation tables.

36

?


Reconciliation of Non-GAAP Financial Measure: Cash Flow Before Share Repurchases
and Changes in Debt




The following table reconciles net increase (decrease) in cash and cash
equivalents to cash flow before share repurchases and changes in debt, which is
presented in "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations":


Fiscal Year Ended August
(in thousands) 2020 2019 2018 2017 2016

Net cash provided by/(used
in):
Operating activities(1) $ 2,720,108 $ 2,128,513 $ 2,080,292 $ 1,570,612 $ 1,641,060
Investing activities (497,875) (491,846) (521,860) (553,599) (505,835)
Financing activities(1) (643,636) (1,674,088) (1,632,154) (914,329) (1,116,528)
Effect of exchange rate
changes on cash (4,082) (4,103) (1,724) 852 (4,272)
Net increase/(decrease) in
cash and cash equivalents 1,574,515 (41,524) (75,446) 103,536 14,425
Less: increase/(decrease) in
debt, excluding deferred
financing costs 320,000 204,700 (79,800) 157,600 299,900
Plus: Share repurchases(2) 930,903 2,004,896 1,592,013 1,071,649 1,452,462
Cash flow before share
repurchases and changes in
debt $ 2,185,418 $ 1,758,672 $ 1,596,367 $ 1,017,585 $ 1,166,987





The Company adopted the provisions of ASU 2016-09, Compensation - Stock
(1) Compensation (Topic 718): Improvement to Employee Share-based Payment



Accounting, as of August 28, 2016.



(2) During the third quarter of fiscal 2020, the Company temporarily ceased share



repurchases under the share repurchase program in response to COVID-19.














37

?



Reconciliation of Non-GAAP Financial Measure: Adjusted After-tax ROIC




The following table calculates the percentage of ROIC. ROIC is calculated as
after-tax operating profit (excluding rent) divided by invested capital (which
includes a factor to capitalize operating leases). The ROIC percentages are
presented in "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations":

The following table calculates
the percentage of ROIC. ROIC is
calculated as after-tax
operating profit (excluding
rent) divided by invested
capital (which includes a factor
to capitalize operating leases).
The ROIC percentages are
presented in "Selected Financial
Data" and "Management's
Discussion and Analysis of
Financial Condition and Results
of Operations":



Fiscal Year Ended August
(in thousands, except
percentages) 2020 2019(1) 2018(2) 2017 2016

Net income $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869 $ 1,241,007
Adjustments:
Impairment before tax - - 193,162 - -
Pension termination charges
before tax - - 130,263 - -
Interest expense 201,165 184,804 174,527 154,580 147,681
Rent expense(3) 329,783 332,726 315,580 302,928 280,490
Tax effect(4) (115,747) (105,576) (211,806) (153,265) (150,288)
Deferred tax liabilities, net of
repatriation tax(5) - (6,340) (132,113) - -
Adjusted after-tax return $ 2,148,173 $ 2,022,835 $ 1,807,149 $ 1,585,112 $ 1,518,890

Average debt(6)(7) $ 5,001,194 $ 5,126,286 $ 5,013,678 $ 5,061,502 $ 4,820,402
Average stockholders' deficit(6) (1,542,355) (1,615,339) (1,433,196) (1,730,559) (1,774,329)
Add: Rent x 6(3)(8) 1,978,696 1,996,358 1,893,480 1,817,568 1,682,940
Average finance lease
liabilities(6) 203,998 162,591 156,198 150,066 131,008
Invested capital $ 5,641,533 $ 5,669,896 $ 5,630,160 $ 5,298,577 $ 4,860,021

Adjusted after-tax ROIC 38.1 % 35.7 % 32.1 % 29.9 % 31.3 %





Reconciliation of Non-GAAP Financial Measure: Adjusted Debt to EBITDAR




The following table calculates the ratio of adjusted debt to EBITDAR. Adjusted
debt to EBITDAR is calculated as the sum of total debt, financing lease
liabilities and annual rents times six; divided by net income plus interest,
taxes, depreciation, amortization, rent and share-based compensation expense.
The adjusted debt to EBITDAR ratios are presented in "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations":





Fiscal Year Ended August



(in thousands, except ratios) 2020 2019(1) 2018(2)


2017 2016

Net income $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869 $ 1,241,007
Add: Impairment before tax - - 193,162 - -
Pension termination charges
before tax - - 130,263 - -
Add: Interest expense 201,165 184,804 174,527 154,580 147,681
Income tax expense 483,542 414,112 298,793 644,620 671,707
Adjusted EBIT 2,417,679 2,216,137 2,134,281 2,080,069 2,060,395
Add: Depreciation expense 397,466 369,957 345,084 323,051 297,397
Rent expense(3) 329,783 332,726 315,580 302,928 280,490
Share-based expense 44,835 43,255 43,674 38,244 39,825
Adjusted EBITDAR $ 3,189,763 $ 2,962,075 $ 2,838,619 $ 2,744,292 $ 2,678,107

Debt(9) $ 3,957,186 $ 5,206,344 $ 5,005,930 $ 5,081,238 $ 4,924,119
Financing lease liabilities 223,353 179,905 154,303 150,456 147,285
Add: Rent x 6(3)(8) 1,978,696 1,996,358 1,893,480 1,817,568 1,682,940
Adjusted debt $ 6,159,235 $ 7,382,607 $ 7,053,713 $ 7,049,262 $ 6,754,344
Adjusted debt to EBITDAR 1.9 2.5 2.5 2.6 2.5






38

?



(1) The fiscal year ended August 31, 2019 consisted of 53 weeks.



(2) For fiscal 2018, after-tax operating profit was adjusted for impairment
charges and pension settlement charges.



Effective September 1, 2019, the Company adopted ASU 2016-02, Leases (Topic



842), the new lease accounting standard that required the Company to
(3) recognize operating lease assets and liabilities in the balance sheet. The



table below outlines the calculation of rent expense and reconciles rent



expense to total lease cost, per ASC 842, the most directly comparable GAAP



financial measure, for the 52 weeks ended, August 29, 2020.





Total lease cost, per ASC 842, for the 52 weeks ended August
29, 2020
$



415,505



Less: Finance lease interest and amortization


(60,275)



Less: Variable operating lease components, related to
insurance and common area maintenance for the 52 weeks ended
August 29, 2020



(25,)



Rent expense for the 52 weeks ended August 29, 2020 $ 329,783




For fiscal 2020 and 2019, the effective tax rate was 21.8% and 20.4%,



respectively. The effective tax rate during fiscal 2018 was 24.2% for
(4) impairment, 28.1% for pension termination and 26.2% for interest and rent



expense. For fiscal 2017 and 2016 the effective tax rate was 33.5% and 35.1%,



respectively.



For fiscal 2019 and 2018, after-tax operating profit was adjusted for the
(5) impact of the revaluation of deferred tax liabilities, net of repatriation



tax.



(6) All averages are computed based on trailing five quarters.



(7) Average debt is presented net of average excess cash of $374.2 million.



(8) Rent is multiplied by a factor of six to capitalize operating leases in the



determination of pre-tax invested capital.



(9) The Company ended fiscal 2020 with excess cash of $1.6 billion. Debt is



presented net of excess cash.





Recent Accounting Pronouncements



See Note A of the Notes to Consolidated Financial Statements for a discussion on
recent accounting pronouncements.



Critical Accounting Policies and Estimates




Preparation of our Consolidated Financial Statements requires us to make
estimates and assumptions affecting the reported amounts of assets and
liabilities at the date of the financial statements, reported amounts of
revenues and expenses during the reporting period and related disclosures of
contingent liabilities. In the Notes to our Consolidated Financial Statements,
we describe our significant accounting policies used in preparing the
Consolidated Financial Statements. Our policies are evaluated on an ongoing
basis and are drawn from historical experience and other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
under different assumptions or conditions. Our senior management has identified
the critical accounting policies for the areas that are materially impacted by
estimates and assumptions and have discussed such policies with the Audit
Committee of our Board. The following items in our Consolidated Financial
Statements represent our critical accounting policies that require significant
estimation or judgment by management:


Self-Insurance Reserves




We retain a significant portion of the risks associated with workers'
compensation, general, product liability, property and vehicle liability; and we
obtain third party insurance to limit the exposure related to certain of these
risks. Our self-insurance reserve estimates totaled $288.6 million at August 29,
2020
, and $207.0 million at August 31, 2019. This change is primarily reflective
of our growing operations, including inflation, increases in healthcare costs,
the number of vehicles and the number of hours worked, as well as our historical
claims experience. Where estimable, losses covered by insurance are recognized
on a gross basis with a corresponding insurance receivable.



39

?

The assumptions made by management in estimating our self-insurance reserves
include consideration of historical cost experience, judgments about the present
and expected levels of cost per claim and retention levels. We utilize various
methods, including analyses of historical trends and use of a specialist, to
estimate the cost to settle reported claims and claims incurred but not yet
reported. The actuarial methods develop estimates of the future ultimate claim
costs based on the claims incurred as of the balance sheet date. When estimating
these liabilities, we consider factors, such as the severity, duration and
frequency of claims, legal costs associated with claims, healthcare trends and
projected inflation of related factors. In recent history, our methods for
determining our exposure have remained consistent, and our historical trends
have been appropriately factored into our reserve estimates. As we obtain
additional information and refine our methods regarding the assumptions and
estimates we use to recognize liabilities incurred, we will adjust our reserves
accordingly.

Management believes that the various assumptions developed and actuarial methods
used to determine our self- insurance reserves are reasonable and provide
meaningful data and information that management uses to make its best estimate
of our exposure to these risks. Arriving at these estimates, however, requires a
significant amount of subjective judgment by management, and as a result these
estimates are uncertain and our actual exposure may be different from our
estimates. For example, changes in our assumptions about healthcare costs, the
severity of accidents and the incidence of illness, the average size of claims
and other factors could cause actual claim costs to vary materially from our
assumptions and estimates, causing our reserves to be overstated or understated.
For instance, a 10% change in our self-insurance liability would have affected
net income by approximately $22.4 million for fiscal 2020.

Our liabilities for workers' compensation, general and product liability,
property and vehicle claims do not have scheduled maturities; however, the
timing of future payments is predictable based on historical patterns and is
relied upon in determining the current portion of these liabilities.
Accordingly, we reflect the net present value of the obligations we determine to
be long-term using the risk-free interest rate as of the balance sheet date.


If the discount rate used to calculate the present value of these reserves
changed by 25 basis points, net income would have been affected by approximately
$1.4 million for fiscal 2020.




Income Taxes

Our income tax returns are audited by state, federal and foreign tax
authorities, and we are typically engaged in various tax examinations at any
given time. Tax contingencies often arise due to uncertainty or differing
interpretations of the application of tax rules throughout the various
jurisdictions in which we operate. The contingencies are influenced by items
such as tax audits, changes in tax laws, litigation, appeals and prior
experience with similar tax positions.

We regularly review our tax reserves for these items and assess the adequacy of
the amount we have recorded. As of August 29, 2020, we had approximately $23.0
million
reserved for uncertain tax positions.

We evaluate exposures associated with our various tax filings by estimating a
liability for uncertain 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 us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.

We believe our estimates to be reasonable and have not experienced material
adjustments to our reserves in the previous three years; however, actual results
could differ from our estimates, and we may be exposed to gains or losses that
could be material. Specifically, management has used judgment and made
assumptions to estimate the likely outcome of uncertain tax positions.
Additionally, to the extent we prevail in matters for which a liability has been
established, or must pay in excess of recognized reserves, our effective tax
rate in any particular period could be materially affected.

40

?

Vendor Allowances

We receive various payments and allowances from our vendors through a variety of
programs and arrangements, including allowances for warranties, advertising and
general promotion of vendor products. Vendor allowances are treated as a
reduction of the cost of inventory, unless they are provided as a reimbursement
of specific, incremental, identifiable costs incurred by the Company in selling
the vendor's products. Approximately 85% of the vendor funds received during
fiscal 2020 were recorded as a reduction of the cost of inventories and
recognized as a reduction to cost of sales as these inventories are sold.

Based on our vendor agreements, a significant portion of vendor funding we
receive is earned as we purchase inventory. Therefore, we record receivables for
funding earned but not yet received as we purchase inventory. During the year,
we regularly review the receivables from vendors to ensure vendors are able to
meet their obligations. We generally have not recorded a reserve against these
receivables as we have not experienced significant losses and typically have a
legal right of offset with our vendors for payments owed them. Historically, we
have had write-offs less than $1 million in each of the last three years.

© Edgar Online, source Glimpses

© Acquiremedia 2020
Copier lien
All news about AUTOZONE, INC.
13h ago
7d ago
11/16
11/16
11/16