AUTOZONE, INC. We are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in theAmericas . We began operations in 1979 and atAugust 29, 2020 , operated 5,885 stores in theU.S. , 621 stores inMexico and 43 stores inBrazil . 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. AtAugust 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 inMexico andBrazil . 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 onMarch 11, 2020 by theWorld 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 theU.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 theU.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 endedAugust 29, 2020 . InMarch 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 theU.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.
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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 throughJuly 2020 (latest publicly available information), miles driven in theU.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.
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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
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 endedAugust 29, 2020 , we reported net sales of$12.632 billion compared with$11.864 billion for the year endedAugust 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. AtAugust 29, 2020 , we operated 5,885 domestic stores, 621 inMexico and 43 inBrazil , compared with 5,772 domestic stores, 604 inMexico and 35 inBrazil atAugust 31, 2019 . We reported a total auto parts segment (domestic,Mexico andBrazil ) 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
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 endedAugust 31, 2019 , filed with theSEC onOctober 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
OnDecember 22, 2017 , the Tax Cuts and Jobs Act ("Tax Reform") was enacted into law. Tax Reform significantly revises theU.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 toU.S. federal tax. Also, inDecember 2017 , theSEC 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 endedAugust 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 endedAugust 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 endingAugust 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 endedAugust 29, 2020 andAugust 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.
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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.
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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 ofNovember 18, 2017 (the "Extension Amendment") to the Third Amended and Restated Credit Agreement dated as ofNovember 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 fromNovember 18, 2021 untilNovember 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. OnApril 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, onApril 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
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 ofAugust 29, 2020 was 6.1:1. 33 ? As ofAugust 29, 2020 , the$250 million 2.500% Senior Notes dueApril 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 ofAugust 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 ofAugust 29, 2020 , we had$25.0 million in letters of credit outstanding under the letter of credit facility which expires inJune 2022 .
In addition to the outstanding letters of credit issued under the committed
facilities discussed above, we had
OnAugust 14, 2020 , we issued$600 million in 1.650% Senior Notes dueJanuary 2031 under our automatic shelf registration statement on Form S-3, filed with theSEC onApril 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 inNovember 2020 that were callable at par inAugust 2020 . OnMarch 30, 2020 , we issued$500 million in 3.625% Senior Notes dueApril 2025 and$750 million in 4.000% Senior Notes dueApril 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. OnApril 18, 2019 , we issued$300 million in 3.125% Senior Notes dueApril 2024 and$450 million in 3.750% Senior Notes dueApril 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 inApril 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
For the fiscal year endedAugust 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"). OnOctober 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. FromJanuary 1998 toAugust 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 ofAugust 29, 2020 , we had$795.9 million remaining under the Board's authorization to repurchase our common stock. For the fiscal year endedAugust 29, 2020 , cash flow before share repurchases and changes in debt was$2.185 billion as compared to$1.759 billion during the comparable prior year period. Cash flow before share repurchases and changes in debt is calculated as the net increase or decrease in cash and cash equivalents less net increases or decreases in debt plus share repurchases. We use cash flow before share repurchases and changes in debt to calculate the cash flows remaining and available. We believe this is important information regarding our allocation of available capital where we prioritize investments in the business and utilize the remaining funds to repurchase shares, while maintaining debt levels that support our investment grade credit ratings. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for further details of our calculation. During fiscal 2020, we temporarily ceased share repurchases under our share repurchase program to conserve liquidity in response to the uncertainty related to COVID-19. While we have restarted share repurchases during the first quarter of fiscal year 2021, we will continue to evaluate current and expected business conditions and adjust the level of share repurchases under our share repurchase program as we deem appropriate.
Subsequent to
Financial Commitments
The following table shows our significant contractual obligations as ofAugust 29, 2020 : Total Payment Due by Period Contractual Less than Between Between Over (in thousands) Obligations 1 year 13 years 35 years 5 years Debt(1)$ 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
("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.
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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 atAugust 29, 2020 . Approximately$2.0 million is classified as current liabilities and$21.0 million is classified as long-term liabilities. We did not reflect these obligations in the table above as we are unable to make an estimate of the timing of payments of the long-term liabilities due to uncertainties in the timing and amounts of the settlement of these tax positions.
Off-Balance Sheet Arrangements
The following table reflects outstanding letters of credit and surety bonds as ofAugust 29, 2020 : Total Other (in thousands) Commitments Standby letters of credit$ 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.
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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
(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
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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
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(1) The fiscal year ended
(2) For fiscal 2018, after-tax operating profit was adjusted for impairment charges and pension settlement charges.
Effective
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
(25,447)
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
(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
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 atAugust 29, 2020 , and$207.0 million atAugust 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
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 ofAugust 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.
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