filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
Index
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes, among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for processing transactions and properly trained staff. Mechanisms are in place to monitor the effectiveness of our internal control over financial reporting, including regular testing performed by the Company’s internal audit team. Actions are taken to correct deficiencies as they are identified. Our procedures for financial reporting include the active involvement of senior management, our Audit Committee and a staff of highly qualified financial and legal professionals.
Management, with the participation of our principal executive and financial officers, assessed our internal control over financial reporting as of August 25, 2018, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework.
Based on this assessment, management has concluded that our internal control over financial reporting was effective as of August 25, 2018.
Our independent registered public accounting firm, Ernst & Young LLP, audited the effectiveness of our internal control over financial reporting. Ernst & Young LLP’s attestation report on the Company’s internal control over financial reporting as of August 25, 2018 is included in this Annual Report on Form 10-K.
| /s/ WILLIAM C. RHODES, III |
| William C. Rhodes, III |
| Chairman, President and |
| Chief Executive Officer |
| (Principal Executive Officer) |
| /s/ WILLIAM T. GILES |
| William T. Giles |
| Chief Financial Officer and Executive |
| Vice President – Finance and Information |
| Technology |
| (Principal Financial Officer) |
Certifications
Compliance with NYSE Corporate Governance Listing Standards
On January 3, 2018, the Company submitted to the New York Stock Exchange the Annual CEO Certification required pursuant to Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.
Rule 13a-14(a) Certifications of Principal Executive Officer and Principal Financial Officer
The Company has filed, as exhibits to its Annual Report on Form 10-K for the fiscal year ended August 25, 2018, the certifications of its Principal Executive Officer and Principal Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of AutoZone, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited AutoZone Inc.’s internal control over financial reporting as of August 25, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AutoZone, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of August 25, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of AutoZone, Inc. as of August 25, 2018 and August 26, 2017, and the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended August 25, 2018, and the related notes and our report dated October 24, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Memphis, Tennessee
October 24, 2018
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of AutoZone, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AutoZone, Inc. (the Company) as of August 25, 2018 and August 26, 2017, the related consolidated statements of income, comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended August 25, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 25, 2018 and August 26, 2017, and the results of its operations and its cash flows for each of the three years in the period ended August 25, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 25, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 24, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1988.
Memphis, Tennessee
October 24, 2018
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Consolidated Statements of Income
| Year Ended | ||||||||||||
| (in thousands, except per share data) | August 25, 2018 (52 weeks) | August 26, 2017 (52 weeks) | August 27, 2016 (52 weeks) | |||||||||
| Net sales | $ | 11,221,077 | $ | 10,888,676 | $ | 10,635,676 | ||||||
| Cost of sales, including warehouse and delivery expenses | 5,247,331 | 5,149,056 | 5,026,940 | |||||||||
| Gross profit | 5,973,746 | 5,739,620 | 5,608,736 | |||||||||
| Operating, selling, general and administrative expenses | 4,162,890 | 3,659,551 | 3,548,341 | |||||||||
| Operating profit | 1,810,856 | 2,080,069 | 2,060,395 | |||||||||
| Interest expense, net | 174,527 | 154,580 | 147,681 | |||||||||
| Income before income taxes | 1,636,329 | 1,925,489 | 1,912,714 | |||||||||
| Income tax expense | 298,793 | 644,620 | 671,707 | |||||||||
| Net income | $ | 1,337,536 | $ | 1,280,869 | $ | 1,241,007 | ||||||
| Weighted average shares for basic earnings per share | 26,970 | 28,430 | 29,889 | |||||||||
| Effect of dilutive stock equivalents | 454 | 635 | 599 | |||||||||
| Weighted average shares for diluted earnings per share | 27,424 | 29,065 | 30,488 | |||||||||
| Basic earnings per share | $ | 49.59 | $ | 45.05 | $ | 41.52 | ||||||
| Diluted earnings per share | $ | 48.77 | $ | 44.07 | $ | 40.70 | ||||||
See Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 (52 weeks) | August 26, 2017 (52 weeks) | August 27, 2016 (52 weeks) | |||||||||
| Net income | $ | 1,337,536 | $ | 1,280,869 | $ | 1,241,007 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Pension liability adjustments, net of taxes(1) | 72,376 | 16,514 | (18,095 | ) | ||||||||
| Foreign currency translation adjustments | (53,085 | ) | 35,198 | (39,524 | ) | |||||||
| Unrealized (losses) gains on marketable securities, net of taxes(2) | (862 | ) | (131 | ) | 146 | |||||||
| Net derivative activity, net of taxes(3) | 323 | 1,391 | (538 | ) | ||||||||
| Total other comprehensive income (loss) | 18,752 | 52,972 | (58,011 | ) | ||||||||
| Comprehensive income | $ | 1,356,288 | $ | 1,333,841 | $ | 1,182,996 | ||||||
| (1) | Pension liability adjustments are presented net of taxes of $46,523 in 2018, which includes $13,122 related to the adoption of ASU 2018-02, $10,542 in 2017 and $11,394 in 2016. |
|---|
| (2) | Unrealized (losses) gains on marketable securities are presented net of taxes of $234 in 2018, $69 in 2017 and $79 in 2016 |
|---|
| (3) | Net derivative activities are presented net of taxes of $1,882 in 2018, which includes $1,367 related to the adoption of ASU 2018-02, $814 in 2017 and $315 in 2016 |
|---|
See Notes to Consolidated Financial Statements.
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Consolidated Balance Sheets
| (in thousands) | August 25, 2018 | August 26, 2017 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 217,824 | $ | 293,270 | ||||
| Accounts receivable | 258,136 | 280,733 | ||||||
| Merchandise inventories | 3,943,670 | 3,882,086 | ||||||
| Other current assets | 216,239 | 155,166 | ||||||
| Total current assets | 4,635,869 | 4,611,255 | ||||||
| Property and equipment: | ||||||||
| Land | 1,107,092 | 1,056,187 | ||||||
| Buildings and improvements | 3,698,010 | 3,423,056 | ||||||
| Equipment | 1,841,330 | 1,704,653 | ||||||
| Leasehold improvements | 504,656 | 470,998 | ||||||
| Construction in progress | 140,535 | 218,299 | ||||||
| 7,291,623 | 6,873,193 | |||||||
| Less: Accumulated depreciation and amortization | 3,073,223 | 2,842,175 | ||||||
| 4,218,400 | 4,031,018 | |||||||
| Goodwill | 302,645 | 391,887 | ||||||
| Deferred income taxes | 34,620 | 35,308 | ||||||
| Other long-term assets | 155,446 | 190,313 | ||||||
| 492,711 | 617,508 | |||||||
| $ | 9,346,980 | $ | 9,259,781 | |||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 4,409,372 | $ | 4,168,940 | ||||
| Accrued expenses and other | 606,894 | 563,350 | ||||||
| Income taxes payable | 12,415 | 34,011 | ||||||
| Total current liabilities | 5,028,681 | 4,766,301 | ||||||
| Long-term debt | 5,005,930 | 5,081,238 | ||||||
| Deferred income taxes | 285,204 | 371,111 | ||||||
| Other long-term liabilities | 547,520 | 469,508 | ||||||
| Commitments and contingencies | — | — | ||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, authorized 1,000 shares; no shares issued | — | — | ||||||
| Common stock, par value $.01 per share, authorized 200,000 shares; 27,530 shares issued and 25,742 shares outstanding in 2018 and 28,735 shares issued and 27,833 shares outstanding in 2017 | 275 | 287 | ||||||
| Additional paid-in capital | 1,155,426 | 1,086,671 | ||||||
| Retained deficit | (1,208,824 | ) | (1,642,387 | ) | ||||
| Accumulated other comprehensive loss | (235,805 | ) | (254,557 | ) | ||||
| Treasury stock, at cost | (1,231,427 | ) | (618,391 | ) | ||||
| Total stockholders’ deficit | (1,520,355 | ) | (1,428,377 | ) | ||||
| $ | 9,346,980 | $ | 9,259,781 | |||||
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Cash Flows
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 (52 weeks) | August 26, 2017 (52 weeks) | August 27, 2016 (52 weeks) | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 1,337,536 | $ | 1,280,869 | $ | 1,241,007 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization of property and equipment and intangibles | 345,084 | 323,051 | 297,397 | |||||||||
| Amortization of debt origination fees | 8,393 | 8,369 | 7,980 | |||||||||
| Deferred income taxes | (124,261 | ) | 74,902 | 45,019 | ||||||||
| Share-based compensation expense | 43,674 | 38,244 | 39,825 | |||||||||
| Pension plan contributions | (11,596 | ) | (17,761 | ) | (52,721 | ) | ||||||
| Pension termination charges | 130,263 | — | — | |||||||||
| Asset impairment | 193,162 | — | — | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | 7,534 | 7,795 | (41,447 | ) | ||||||||
| Merchandise inventories | (188,782 | ) | (236,807 | ) | (227,518 | ) | ||||||
| Accounts payable and accrued expenses | 319,609 | 82,614 | 271,198 | |||||||||
| Income taxes payable | (6,438 | ) | (3,659 | ) | 50,122 | |||||||
| Other, net | 26,114 | 12,995 | 10,198 | |||||||||
| Net cash provided by operating activities | 2,080,292 | 1,570,612 | 1,641,060 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (521,788 | ) | (553,832 | ) | (488,791 | ) | ||||||
| Purchase of intangibles | — | — | (10,000 | ) | ||||||||
| Proceeds from sale of assets | 35,279 | — | — | |||||||||
| Purchase of marketable securities | (104,536 | ) | (85,711 | ) | (130,170 | ) | ||||||
| Proceeds from sale of marketable securities | 69,644 | 82,993 | 120,472 | |||||||||
| (Payments) proceeds from disposal of capital assets and other, net | (459 | ) | 2,951 | 2,654 | ||||||||
| Net cash used in investing activities | (521,860 | ) | (553,599 | ) | (505,835 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Net proceeds from (payments of) commercial paper | 170,200 | (42,400 | ) | 149,900 | ||||||||
| Proceeds from issuance of debt | — | 600,000 | 650,000 | |||||||||
| Repayment of debt | (250,000 | ) | (400,000 | ) | (500,000 | ) | ||||||
| Net proceeds from sale of common stock | 89,715 | 54,686 | 80,289 | |||||||||
| Purchase of treasury stock | (1,592,013 | ) | (1,071,649 | ) | (1,452,462 | ) | ||||||
| Payments of capital lease obligations | (49,004 | ) | (47,604 | ) | (36,320 | ) | ||||||
| Other, net | (1,052 | ) | (7,362 | ) | (7,935 | ) | ||||||
| Net cash used in financing activities | (1,632,154 | ) | (914,329 | ) | (1,116,528 | ) | ||||||
| Effect of exchange rate changes on cash | (1,724 | ) | 852 | (4,272 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | (75,446 | ) | 103,536 | 14,425 | ||||||||
| Cash and cash equivalents at beginning of year | 293,270 | 189,734 | 175,309 | |||||||||
| Cash and cash equivalents at end of year | $ | 217,824 | $ | 293,270 | $ | 189,734 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Interest paid, net of interest cost capitalized | $ | 163,965 | $ | 135,331 | $ | 136,731 | ||||||
| Income taxes paid | $ | 427,161 | $ | 579,925 | $ | 582,384 | ||||||
| Assets acquired through capital lease | $ | 98,782 | $ | 84,011 | $ | 94,052 | ||||||
See Notes to Consolidated Financial Statements.
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Consolidated Statements of Stockholders’ Deficit
| (in thousands) | Common Shares Issued | Common Stock | Additional Paid-in Capital | Retained Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||||
| Balance at August 29, 2015 | 32,098 | $ | 321 | $ | 938,355 | $ | (1,418,738 | ) | $ | (249,518 | ) | $ | (971,810 | ) | $ | (1,701,390 | ) | |||||||||||
| Net income | 1,241,007 | 1,241,007 | ||||||||||||||||||||||||||
| Total other comprehensive loss | (58,011 | ) | (58,011 | ) | ||||||||||||||||||||||||
| Purchase of 1,903 shares of treasury stock | (1,452,462 | ) | (1,452,462 | ) | ||||||||||||||||||||||||
| Retirement of treasury shares | (2,132 | ) | (21 | ) | (67,023 | ) | (1,424,455 | ) | 1,491,499 | — | ||||||||||||||||||
| Issuance of common stock under stock options and stock purchase plans | 363 | 3 | 80,286 | 80,289 | ||||||||||||||||||||||||
| Share-based compensation expense | 39,298 | 39,298 | ||||||||||||||||||||||||||
| Income tax benefit from exercise of stock options | 63,731 | 63,731 | ||||||||||||||||||||||||||
| Balance at August 27, 2016 | 30,329 | 303 | 1,054,647 | (1,602,186 | ) | (307,529 | ) | (932,773 | ) | (1,787,538 | ) | |||||||||||||||||
| Net income | 1,280,869 | 1,280,869 | ||||||||||||||||||||||||||
| Total other comprehensive income | 52,972 | 52,972 | ||||||||||||||||||||||||||
| Purchase of 1,495 shares of treasury stock | (1,071,649 | ) | (1,071,649 | ) | ||||||||||||||||||||||||
| Retirement of treasury shares | (1,804 | ) | (18 | ) | (64,943 | ) | (1,321,070 | ) | 1,386,031 | — | ||||||||||||||||||
| Issuance of common stock under stock options and stock purchase plans | 210 | 2 | 54,684 | 54,686 | ||||||||||||||||||||||||
| Share-based compensation expense | 42,283 | 42,283 | ||||||||||||||||||||||||||
| Balance at August 26, 2017 | 28,735 | 287 | 1,086,671 | (1,642,387 | ) | (254,557 | ) | (618,391 | ) | (1,428,377 | ) | |||||||||||||||||
| Net income | 1,337,536 | 1,337,536 | ||||||||||||||||||||||||||
| Total other comprehensive income | 18,752 | 18,752 | ||||||||||||||||||||||||||
| Purchase of 2,398 shares of treasury stock | (1,592,013 | ) | (1,592,013 | ) | ||||||||||||||||||||||||
| Retirement of treasury shares | (1,512 | ) | (15 | ) | (60,500 | ) | (918,462 | ) | 978,977 | — | ||||||||||||||||||
| Issuance of common stock under stock options and stock purchase plans | 307 | 3 | 89,712 | 89,715 | ||||||||||||||||||||||||
| Adoption of ASU 2018-02 | 14,489 | 14,489 | ||||||||||||||||||||||||||
| Share-based compensation expense | 39,543 | 39,543 | ||||||||||||||||||||||||||
| Balance at August 25, 2018 | 27,530 | $ | 275 | $ | 1,155,426 | $ | (1,208,824 | ) | $ | (235,805 | ) | $ | (1,231,427 | ) | $ | (1,520,355 | ) | |||||||||||
See Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
Note A – Significant Accounting Policies
Business: AutoZone, Inc. and its wholly owned subsidiaries (“AutoZone” or the “Company”) are principally a retailer and distributor of automotive replacement parts and accessories. At the end of fiscal 2018, the Company operated 5,618 stores in the United States, including Puerto Rico; 564 stores in Mexico; and 20 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 the end of fiscal 2018, 4,741 of the domestic stores had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. The company also had commercial programs in stores in Mexico and Brazil. The Company also sells the ALLDATA brand automotive diagnostic and repair software through www.alldata.com and www.alldatadiy.com. Additionally, the Company sells automotive hard parts, maintenance items, accessories, and non-automotive products through www.autozone.com, and its commercial customers can make purchases through www.autozonepro.com. The Company does not derive revenue from automotive repair or installation services.
Fiscal Year: The Company’s fiscal year consists of 52 or 53 weeks ending on the last Saturday in August. Fiscal 2018, 2017 and 2016 represented 52 weeks.
Basis of Presentation: The Consolidated Financial Statements include the accounts of AutoZone, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents consist of investments with original maturities of 90 days or less at the date of purchase. Cash equivalents include proceeds due from credit and debit card transactions with settlement terms of less than five days. Credit and debit card receivables included within cash and cash equivalents were $51.0 million at August 25, 2018 and $48.3 million at August 26, 2017.
Cash balances are held in various locations around the world. Cash and cash equivalents of $98.8 million and $148.4 million were held outside of the U.S. as of August 25, 2018, and August 26, 2017, respectively, and were generally utilized to support liquidity needs in foreign operations.
Accounts Receivable: Accounts receivable consists of receivables from commercial customers and vendors, and is presented net of an allowance for uncollectible accounts. AutoZone routinely grants credit to certain of its commercial customers. The risk of credit loss in its trade receivables is substantially mitigated by the Company’s credit evaluation process, short collection terms and sales to a large number of customers, as well as the low dollar value per transaction for most of its sales. Allowances for potential credit losses are determined based on historical experience and current evaluation of the composition of accounts receivable. Historically, credit losses have been within management’s expectations and the balance of the allowance for uncollectible accounts was $6.1 million at August 25, 2018, and $5.9 million at August 26, 2017.
Merchandise Inventories: Inventories are stated at the lower of cost or market. Merchandise inventories include related purchasing, storage and handling costs. Inventory cost has been determined using the last-in, first-out (“LIFO”) method for domestic inventories and the weighted average cost method for Mexico and Brazil inventories. Due to price deflation on the Company’s merchandise purchases, the Company has exhausted its LIFO reserve balance. The Company’s policy is to not write up inventory in excess of replacement cost.
The difference between LIFO cost and replacement cost, which will be reduced upon experiencing price inflation on the Company’s merchandise purchases, was $452.4 million at August 25, 2018, and $414.9 million at August 26, 2017.
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Marketable Securities: The Company invests a portion of its assets held by the Company’s wholly owned insurance captive in marketable debt securities and classifies them as available-for-sale. The Company includes these securities within the Other current assets and Other long-term assets captions in the accompanying Consolidated Balance Sheets and records the amounts at fair market value, which is determined using quoted market prices at the end of the reporting period. A discussion of marketable securities is included in “Note E – Fair Value Measurements” and “Note F – Marketable Securities.”
Property and Equipment: Property and equipment is stated at cost. Depreciation and amortization are computed principally using the straight-line method over the following estimated useful lives: buildings, 40 to 50 years; building improvements, 5 to 15 years; equipment, including software, 3 to 10 years; and leasehold improvements, over the shorter of the asset’s estimated useful life or the remaining lease term, which includes any reasonably assured renewal periods. Depreciation and amortization include amortization of assets under capital lease.
Impairment of Long-Lived Assets: The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such an event occurs, the Company compares the sum of the undiscounted expected future cash flows of the asset (asset group) with the carrying amounts of the asset. If the undiscounted expected future cash flows are less than the carrying value of the assets, the Company measures the amount of impairment loss as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Goodwill: The cost in excess of fair value of identifiable net assets of businesses acquired is recorded as goodwill. Goodwill has not been amortized since fiscal 2001, but an analysis is performed at least annually to compare the fair value of the reporting unit to the carrying amount to determine if any impairment exists. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. Refer to “Note N – Goodwill and Intangibles” for additional disclosures regarding the Company’s goodwill and impairment assessment.
Intangible Assets: Intangible assets consist of customer relationships purchased relating to ALLDATA operations. Amortizing intangible assets are amortized over periods ranging from 3 to 10 years. Refer to “Note N – Goodwill and Intangibles” and “Note M – Sale of Assets” for additional disclosures regarding the Company’s intangible assets and impairment assessment.
Derivative Instruments and Hedging Activities: AutoZone is exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, the Company uses various derivative instruments to reduce such risks. To date, based upon the Company’s current level of foreign operations, no derivative instruments have been utilized to reduce foreign exchange rate risk. All of the Company’s hedging activities are governed by guidelines that are authorized by AutoZone’s Board of Directors (the “Board”). Further, the Company does not buy or sell derivative instruments for trading purposes.
AutoZone’s financial market risk results primarily from changes in interest rates. At times, AutoZone reduces its exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and forward-starting interest rate swaps. All of the Company’s interest rate hedge instruments are designated as cash flow hedges. Refer to “Note H – Derivative Financial Instruments” for additional disclosures regarding the Company’s derivative instruments and hedging activities. Cash flows related to these instruments designated as qualifying hedges are reflected in the accompanying Consolidated Statements of Cash Flows in the same categories as the cash flows from the items being hedged. Accordingly, cash flows relating to the settlement of interest rate derivatives hedging the forecasted issuance of debt have been reflected upon settlement as a component of financing cash flows. The resulting gain or loss from such settlement is deferred to Accumulated other comprehensive loss and reclassified to interest expense over the term of the underlying debt. This reclassification of the deferred gains and losses impacts the interest expense recognized on the underlying debt that was hedged and is therefore reflected as a component of operating cash flows in periods subsequent to settlement.
Foreign Currency: The Company accounts for its Mexican, Brazilian, Canadian, European, Chinese and British operations using the local market currency and converts its financial statements from these currencies to U.S. dollars. The cumulative loss on currency translation is recorded as a component of Accumulated other comprehensive loss (see “Note G – Accumulated Other Comprehensive Loss”).
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Self-Insurance Reserves: The Company retains a significant portion of the risks associated with workers’ compensation, employee health, general, products liability, property and vehicle insurance. Through various methods, which include analyses of historical trends and utilization of actuaries, the Company estimates the costs of these risks. The costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. Estimates are based on calculations that consider historical lag and claim development factors. The long-term portions of these liabilities are recorded at the Company’s estimate of their net present value.
Deferred Rent: The Company recognizes rent expense on a straight-line basis over the course of the lease term, which includes any reasonably assured renewal periods, beginning on the date the Company takes physical possession of the property (see “Note O – Leases”). Differences between this calculated expense and cash payments are recorded as a liability within the Accrued expenses and other and Other long-term liabilities captions in the accompanying Consolidated Balance Sheets, based on the terms of the lease. Deferred rent approximated $139.6 million as of August 25, 2018, and $130.2 million as of August 26, 2017.
Financial Instruments: The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in “Note I – Financing,” marketable securities is included in “Note F – Marketable Securities,” and derivatives is included in “Note H – Derivative Financial Instruments.”
Income Taxes: The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our effective tax rate is based on income by tax jurisdiction, statutory rates, and tax saving initiatives available to the Company in the various jurisdictions in which we operate.
The Company recognizes liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires the Company to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company must determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.
The Company classifies interest related to income tax liabilities, and if applicable, penalties, as a component of Income tax expense. The income tax liabilities and accrued interest and penalties that are expected to be payable within one year of the balance sheet date are presented within the Accrued expenses and other caption in the accompanying Consolidated Balance Sheets. The remaining portion of the income tax liabilities and accrued interest and penalties are presented within the Other long-term liabilities caption in the accompanying Consolidated Balance Sheets because payment of cash is not anticipated within one year of the balance sheet date. Refer to “Note D – Income Taxes” for additional disclosures regarding the Company’s income taxes.
Sales and Use Taxes: Governmental authorities assess sales and use taxes on the sale of goods and services. The Company excludes taxes collected from customers in its reported sales results; such amounts are included within the Accrued expenses and other caption until remitted to the taxing authorities.
Dividends: The Company currently does not pay a dividend on its common stock. The ability to pay dividends is subject to limitations imposed by Nevada law. Under Nevada law, any future payment of dividends would be dependent upon the Company’s financial condition, capital requirements, earnings and cash flow.
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Revenue Recognition: The Company recognizes sales at the time the sale is made and the product is delivered to the customer. Revenue from sales are presented net of allowances for estimated sales returns, which are based on historical return rates.
A portion of the Company’s transactions include the sale of auto parts that contain a core component. The core component represents the recyclable portion of the auto part. Customers are not charged for the core component of the new part if a used core is returned at the point of sale of the new part; otherwise the Company charges customers a specified amount for the core component. The Company refunds that same amount upon the customer returning a used core to the store at a later date. The Company does not recognize sales or cost of sales for the core component of these transactions when a used part is returned or expected to be returned from the customer.
Vendor Allowances and Advertising Costs: The Company receives various payments and allowances from its vendors through a variety of programs and arrangements. Monies received from vendors include rebates, allowances and promotional funds. The amounts to be received are subject to the terms of the vendor agreements, which generally do not state an expiration date, but are subject to ongoing negotiations that may be impacted in the future based on changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise.
Rebates and other miscellaneous incentives are earned based on purchases or product sales and are accrued ratably over the purchase or sale of the related product. These monies are generally recorded as a reduction of merchandise inventories and are recognized as a reduction to cost of sales as the related inventories are sold.
For arrangements that provide for reimbursement of specific, incremental, identifiable costs incurred by the Company in selling the vendors’ products, the vendor funds are recorded as a reduction to Operating, selling, general and administrative expenses in the period in which the specific costs were incurred.
The Company expenses advertising costs as incurred. Advertising expense, net of vendor promotional funds, was $95.2 million in fiscal 2018, $93.1 million in fiscal 2017, and $98.3 million in fiscal 2016. Vendor promotional funds, which reduced advertising expense, amounted to $25.3 million in fiscal 2018, $28.3 million in fiscal 2017, and $21.4 million in fiscal 2016.
Cost of Sales and Operating, Selling, General and Administrative Expenses: The following illustrates the primary costs classified in each major expense category:
Cost of Sales
| • | Total cost of merchandise sold, including: |
|---|
| • | Freight expenses associated with moving merchandise inventories from the Company’s vendors to the distribution centers; |
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| • | Vendor allowances that are not reimbursements for specific, incremental and identifiable costs |
|---|
| • | Costs associated with operating the Company’s supply chain, including payroll and benefit costs, warehouse occupancy costs, transportation costs and depreciation; and |
|---|
| • | Inventory shrinkage |
|---|
Operating, Selling, General and Administrative Expenses
| • | Payroll and benefit costs for store, field leadership and store support employees; |
|---|
| • | Occupancy costs of store and store support facilities; |
|---|
| • | Depreciation and amortization related to store and store support assets; |
|---|
| • | Transportation costs associated with field leadership, commercial sales force and hub deliveries; |
|---|
| • | Advertising; |
|---|
| • | Self insurance costs; and |
|---|
| • | Other administrative costs, such as credit card transaction fees, legal costs, supplies, and travel and lodging |
|---|
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Warranty Costs: The Company or the vendors supplying its products provides the Company’s customers limited warranties on certain products that range from 30 days to lifetime. In most cases, the Company’s vendors are primarily responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate. These obligations, which are often funded by vendor allowances, are recorded within the Accrued expenses and other caption in the Consolidated Balance Sheets. For vendor allowances that are in excess of the related estimated warranty expense for the vendor’s products, the excess is recorded in inventory and recognized as a reduction to cost of sales as the related inventory is sold.
Shipping and Handling Costs: The Company does not generally charge customers separately for shipping and handling. Substantially all the costs the Company incurs to ship products to our stores are included in cost of sales.
Pre-opening Expenses: Pre-opening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred.
Earnings per Share: Basic earnings per share is based on the weighted average outstanding common shares. Diluted earnings per share is based on the weighted average outstanding common shares adjusted for the effect of common stock equivalents, which are primarily stock options. There were 847,279 stock options excluded from the diluted earnings per share calculation because they would have been anti-dilutive as of August 25, 2018. There were 620,025 stock options excluded for the year ended August 26, 2017, and 329,900 stock options excluded for the year ended August 27, 2016, because they would have been anti-dilutive.
Share-Based Payments: Share-based payments include stock option grants and certain other transactions under the Company’s stock plans. The Company recognizes compensation expense for its share-based payments over the requisite service period based on the fair value of the awards. See “Note B – Share-Based Payments” for further discussion.
Risk and Uncertainties: In fiscal 2018, one class of similar products accounted for approximately 12 percent of the Company’s total revenues, and one vendor supplied approximately 12 percent of the Company’s total purchases. No other class of similar products accounted for 10 percent or more of total revenues, and no other individual vendor provided more than 10 percent of total purchases.
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Recently Adopted Accounting Pronouncements:
In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. ASU 2018-05 provides guidance on accounting for the tax effects of the U.S. Tax Cuts and Jobs Act (“Tax Reform”) pursuant to the Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under Accounting Standard Codificiation (“ASC”) 740 within a one-year measurement period from Tax Reform enactment date, which occurred for the purposes of the Company’s financial statements during the quarter ended February 10, 2018, when the necessary information is not available, prepared, or analyzed in sufficient detail to complete the accounting. The Company has applied this amendment. Refer to “Note D – Income Taxes” in the Consolidated Financial Statements for more information.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax effects from Accumulated Other Comprehensive Income, which allows for the reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the tax effects on deferred tax items included within AOCI (referred to in the ASU as “stranded tax effects”) resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% that was effected by the 2017 U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”). ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company early adopted ASU 2018-02 in the fourth quarter of fiscal 2018, resulting in a $14.5 million reclassification from accumulated other comprehensive income to retained deficit on the Consolidated Balance Sheets and a decrease in the Consolidated Statement of Comprehensive Income.
Recently Issued Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU, along with subsequent ASU’s issued to clarify certain provisions of ASU 2014-09, is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Companies that transition to this new standard may either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at the date of adoption. The Company will adopt this standard using the modified retrospective method beginning with our first quarter ending November 17, 2018. Results for annual reporting periods beginning after August 25, 2018, will be presented under ASU 2014-09, while prior period amounts will not be adjusted and will continue to be reported under the accounting standards in effect for the prior periods. The Company’s primary source of revenue is derived from the sale of automotive aftermarket parts to our customers, and generally, these performance obligations are satisfied the same day contracts with customers are initiated. As such, the adoption of the new standard will not have a material impact on the Company’s consolidated financial condition, results of operations, cash flows, business process, controls or systems.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms greater than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption is permitted. The Company will adopt this standard using the required modified retrospective approach at the beginning of fiscal 2020. The Company established a cross-functional implementation team to evaluate and identify the impact of ASU 2016-02 on the Company’s financial position, results of operations and cash flows. Based on the preliminary work completed, the Company has concluded its assessment on its leasing arrangements, evaluated the impact of applying the practical expedients and accounting policy elections and is currently working on implementing software to meet the reporting requirements of this standard. The Company is also in the process of identifying changes to its business processes and controls to support adoption of the new standard. The team is continuing to understand the full analysis of the adoption, but is unable to quantify the impact at this time. The Company anticipates the adoption of this new standard to result in a significant increase in lease-related assets and liabilities on the Company’s consolidated balance sheets. The impact on the Company’s Consolidated Statements of Income is currently being evaluated. As the impact of this standard is non-cash in nature, the Company does not anticipate its adoption to have an impact on the Company’s Consolidated Statement of Cash Flows.
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In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. ASU 2016-16 requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. The guidance must be applied using the modified retrospective basis. The Company does not expect the provisions of ASU 2016-16 to have a material impact on its financial statements. This update will be effective for the Company at the beginning of its fiscal 2019 year.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires a prospective adoption. Early adoption is permitted. The Company does not expect the provisions of ASU 2017-01 to have a material impact on its Consolidated Financial Statements. This update will be effective for the Company at the beginning of its fiscal 2019 year.
Note B – Share-Based Payments
Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $43.7 million for fiscal 2018, $38.2 million for fiscal 2017, and $39.8 million for fiscal 2016. As of August 25, 2018, share-based compensation expense for unvested awards not yet recognized in earnings is $33.1 million and will be recognized over a weighted average period of 1.82 years. As a result of the adoption of the new accounting guidance for share-based payments in 2017, cash flows related to tax deductions in excess of recognized compensation cost are classified as operating cash flows for each period presented. Retrospective application of the cash flow presentation resulted in increases to both net cash provided by operations and net cash required for financing activities of $63.7 million for fiscal 2016.
On December 15, 2010, the Company’s stockholders approved the 2011 Equity Incentive Award Plan (the “2011 Plan”), allowing the Company to provide equity-based compensation to non-employee directors and employees for their service to AutoZone or its subsidiaries or affiliates. Prior to the Company’s adoption of the 2011 Plan, equity-based compensation was provided to employees under the 2006 Stock Option Plan and to non-employee directors under the 2003 Director Compensation Plan (the “2003 Comp Plan”) and the 2003 Director Stock Option Plan (the “2003 Option Plan”).
During fiscal 2016, the Company’s stockholders approved the Amended and Restated AutoZone, Inc. 2011 Equity Incentive Award Plan (the “Amended 2011 Equity Plan”). The Amended 2011 Equity Plan imposes a maximum limit on the compensation, measured as the sum of any cash compensation and the aggregate grant date fair value of awards granted under the Amended 2011 Equity Plan, which may be paid to non-employee directors for such service during any calendar year. The Amended 2011 Equity Plan also applies a ten-year term on the Amended 2011 Equity Plan through December 16, 2025 and extends the Company’s ability to grant incentive stock options through October 7, 2025.
The Company grants options to purchase common stock to certain of its employees under its plan at prices equal to the market value of the stock on the date of grant. Options have a term of 10 years or 10 years and one day from grant date. Employee options generally vest in equal annual installments on the first, second, third and fourth anniversaries of the grant date and generally have 30 or 90 days after the service relationship ends, or one year after death, to exercise all vested options. The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the award and each vesting date.
In addition to the 2011 Plan, on December 15, 2010, the Company adopted the 2011 Director Compensation Program (the “2011 Program”), which stated that non-employee directors would receive their compensation in awards of restricted stock units under the 2011 Plan. Under the 2011 Program, restricted stock units are granted the first day of each calendar quarter. The number of restricted stock units granted each quarter is determined by dividing one-fourth of the amount of the annual retainer by the fair market value of the shares of common stock as of the grant date. The restricted stock units are fully vested on the date they are issued and are paid in shares of the Company’s common stock subsequent to the non-employee director ceasing to be a member of the Board.
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The 2011 Program replaced the 2003 Comp Plan and the 2003 Option Plan. Under the 2003 Comp Plan, non-employee directors could receive no more than one-half of their director fees immediately in cash, and the remainder of the fees was required to be taken in common stock or stock appreciation rights. The director had the option to elect to receive up to 100% of the fees in stock or defer all or part of the fees in units with value equivalent to the value of shares of common stock as of the grant date. At August 25, 2018, the Company had $13.6 million accrued related to 17,710 outstanding units issued under the 2003 Comp Plan and prior plans, and there was $9.5 million accrued related to 17,990 outstanding units issued as of August 26, 2017. No additional shares of stock or units will be issued in future years under the 2003 Comp Plan.
Under the 2003 Option Plan, each non-employee director received an option grant on January 1 of each year, and each new non-employee director received an option to purchase 3,000 shares upon election to the Board, plus a portion of the annual directors’ option grant prorated for the portion of the year actually served. These stock option grants were made at the fair market value as of the grant date and generally vested three years from the grant date. There were 13,000 and 19,000 outstanding options under the 2003 Option Plan as of August 25, 2018 and August 26, 2017, respectively. No additional shares of stock will be issued in future years under the 2003 Option Plan.
During fiscal 2014, the Company adopted the 2014 Director Compensation Program (the “Program”), which states that non-employee directors will receive their compensation in awards of restricted stock units under the 2011 Equity Incentive Award Plan, with an option for a certain portion of a director’s compensation to be paid in cash at the non-employee director’s election. The Program replaced the 2011 Director Compensation Program. Under the Program, restricted stock units are granted January 1 of each year (the “Grant Date”). The number of restricted stock units is determined by dividing the amount of the annual retainer by the fair market value of the shares of common stock as of the Grant Date. The restricted stock units are fully vested on January 1 of each year and are paid in shares of the Company’s common stock on the fifth anniversary of the Grant Date or the date the non-employee director ceases to be a member of the Board (“Separation from Service”), whichever occurs first. Non-employee directors may elect to defer receipt of the restricted stock units until their Separation from Service. The cash portion of the award, if elected, is paid ratably over the remaining calendar quarters.
The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes-Merton multiple-option pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The following table presents the weighted average for key assumptions used in determining the fair value of options granted and the related share-based compensation expense:
| Year Ended | ||||||||||||
| August 25, 2018 | August 26, 2017 | August 27, 2016 | ||||||||||
| Expected price volatility | 20 | % | 18 | % | 18 | % | ||||||
| Risk-free interest rates | 1.9 | % | 1.2 | % | 1.5 | % | ||||||
| Weighted average expected lives (in years) | 5.1 | 5.1 | 5.1 | |||||||||
| Forfeiture rate | 10 | % | 10 | % | 10 | % | ||||||
| Dividend yield | 0 | % | 0 | % | 0 | % |
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The following methodologies were applied in developing the assumptions used in determining the fair value of options granted:
Expected price volatility – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate the volatility assumption as it is management’s belief that this is the best indicator of future volatility. The Company calculates daily market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.
Risk-free interest rate – This is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.
Expected lives – This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Options granted have a maximum term of ten years or ten years and one day. An increase in the expected life will increase compensation expense.
Forfeiture rate – This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This estimate is based on historical experience at the time of valuation and reduces expense ratably over the vesting period. An increase in the forfeiture rate will decrease compensation expense. This estimate is evaluated periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Dividend yield – The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.
The weighted average grant date fair value per share of options granted was $129.12 during fiscal 2018, $139.80 during fiscal 2017, and $156.20 during fiscal 2016. The intrinsic value of options exercised was $123.1 million in fiscal 2018, $93.9 million in fiscal 2017, and $178.0 million in fiscal 2016. The total fair value of options vested was $35.7 million in fiscal 2018, $34.7 million in fiscal 2017, and $32.2 million in fiscal 2016.
The Company generally issues new shares when options are exercised. The following table summarizes information about stock option activity for the year ended August 25, 2018:
| Number of Shares | Weighted Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding – August 26, 2017 | 1,798,055 | $ | 493.18 | |||||||||||||
| Granted | 284,335 | 587.57 | ||||||||||||||
| Exercised | (297,616 | ) | 298.02 | |||||||||||||
| Cancelled | (77,908 | ) | 672.61 | |||||||||||||
| Outstanding – August 25, 2018 | 1,706,866 | 534.74 | 6.06 | $ | 402,631 | |||||||||||
| Exercisable | 1,014,819 | 446.07 | 4.73 | 329,352 | ||||||||||||
| Expected to vest | 622,842 | 664.77 | 8.02 | 38,387 | ||||||||||||
| Available for future grants | 686,577 | |||||||||||||||
The Company recognized $2.1 million in expense related to the discount on the selling of shares to employees and executives under various share purchase plans in fiscal 2018, $1.8 million in fiscal 2017 and $2.0 million in fiscal 2016. The Sixth Amended and Restated AutoZone, Inc. Employee Stock Purchase Plan (the “Employee Plan”), which is qualified under Section 423 of the Internal Revenue Code, permits all eligible employees to purchase AutoZone’s common stock at 85% of the lower of the market price of the common stock on the first day or last
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day of each calendar quarter through payroll deductions. Maximum permitted annual purchases are $15,000 per employee or 10 percent of compensation, whichever is less. Under the Employee Plan, 14,523 shares were sold to employees in fiscal 2018, 14,205 shares were sold to employees in fiscal 2017, and 12,662 shares were sold to employees in fiscal 2016. The Company repurchased 11,816 shares at market value in fiscal 2018, 12,455 shares in fiscal 2017 and 12,460 shares in fiscal 2016 from employees electing to sell their stock. Issuances of shares under the Employee Plan are netted against repurchases and such repurchases are not included in share repurchases disclosed in “Note K – Stock Repurchase Program.” At August 25, 2018, 163,777 shares of common stock were reserved for future issuance under the Employee Plan.
Once executives have reached the maximum purchases under the Employee Plan, the Fifth Amended and Restated Executive Stock Purchase Plan (the “Executive Plan”) permits all eligible executives to purchase AutoZone’s common stock up to 25 percent of his or her annual salary and bonus. Purchases under the Executive Plan were 1,840 shares in fiscal 2018, 1,865 shares in fiscal 2017 and 1,943 shares in fiscal 2016. At August 25, 2018, 238,048 shares of common stock were reserved for future issuance under the Executive Plan.
Note C – Accrued Expenses and Other
Accrued expenses and other consisted of the following:
| (in thousands) | August 25, 2018 | August 26, 2017 | ||||||
| Accrued compensation, related payroll taxes and benefits | $ | 195,004 | $ | 181,591 | ||||
| Property, sales, and other taxes | 106,050 | 98,829 | ||||||
| Medical and casualty insurance claims (current portion) | 88,761 | 84,756 | ||||||
| Capital lease obligations | 52,290 | 48,134 | ||||||
| Accrued interest | 36,902 | 41,047 | ||||||
| Accrued gift cards | 27,401 | 24,192 | ||||||
| Accrued sales and warranty returns | 20,025 | 19,520 | ||||||
| Other | 80,461 | 65,281 | ||||||
| $ | 606,894 | $ | 563,350 | |||||
The Company retains a significant portion of the insurance risks associated with workers’ compensation, employee health, general, products liability, property and vehicle insurance. A portion of these self-insured losses is managed through a wholly owned insurance captive. The Company maintains certain levels for stop-loss coverage for each self-insured plan in order to limit its liability for large claims. The retained limits are per claim and are $2.0 million for workers’ compensation, $3.0 million for vehicles, $21.5 million for property, $0.7 million for employee health, and $1.0 million for general and products liability.
Note D – Income Taxes
The components of income from continuing operations before income taxes are as follows:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Domestic | $ | 1,412,963 | $ | 1,737,401 | $ | 1,737,727 | ||||||
| International | 223,366 | 188,088 | 174,987 | |||||||||
| $ | 1,636,329 | $ | 1,925,489 | $ | 1,912,714 | |||||||
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The provision for income tax expense consisted of the following:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 328,963 | $ | 487,492 | $ | 534,621 | ||||||
| State | 36,389 | 31,733 | 39,223 | |||||||||
| International | 57,702 | 50,493 | 52,844 | |||||||||
| 423,054 | 569,718 | 626,688 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (131,926 | ) | 72,208 | 48,509 | ||||||||
| State | 8,167 | 7,769 | 9,453 | |||||||||
| International | (502 | ) | (5,075 | ) | (12,943 | ) | ||||||
| (124,261 | ) | 74,902 | 45,019 | |||||||||
| Income tax expense | $ | 298,793 | $ | 644,620 | $ | 671,707 | ||||||
A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate to income before income taxes is as follows:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Federal tax at statutory U.S. income tax rate | 25.9 | % | 35.0 | % | 35.0 | % | ||||||
| State income taxes, net | 1.9 | % | 1.3 | % | 1.6 | % | ||||||
| Transition tax | 1.6 | % | — | — | ||||||||
| Share-based compensation | (1.6 | %) | (1.4 | %) | — | |||||||
| Impact of tax reform | (9.6 | %) | — | — | ||||||||
| Other | 0.1 | % | (1.4 | %) | (1.5 | %) | ||||||
| Effective tax rate | 18.3 | % | 33.5 | % | 35.1 | % | ||||||
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.
As a result of the decrease in the federal tax rate from 35% to 21%, effective January 1, 2018, the Company has computed its income tax expense for the year ended August 25, 2018 using a blended federal tax rate of 25.9%, which provided a benefit of $119.2 million on fiscal 2018 earnings before taxes. The Company’s federal statutory tax rate will be 21% for the year ending August 31, 2019 and each subsequent year.
For the year ended August 25, 2018 and August 26, 2017, the Company recognized excess tax benefits from stock option exercises of $31.3 million and $31.2 million, respectively.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of Tax Reform. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of Tax Reform. The ultimate impact may differ from provisional amounts recorded, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional regulatory guidance that may be issued. The accounting must be completed within one year from the enactment date of Tax Reform.
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As a result of the statutory rate changes of Tax Reform, the Company must remeasure its deferred tax assets and liabilities using the federal tax rate that will apply when the related temporary differences are expected to reverse. During the year ended August 25, 2018, the Company recorded a provisional tax benefit of $157.3 million related to the remeasurement of deferred taxes as a result of Tax Reform. The Company is continuing to analyze certain aspects of Tax Reform and is refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
As part of the transition to the new territorial tax system, Tax Reform imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries. For the year ended August 25, 2018, the Company recorded a provisional tax expense of $25.8 million related to the transition tax. Our analysis of the transition tax is not completed as of the year ended August 25, 2018, as the Company continues to finalize the calculation of foreign earnings and profits and the amounts held in cash or other specified assets. The provisional amount may also change as new guidance and clarifications are issued by the US federal and state jurisdictions. The Company will complete the accounting for these items during the measurement period. The Company intends to file an election to pay the transition tax liability over the following eight years as prescribed under the enacted law.
The other provisions of Tax Reform are either immaterial or not applicable for the year ended August 25, 2018. The provisions applicable for the year ended August 25, 2018, including the deductibility of certain expenditures, are provisional amounts that may also change as new guidance and clarifications are issued.
Significant components of the Company’s deferred tax assets and liabilities were as follows:
| (in thousands) | August 25, 2018 | August 26, 2017 | ||||||
| Deferred tax assets: | ||||||||
| Net operating loss and credit carryforwards | $ | 47,190 | $ | 48,062 | ||||
| Accrued benefits | 62,867 | 96,664 | ||||||
| Other | 46,375 | 56,052 | ||||||
| Total deferred tax assets | 156,432 | 200,778 | ||||||
| Less: Valuation allowances | (19,619 | ) | (13,501 | ) | ||||
| Net deferred tax assets | 136,813 | 187,277 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (101,049 | ) | (117,580 | ) | ||||
| Inventory | (242,138 | ) | (333,422 | ) | ||||
| Prepaid expenses | (42,019 | ) | (60,920 | ) | ||||
| Other | (2,191 | ) | (11,158 | ) | ||||
| Total deferred tax liabilities | (387,397 | ) | (523,080 | ) | ||||
| Net deferred tax liabilities | $ | (250,584 | ) | $ | (335,803 | ) | ||
The Company has historically asserted its intention to indefinitely reinvest foreign current and accumulated earnings and other basis differences in certain foreign subsidiaries. During the year ended August 25, 2018, the Company has reevaluated its assertion as a result of the enactment of Tax Reform and, with few exceptions, no longer considers the current and accumulated earnings to be indefinitely reinvested in our foreign subsidiaries. Where necessary, withholding tax provisions resulting from foreign distributions of current and accumulated earnings have been considered in the Company’s provision for income taxes.
The Company maintains its assertion related to other basis differences in foreign subsidiaries. It is impracticable for the Company to determine the amount of unrecognized deferred tax liability on these indefinitely reinvested basis differences.
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At August 25, 2018 and August 26, 2017, the Company had deferred tax assets of $30.9 million and $30.8 million, respectively, from net operating loss (“NOL”) carryforwards available to reduce future taxable income totaling approximately $219.1 million and $198.2 million, respectively. Certain NOLs have no expiration date and others will expire, if not utilized, in various years from fiscal 2019 through 2038. At August 25, 2018 and August 26, 2017, the Company had deferred tax assets for income tax credit carryforwards of $16.3 million and $17.2 million, respectively. Income tax credit carryforwards will expire, if not utilized, in various years from fiscal 2023 through 2028.
At August 25, 2018 and August 26, 2017, the Company had a valuation allowance of $19.6 million and $13.5 million, respectively, on deferred tax assets associated with NOL and tax credit carryforwards for which management has determined it is more likely than not that the deferred tax asset will not be realized. Management believes it is more likely than not that the remaining deferred tax assets will be fully realized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (in thousands) | August 25, 2018 | August 26, 2017 | ||||||
| Beginning balance | $ | 22,201 | $ | 27,726 | ||||
| Additions based on tax positions related to the current year | 8,184 | 7,089 | ||||||
| Additions for tax positions of prior years | 1,404 | 278 | ||||||
| Reductions for tax positions of prior years | (482 | ) | (6,954 | ) | ||||
| Reductions due to settlements | (1,930 | ) | (1,964 | ) | ||||
| Reductions due to statute of limitations | (3,300 | ) | (3,974 | ) | ||||
| Ending balance | $ | 26,077 | $ | 22,201 | ||||
Included in the August 25, 2018 and the August 26, 2017 balances are $13.5 million and $9.9 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s effective tax rate.
The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. The Company had $0.7 million and $1.2 million accrued for the payment of interest and penalties associated with unrecognized tax benefits at August 25, 2018 and August 26, 2017, respectively.
The Company files U.S. federal, U.S. state and local, and international income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, U.S. state and local, or Non-U.S. examinations by tax authorities for fiscal year 2013 and prior. The Company is typically engaged in various tax examinations at any given time by U.S. federal, U.S. state and local, and Non-U.S. taxing jurisdictions. As of August 25, 2018, the Company estimates that the amount of unrecognized tax benefits could be reduced by approximately $1.1 million over the next twelve months as a result of tax audit settlements. While the Company believes that it is adequately accrued for possible audit adjustments, the final resolution of these examinations cannot be determined at this time and could result in final settlements that differ from current estimates.
Note E – Fair Value Measurements
The Company defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company uses the fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are set forth below:
Level 1 inputs — unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.
Level 2 inputs — inputs other than quoted market prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability.
Level 3 inputs — unobservable inputs for the asset or liability, which are based on the Company’s own assumptions as there is little, if any, observable activity in identical assets or liabilities.
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Financial Assets & Liabilities Measured at Fair Value on a Recurring Basis
The Company’s assets and liabilities measured at fair value on a recurring basis were as follows:
| August 25, 2018 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
| Other current assets | $ | 55,711 | $ | 3,733 | $ | — | $ | 59,444 | ||||||||
| Other long-term assets | 58,973 | 16,259 | — | 75,232 | ||||||||||||
| $ | 114,684 | $ | 19,992 | $ | — | $ | 134,676 | |||||||||
| August 26, 2017 | ||||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
| Other current assets | $ | 18,453 | $ | 120 | $ | — | $ | 18,573 | ||||||||
| Other long-term assets | 53,319 | 28,981 | — | 82,300 | ||||||||||||
| $ | 71,772 | $ | 29,101 | $ | — | $ | 100,873 | |||||||||
At August 25, 2018, the fair value measurement amounts for assets and liabilities recorded in the accompanying Consolidated Balance Sheet consisted of short-term marketable securities of $59.4 million, which are included within Other current assets and long-term marketable securities of $75.2 million, which are included in Other long-term assets. The Company’s marketable securities are typically valued at the closing price in the principal active market as of the last business day of the quarter or through the use of other market inputs relating to the securities, including benchmark yields and reported trades.
A discussion on how the Company’s cash flow hedges are valued is included in “Note H – Derivative Financial Instruments,” while the fair value of the Company’s pension plan assets are disclosed in “Note L – Pension and Savings Plans.”
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
Certain non-financial assets and liabilities are required to be measured at fair value on a non-recurring basis in certain circumstances, including the event of impairment. These non-financial assets and liabilities could include assets and liabilities acquired in an acquisition as well as goodwill, intangible assets and property, plant and equipment that are determined to be impaired. At August 25, 2018, the Company did not have any other significant non-financial assets or liabilities that had been measured at fair value on a non-recurring basis subsequent to initial recognition.
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Financial Instruments not Recognized at Fair Value
The Company has financial instruments, including cash and cash equivalents, accounts receivable, other current assets and accounts payable. The carrying amounts of these financial instruments approximate fair value because of their short maturities. A discussion of the carrying values and fair values of the Company’s debt is included in “Note I – Financing.”
Note F – Marketable Securities
The Company’s basis for determining the cost of a security sold is the “Specific Identification Model.” Unrealized gains (losses) on marketable securities are recorded in Accumulated other comprehensive loss. The Company’s available-for-sale marketable securities consisted of the following:
| August 25, 2018 | ||||||||||||||||
| (in thousands) | Amortized Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Corporate securities | $ | 50,306 | $ | — | $ | (684 | ) | $ | 49,622 | |||||||
| Government bonds | 28,777 | — | (173 | ) | 28,604 | |||||||||||
| Mortgage-backed securities | 3,248 | — | (90 | ) | 3,158 | |||||||||||
| Asset-backed securities and other | 53,445 | — | (153 | ) | 53,292 | |||||||||||
| $ | 135,776 | $ | — | $ | (1,100 | ) | $ | 134,676 | ||||||||
| August 26, 2017 | ||||||||||||||||
| (in thousands) | Amortized Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Corporate securities | $ | 39,917 | $ | 73 | $ | (13 | ) | $ | 39,977 | |||||||
| Government bonds | 31,076 | 49 | (74 | ) | 31,051 | |||||||||||
| Mortgage-backed securities | 4,850 | 2 | (42 | ) | 4,810 | |||||||||||
| Asset-backed securities and other | 25,042 | 28 | (35 | ) | 25,035 | |||||||||||
| $ | 100,885 | $ | 152 | $ | (164 | ) | $ | 100,873 | ||||||||
The debt securities held at August 25, 2018, had effective maturities ranging from less than one year to approximately three years. The Company did not realize any material gains or losses on its marketable securities during fiscal 2018, 2017 or 2016.
The Company holds 121 securities that are in an unrealized loss position of approximately $1.1 million at August 25, 2018. The Company has the intent and ability to hold these investments until recovery of fair value or maturity, and does not deem the investments to be impaired on an other than temporary basis. In evaluating whether the securities are deemed to be impaired on an other than temporary basis, the Company considers factors such as the duration and severity of the loss position, the credit worthiness of the investee, the term to maturity and its intent and ability to hold the investments until maturity or until recovery of fair value.
Included above in total marketable securities are $85.6 million and $85.4 million of marketable securities transferred by the Company’s insurance captive to a trust account to secure its obligations to an insurance company related to future workers’ compensation and casualty losses as of August 25, 2018 and August 26, 2017, respectively.
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Note G – Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes certain adjustments to pension liabilities, foreign currency translation adjustments, certain activity for interest rate swaps and treasury rate locks that qualify as cash flow hedges and unrealized gains (losses) on available-for-sale securities. Changes in Accumulated other comprehensive loss consisted of the following:
| (in thousands) | Pension Liability | Foreign Currency(4) | Net Unrealized Gain (Loss) on Securities | Derivatives | Total | |||||||||||||||
| Balance at August 27, 2016 | $ | (88,890 | ) | $ | (211,012 | ) | $ | 120 | $ | (7,747 | ) | $ | (307,529 | ) | ||||||
| Other comprehensive income (loss) before reclassifications | 8,046 | 35,198 | (60 | ) | — | 43,184 | ||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss(1) | 8,468 | (3) | — | (71 | )(5) | 1,391 | (6) | 9,788 | ||||||||||||
| Balance at August 26, 2017 | (72,376 | ) | (175,814 | ) | (11 | ) | (6,356 | ) | (254,557 | ) | ||||||||||
| Other comprehensive income (loss) before reclassifications | 77,774 | (53,085 | ) | (800 | ) | — | 23,889 | |||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss(1) | 7,724 | (3) | — | (62 | )(5) | 1,690 | (6) | 9,352 | ||||||||||||
| Adoption of ASU 2018- 02(2) | (13,122 | ) | — | — | (1,367 | ) | (14,489 | ) | ||||||||||||
| Balance at August 25, 2018 | $ | — | $ | (228,899 | ) | $ | (873 | ) | $ | (6,033 | ) | $ | (235,805 | ) | ||||||
| (1) | Amounts in parentheses indicate debits to Accumulated other comprehensive loss (AOCL). |
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| (2) | Represents the tax effects from deferred tax items reclassified from AOCL to retained earnings related to the adoption of ASU 2018-02. |
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| (3) | The amounts reclassified from AOCL associated with our pension plans have been reclassified to Operating, selling, general and administrative expenses on the Consolidated Statements of Income as a result of the termination of the plans. See “Note L – Pension and Savings Plans” for further discussion. |
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| (4) | Foreign currency is shown net of U.S. tax to account for foreign currency impacts of certain undistributed non-U.S. subsidiaries earnings. Other foreign currency is not shown net of additional U.S. tax as other basis differences of non-U.S. subsidiaries are intended to be permanently reinvested. |
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| (5) | Represents realized losses on marketable securities, net of taxes of $234 in fiscal 2018 and $38 in fiscal 2017, which is recorded in Operating, selling, general, and administrative expenses on the Consolidated Statements of Income. See “Note F – Marketable Securities” for further discussion. |
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| (6) | Represents gains and losses on derivatives, net of taxes of $515 in fiscal 2018 and $814 in fiscal 2017, which is recorded in Interest expense, net, on the Consolidated Statements of Income. See “Note H – Derivative Financial Instruments” for further discussion. |
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Note H – Derivative Financial Instruments
The Company periodically uses derivatives to hedge exposures to interest rates. The Company does not hold or issue financial instruments for trading purposes. For transactions that meet the hedge accounting criteria, the Company formally designates and documents the instrument as a hedge at inception and quarterly thereafter assesses the hedges to ensure they are effective in offsetting changes in the cash flows of the underlying exposures. Derivatives are recorded in the Company’s Consolidated Balance Sheet at fair value, determined using available market information or other appropriate valuation methodologies. In accordance with ASC Topic 815, Derivatives and Hedging, the effective portion of a financial instrument’s change in fair value is recorded in Accumulated other comprehensive loss for derivatives that qualify as cash flow hedges and any ineffective portion of an instrument’s change in fair value is recognized in earnings.
At August 25, 2018, the Company had $7.9 million recorded in Accumulated other comprehensive loss related to net realized losses associated with terminated interest rate swap and treasury rate lock derivatives which were designated as hedging instruments. Net losses are amortized into Interest expense over the remaining life of the associated debt. During the fiscal 2018 and 2017, the Company reclassified $2.2 million of net losses from Accumulated other comprehensive loss to Interest expense and expects the same level of expense in fiscal 2019.
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Note I – Financing
The Company’s debt consisted of the following:
| (in thousands) | August 25, 2018 | August 26, 2017 | ||||||
| 7.125% Senior Notes due August 2018, effective interest rate of 7.28% | $ | — | $ | 250,000 | ||||
| 1.625% Senior Notes due April 2019, effective interest rate of 1.77% | 250,000 | 250,000 | ||||||
| 4.000% Senior Notes due November 2020, effective interest rate of 4.43% | 500,000 | 500,000 | ||||||
| 2.500% Senior Notes due April 2021, effective interest rate of 2.62% | 250,000 | 250,000 | ||||||
| 3.700% Senior Notes due April 2022, effective interest rate of 3.85% | 500,000 | 500,000 | ||||||
| 2.875% Senior Notes due January 2023, effective interest rate of 3.21% | 300,000 | 300,000 | ||||||
| 3.125% Senior Notes due July 2023, effective interest rate of 3.26% | 500,000 | 500,000 | ||||||
| 3.250% Senior Notes due April 2025, effective interest rate 3.36% | 400,000 | 400,000 | ||||||
| 3.125% Senior Notes due April 2026, effective interest rate of 3.28% | 400,000 | 400,000 | ||||||
| 3.750% Senior Notes due June 2027, effective interest rate of 3.83% | 600,000 | 600,000 | ||||||
| Commercial paper, weighted average interest rate of 2.29% and 1.44% at August 25, 2018 and August 26, 2017, respectively | 1,325,300 | 1,155,100 | ||||||
| Total debt before discounts and debt issuance costs | 5,025,300 | 5,105,100 | ||||||
| Less: Discounts and debt issuance costs | 19,370 | 23,862 | ||||||
| Long-term debt | $ | 5,005,930 | $ | 5,081,238 | ||||
As of August 25, 2018, the commercial paper borrowings and the $250 million 1.625% Senior Notes due April 2019 are classified as long-term in the accompanying Consolidated Balance Sheets as the Company has the ability and intent to refinance on a long-term basis through available capacity in its revolving credit facilities. As of August 25, 2018, the Company had $1.997 billion of availability under its $2.0 billion revolving credit facilities, which would allow it to replace these short-term obligations with long-term financing facilities.
The Company 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) the Company’s borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion; (ii) the Company’s option to increase its borrowing capacity under the Revolving Credit Agreement was “refreshed” and the amount of such option remained at $400 million; the maximum borrowing under the Revolving Credit Agreement may, at the Company’s 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) the Company has 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, the Company may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon the Company’s senior, unsecured, (non-credit enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the Revolving Credit Agreement. As of August 25, 2018, the Company had $3.3 million of outstanding letters of credit under the Revolving Credit Agreement.
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The Revolving Credit Agreement requires that the Company’s consolidated interest coverage ratio as of the last day of each quarter shall be no less than 2.5:1. This ratio is defined as the ratio of (i) consolidated earnings before interest, taxes and rents to (ii) consolidated interest expense plus consolidated rents. The Company’s consolidated interest coverage ratio as of August 25, 2018 was 5.8:1.
As of August 25, 2018, the Company had no outstanding borrowings under each of the revolving credit facilities, and $3.3 million of outstanding letters of credit under the Revolving Credit Agreement.
The Company also maintains a letter of credit facility that allows it to request the participating bank to issue letters of credit on its behalf up to an aggregate amount of $75 million. The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement. As of August 25, 2018, the Company had $71.0 million in letters of credit outstanding under the letter of credit facility.
In addition to the outstanding letters of credit issued under the committed facilities discussed above, the Company had $32.5 million in letters of credit outstanding as of August 25, 2018. These letters of credit have various maturity dates and were issued on an uncommitted basis.
On April 18, 2017, the Company issued $600 million in 3.750% Senior Notes due June 2027 under its shelf registration statement filed with the SEC on April 15, 2015 (the “2015 Shelf Registration”). The 2015 Shelf Registration allowed the Company to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new location openings, stock repurchases and acquisitions. Proceeds from the debt issuance were used for general corporate purposes.
On April 21, 2016, the Company issued $400 million in 3.125% Senior Notes due April 2026 and $250 million in 1.625% Senior Notes due April 2019 under its 2015 Shelf Registration. Proceeds from the debt issuances were used for general corporate purposes.
All senior notes are subject to an interest rate adjustment if the debt ratings assigned to the senior notes are downgraded (as defined in the agreements). Further, the senior notes contain a provision that repayment of the senior notes may be accelerated if the Company experiences a change in control (as defined in the agreements). The Company’s borrowings under its senior notes contain minimal covenants, primarily restrictions on liens. Under its revolving credit facilities, covenants include restrictions on liens, a maximum debt to earnings ratio, a minimum fixed charge coverage ratio and a change of control provision that may require acceleration of the repayment obligations under certain circumstances. All of the repayment obligations under its borrowing arrangements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs.
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As of August 25, 2018, the Company was in compliance with all covenants related to its borrowing arrangements. All of the Company’s debt is unsecured. Scheduled maturities of debt are as follows:
| (in thousands) | Scheduled Maturities | |||
| 2019 | $ | 1,575,300 | ||
| 2020 | — | |||
| 2021 | 750,000 | |||
| 2022 | 500,000 | |||
| 2023 | 800,000 | |||
| Thereafter | 1,400,000 | |||
| Subtotal | 5,025,300 | |||
| Discount and debt issuance costs | 19,370 | |||
| Total Debt | $ | 5,005,930 | ||
The fair value of the Company’s debt was estimated at $4.948 billion as of August 25, 2018, and $5.171 billion as of August 26, 2017, based on the quoted market prices for the same or similar issues or on the current rates available to the Company for debt of the same terms (Level 2). Such fair value is less than the carrying value of debt by $57.5 million at August 25, 2018, which reflects face amount, adjusted for any unamortized debt issuance costs and discounts. At August 26, 2017, the fair value was greater than the carrying value of debt by $90.3 million.
Note J – Interest Expense
Net interest expense consisted of the following:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Interest expense | $ | 181,668 | $ | 159,329 | $ | 150,961 | ||||||
| Interest income | (5,636 | ) | (3,502 | ) | (2,371 | ) | ||||||
| Capitalized interest | (1,505 | ) | (1,247 | ) | (909 | ) | ||||||
| $ | 174,527 | $ | 154,580 | $ | 147,681 | |||||||
Note K – Stock Repurchase Program
During 1998, the Company announced a program permitting the Company to repurchase a portion of its outstanding shares not to exceed a dollar maximum established by the Board. The program was amended on March 20, 2018 to increase the repurchase authorization to $19.65 billion from $18.65 billion. From January 1998 to August 25, 2018, the Company has repurchased a total of 144.7 million shares at an aggregate cost of $19.418 billion.
The Company’s share repurchase activity consisted of the following:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Amount | $ | 1,592,013 | $ | 1,071,649 | $ | 1,452,462 | ||||||
| Shares | 2,398 | 1,495 | 1,903 |
During fiscal year 2018, the Company retired 1.5 million shares of treasury stock which had previously been repurchased under the Company’s share repurchase program. The retirement increased Retained deficit by $918.5 million and decreased Additional paid-in capital by $60.5 million. During the comparable prior year period, the Company retired 1.8 million shares of treasury stock, which increased Retained deficit by $1.321 billion and decreased Additional paid-in capital by $64.9 million.
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On September 26, 2018, the Board voted to increase the authorization by $1.25 billion. This brings the total value of the shares authorized to $20.9 billion. Subsequent to August 25, 2018, the Company has repurchased 346,979 shares of common stock at an aggregate cost of $263.4 million. Considering the cumulative repurchases and the increase in authorization subsequent to August 25, 2018, the Company has $1.22 billion remaining under the Board’s authorization to repurchase its common stock.
Note L – Pension and Savings Plans
Prior to January 1, 2003, substantially all full-time employees were covered by a defined benefit pension plan. The benefits under the plan were based on years of service and the employee’s highest consecutive five-year average compensation. On January 1, 2003, the plan was frozen, resulting in pension plan participants earning no new benefits under the plan formula and no new participants joining the pension plan.
On January 1, 2003, the Company’s supplemental defined benefit pension plan for certain highly compensated employees was also frozen, resulting in pension plan participants earning no new benefits under the plan formula and no new participants joining the pension plan.
On December 19, 2017, the Board of Directors approved a resolution to terminate both of the Company’s pension plans, effective March 15, 2018. The Company offered plan participants the option to receive an annuity purchased from an insurance carrier or a lump-sum cash payment based on a number of factors. During the fourth quarter of 2018, the Company contributed $11.4 million to the pension plans to ensure that sufficient assets were available for the lump-sum payments and annuity purchases, completed the transfer of all lump sum payments, transferred all remaining benefit obligations related to the pension plans to a highly rated insurance company, and recognized $130.3 million of non-cash pension termination charges in Operating, selling, general and administrative expenses in the Consolidated Statements of Income. The Company will no longer have any remaining defined pension benefit obligation and thus no periodic pension benefit expense.
The following table sets forth the plans’ funded status and amounts recognized in the Company’s Consolidated Balance Sheets:
| (in thousands) | August 25, 2018 | August 26, 2017 | ||||||
| Change in Projected Benefit Obligation: | ||||||||
| Projected benefit obligation at beginning of year | $ | 314,724 | $ | 328,511 | ||||
| Interest cost | 10,356 | 10,335 | ||||||
| Actuarial (gains) losses | (676 | ) | (8,746 | ) | ||||
| Annuities purchased | (157,589 | ) | — | |||||
| Benefits and settlements paid | (166,815 | ) | (15,376 | ) | ||||
| Benefit obligations at end of year | $ | — | $ | 314,724 | ||||
| Change in Plan Assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | 316,267 | $ | 289,386 | ||||
| Actual return on plan assets | (3,428 | ) | 24,496 | |||||
| Employer contributions | 11,596 | 17,761 | ||||||
| Annuities purchased | (157,589 | ) | — | |||||
| Benefits and settlements paid | (166,815 | ) | (15,376 | ) | ||||
| Asset reversion upon termination | (31 | ) | — | |||||
| Fair value of plan assets at end of year | $ | — | $ | 316,267 | ||||
| Amount Recognized in the Statement of Financial Position: | ||||||||
| Current liabilities | $ | — | $ | (283 | ) | |||
| Long-term assets | — | 8,686 | ||||||
| Long-term liabilities | — | (6,860 | ) | |||||
| Net amount recognized | $ | — | $ | 1,543 | ||||
| Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic Benefit Cost: | ||||||||
| Net actuarial loss | $ | — | $ | (118,889 | ) | |||
| Accumulated other comprehensive loss | $ | — | $ | (118,889 | ) | |||
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Net periodic benefit expense consisted of the following:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Interest cost | $ | 10,356 | $ | 10,335 | $ | 11,272 | ||||||
| Expected return on plan assets | (18,997 | ) | (20,056 | ) | (16,512 | ) | ||||||
| Recognized net actuarial losses | 10,736 | 13,873 | 10,506 | |||||||||
| Settlement loss | 130,263 | — | — | |||||||||
| Net periodic benefit expense | $ | 132,358 | $ | 4,152 | $ | 5,266 | ||||||
The blended actuarial assumptions used in determining the projected benefit obligation include the following:
| Year Ended | ||||||||||||
| August 25, 2018 | August 26, 2017 | August 27, 2016 | ||||||||||
| Discount rate to determine benefit obligation | 3.86 | % | 3.86 | % | 3.72 | % | ||||||
| Discount rate to determine net interest cost | 3.36 | % | 3.21 | % | 3.90 | % | ||||||
| Expected long-term rate of return on plan assets | 6.00 | % | 7.00 | % | 7.00 | % |
The Company has a 401(k) plan that covers all domestic employees who meet the plan’s participation requirements. The plan features include Company matching contributions, immediate 100% vesting of Company contributions and a savings option up to 25% of qualified earnings. The Company makes matching contributions, per pay period, up to a specified percentage of employees’ contributions as approved by the Board. The Company made matching contributions to employee accounts in connection with the 401(k) plan of $23.1 million in fiscal 2018, $21.0 million in fiscal 2017, and $19.7 million in fiscal 2016.
Note M – Sale of Assets
During the second quarter of fiscal 2018, the Company determined that the approximate fair value less costs to sell its IMC and AutoAnything businesses was significantly lower than the carrying value of the net assets based on recent offers received and recorded impairment charges totaling $193.2 million within Operating, selling, general and administrative expenses in its Condensed Consolidated Statements of Income.
The Company recorded an impairment charge of $93.6 million for its IMC business, which is reflected as a component of Auto Parts Locations in its segment reporting. Impairment charges for AutoAnything, which is reflected as a component of the Other category in the Company’s segment reporting, totaled $99.6 million.
During the third quarter of fiscal 2018, the Company completed the IMC and AutoAnything transactions for total consideration that approximated the remaining net book value at the closing date.
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Note N – Goodwill and Intangibles
The changes in the carrying amount of goodwill are as follows:
| (in thousands) | Auto Parts Locations | Other | Total | |||||||||
| Net balance as of August 27, 2016 | $ | 326,703 | $ | 65,184 | $ | 391,887 | ||||||
| Goodwill added through acquisition | — | — | — | |||||||||
| Goodwill adjustments | — | — | — | |||||||||
| Net balance as of August 26, 2017 | 326,703 | 65,184 | 391,887 | |||||||||
| Goodwill added through acquisition | — | — | — | |||||||||
| Goodwill adjustments | (24,058 | ) | (65,184 | ) | (89,242 | ) | ||||||
| Net balance as of August 25, 2018 | $ | 302,645 | $ | — | $ | 302,645 | ||||||
During the second quarter of fiscal 2018, the Company recorded impairment charges related to its IMC and AutoAnything businesses as the Company determined that the approximate fair value less costs to sell the businesses was significantly lower than the carrying value of the net assets. The impairment charge for the IMC business is reflected as a component of Auto Parts Locations, and the impairment charge for AutoAnything is reflected as a component of the Other category in our segment reporting. See “Note M – Sale of Assets” for further discussion.
The Company performs its annual goodwill and intangibles impairment test in the fourth quarter of each fiscal year. In the fourth quarter of fiscal 2018, the Company concluded its remaining goodwill was not impaired. In the fourth quarter of fiscal 2017, the Company concluded that its goodwill was not impaired. Total accumulated goodwill impairment as of August 25, 2018 is $107.5 million compared to $18.3 million as of August 26, 2017.
The carrying amounts of intangible assets are included in Other long-term assets as follows:
| August 25, 2018 | ||||||||||||||||
| (in thousands) | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
| Amortizing intangible assets: | ||||||||||||||||
| Technology | 3-5 years | $ | 870 | $ | (870 | ) | $ | — | ||||||||
| Customer relationships | 3-10 years | 29,376 | (19,587 | ) | 9,789 | |||||||||||
| $ | 30,246 | $ | (20,457 | ) | 9,789 | |||||||||||
| Total intangible assets other than goodwill | $ | 9,789 | ||||||||||||||
| August 26, 2017 | ||||||||||||||||
| (in thousands) | Estimated Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
| Amortizing intangible assets: | ||||||||||||||||
| Technology | 3-5 years | $ | 10,570 | $ | (9,994 | ) | $ | 576 | ||||||||
| Noncompete agreements | 5 years | 1,300 | (1,223 | ) | 77 | |||||||||||
| Customer relationships | 3-10 years | 49,676 | (24,730 | ) | 24,946 | |||||||||||
| $ | 61,546 | $ | (35,947 | ) | 25,599 | |||||||||||
| Non-amortizing intangible asset: | ||||||||||||||||
| Trade names | 26,900 | |||||||||||||||
| Total intangible assets other than goodwill | $ | 52,499 | ||||||||||||||
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During the second quarter of fiscal 2018, the Company recorded $26.9 million of impairment charges related to AutoAnything’s and IMC’s trade names as the Company determined that the approximate fair value less costs to sell the businesses was significantly lower than the carrying value of the net assets. See “Note M – Sale of Assets” for further discussion. Trade names at August 25, 2018 and August 26, 2017 reflect a total accumulated impairment of $31.0 million and $4.1 million, respectively.
Amortization expense of intangible assets for the years ended August 25, 2018 and August 26, 2017 was $5.1 million and $8.5 million, respectively.
Total future amortization expense for intangible assets that have finite lives, based on the existing intangible assets and their current estimated useful lives as of August 25, 2018, is estimated as follows:
| (in thousands) | Total | |||
| 2019 | $ | 4,173 | ||
| 2020 | 4,173 | |||
| 2021 | 1,443 | |||
| Thereafter | — | |||
| $ | 9,789 | |||
Note O – Leases
The Company leases some of its retail stores, distribution centers, facilities, land and equipment, including vehicles. Other than vehicle leases, most of the leases are operating leases, which include renewal options made at the Company’s election and provisions for percentage rent based on sales. Rental expense was $315.6 million in fiscal 2018, $302.9 million in fiscal 2017, and $280.5 million in fiscal 2016. Percentage rentals were insignificant.
The Company records rent for all operating leases on a straight-line basis over the lease term, including any reasonably assured renewal periods and the period of time prior to the lease term that the Company is in possession of the leased space for the purpose of installing leasehold improvements. Differences between recorded rent expense and cash payments are recorded as a liability in Accrued expenses and other and Other long-term liabilities in the accompanying Consolidated Balance Sheets, based on the terms of the lease. The deferred rent approximated $139.6 million on August 25, 2018, and $130.2 million on August 26, 2017.
The Company has a fleet of vehicles used for delivery to its commercial customers and stores and travel for members of field management. The majority of these vehicles are held under capital leases. At August 25, 2018, the Company had capital lease assets of $156.8 million, net of accumulated amortization of $79.9 million, and capital lease obligations of $154.3 million, of which $52.3 million is classified as Accrued expenses and other as it represents the current portion of these obligations. At August 26, 2017, the Company had capital lease assets of $152.0 million, net of accumulated amortization of $70.2 million, and capital lease obligations of $150.5 million, of which $48.1 million is classified as Accrued expenses and other as it represents the current portion of these obligations.
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Future minimum annual rental commitments under non-cancelable operating leases and capital leases were as follows at the end of fiscal 2018:
| (in thousands) | Operating Leases | Capital Leases | ||||||
| 2019 | $ | 300,866 | $ | 52,290 | ||||
| 2020 | 289,007 | 50,777 | ||||||
| 2021 | 267,298 | 38,290 | ||||||
| 2022 | 244,786 | 21,211 | ||||||
| 2023 | 215,237 | 3,118 | ||||||
| Thereafter | 823,969 | — | ||||||
| Total minimum payments required | $ | 2,141,163 | 165,686 | |||||
| Less: Interest | (11,383 | ) | ||||||
| Present value of minimum capital lease payments | $ | 154,303 | ||||||
Note P – Commitments and Contingencies
Construction commitments, primarily for new stores, totaled approximately $41.3 million at August 25, 2018.
The Company had $106.8 million in outstanding standby letters of credit and $23.6 million in surety bonds as of August 25, 2018, which all have expiration periods of less than one year. A substantial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to cover reimbursement obligations to our workers’ compensation carriers. There are no additional contingent liabilities associated with these instruments as the underlying liabilities are already reflected in the Consolidated Balance Sheets. The standby letters of credit and surety bonds arrangements have automatic renewal clauses.
Note Q – Litigation
In July 2014, the Company received a subpoena from the District Attorney of the County of Alameda, along with other environmental prosecutorial offices in the state of California, seeking documents and information related to the handling, storage and disposal of hazardous waste. The Company received notice that the District Attorney will seek injunctive and monetary relief. The Company is cooperating fully with the request and cannot predict the ultimate outcome of these efforts, although the Company has accrued all amounts it believes to be probable and reasonably estimable. The Company does not believe the ultimate resolution of this matter will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Arising out of an April 2016 letter from the California Air Resources Board (“CARB”), one of the Company’s formerly-owned subsidiaries was sued in March 2018 by CARB seeking penalties, among other relief, for alleged violations of the California Health and Safety Code, Title 13 of the California Code of Regulations and the California Vehicle Code related to the sale and advertisement of certain aftermarket motor vehicle pollution control parts in the State of California. On February 26, 2018, the Company completed its transaction to sell substantially all of the assets, net of assumed liabilities related to its AutoAnything operations. As part of the sale, the Company retained the liability related to this lawsuit. The Company is cooperating fully with the lawsuit and cannot predict the ultimate outcome of these efforts. The Company does not believe that any resolution of the matter will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
The Company is involved in various other legal proceedings incidental to the conduct of its business, including, but not limited to, several lawsuits containing class-action allegations in which the plaintiffs are current and former hourly and salaried employees who allege various wage and hour violations and unlawful termination practices. The Company does not currently believe that, either individually or in the aggregate, these matters will result in liabilities material to the Company’s financial condition, results of operations or cash flows.
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Note R – Segment Reporting
The Company’s operating segments (Domestic Auto Parts, Mexico and Brazil; and IMC results through April 4, 2018) are aggregated as one reportable segment: Auto Parts Locations. The criteria the Company used to identify the reportable segment are primarily the nature of the products the Company sells and the operating results that are regularly reviewed by the Company’s chief operating decision maker to make decisions about the resources to be allocated to the business units and to assess performance. The accounting policies of the Company’s reportable segment are the same as those described in “Note A – Significant Accounting Policies.”
The Auto Parts Locations segment is a retailer and distributor of automotive parts and accessories through the Company’s 6,202 locations in the United States, Puerto Rico, Mexico and Brazil. Each location carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.
The Other category reflects business activities of three operating segments that are not separately reportable due to the materiality of these operating segments. The operating segments include ALLDATA, which produces, sells and maintains diagnostic and repair information software used in the automotive repair industry; E-commerce, which includes direct sales to customers through www.autozone.com for sales that are not fulfilled by local stores; and AutoAnything, which includes direct sales to customers through www.autoanything.com, prior to the Company’s sale of substantially all of its assets on February 26, 2018.
The Company evaluates its reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. The following table shows segment results for the following fiscal years:
| Year Ended | ||||||||||||
| (in thousands) | August 25, 2018 | August 26, 2017 | August 27, 2016 | |||||||||
| Net Sales: | ||||||||||||
| Auto Parts Locations | $ | 10,951,498 | $ | 10,523,272 | $ | 10,261,112 | ||||||
| Other | 269,579 | 365,404 | 374,564 | |||||||||
| Total | $ | 11,221,077 | $ | 10,888,676 | $ | 10,635,676 | ||||||
| Segment Profit: | ||||||||||||
| Auto Parts Locations | $ | 5,805,561 | $ | 5,544,494 | $ | 5,410,477 | ||||||
| Other | 168,185 | 195,126 | 198,259 | |||||||||
| Gross profit | 5,973,746 | 5,739,620 | 5,608,736 | |||||||||
| Operating, selling, general and administrative expenses(1) | (4,162,890 | ) | (3,659,551 | ) | (3,548,341 | ) | ||||||
| Interest expense, net | (174,527 | ) | (154,580 | ) | (147,681 | ) | ||||||
| Income before income taxes | $ | 1,636,329 | $ | 1,925,489 | $ | 1,912,714 | ||||||
| Segment Assets: | ||||||||||||
| Auto Parts Locations | $ | 9,231,021 | $ | 8,964,371 | $ | 8,351,883 | ||||||
| Other | 115,959 | 295,410 | 247,904 | |||||||||
| Total | $ | 9,346,980 | $ | 9,259,781 | $ | 8,599,787 | ||||||
| Capital Expenditures: | ||||||||||||
| Auto Parts Locations | $ | 499,762 | $ | 533,304 | $ | 470,631 | ||||||
| Other | 22,026 | 20,528 | 18,160 | |||||||||
| Total | $ | 521,788 | $ | 553,832 | $ | 488,791 | ||||||
| Auto Parts Locations Sales by Product Grouping: | ||||||||||||
| Failure | $ | 5,338,890 | $ | 5,100,702 | $ | 4,913,423 | ||||||
| Maintenance items | 3,914,546 | 3,774,386 | 3,721,240 | |||||||||
| Discretionary | 1,698,062 | 1,648,184 | 1,626,449 | |||||||||
| Auto Parts Locations net sales | $ | 10,951,498 | $ | 10,523,272 | $ | 10,261,112 | ||||||
| (1) | Operating, selling, general and administrative expenses for fiscal 2018 include $130.3 million related to pension termination charges and $193.2 million related to impairment charges. |
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Note S – Quarterly Summary(1)
(Unaudited)
| Twelve Weeks Ended | Sixteen Weeks Ended | |||||||||||||||
| (in thousands, except per share data) | November 18, 2017 | February 10, 2018(3)(5) | May 5, 2018(5) | August 25, 2018(2)(4)(5) | ||||||||||||
| Net sales | $ | 2,589,131 | $ | 2,413,026 | $ | 2,660,152 | $ | 3,558,769 | ||||||||
| Gross profit | 1,365,848 | 1,277,046 | 1,422,974 | 1,907,879 | ||||||||||||
| Operating profit | 468,754 | 205,098 | 545,765 | 591,239 | ||||||||||||
| Income before income taxes | 429,865 | 165,758 | 503,807 | 536,899 | ||||||||||||
| Net income | 281,003 | 289,530 | 366,721 | 400,282 | ||||||||||||
| Basic earnings per share | 10.17 | 10.58 | 13.62 | 15.27 | ||||||||||||
| Diluted earnings per share | 10.00 | 10.38 | 13.42 | 15.02 | ||||||||||||
| Twelve Weeks Ended | Sixteen Weeks Ended | |||||||||||||||
| (in thousands, except per share data) | November 19, 2016 | February 11, 2017 | May 6, 2017 | August 26, 2017(2) | ||||||||||||
| Net sales | $ | 2,467,845 | $ | 2,289,219 | $ | 2,619,007 | $ | 3,512,605 | ||||||||
| Gross profit | 1,301,542 | 1,205,536 | 1,378,418 | 1,854,125 | ||||||||||||
| Operating profit | 458,902 | 383,969 | 529,570 | 707,628 | ||||||||||||
| Income before income taxes | 425,596 | 349,771 | 493,895 | 656,227 | ||||||||||||
| Net income | 278,125 | 237,145 | 331,700 | 433,899 | ||||||||||||
| Basic earnings per share | 9.61 | 8.28 | 11.70 | 15.52 | ||||||||||||
| Diluted earnings per share | 9.36 | 8.08 | 11.44 | 15.27 |
| (1) | The sum of quarterly amounts may not equal the annual amounts reported due to rounding. In addition, the earnings per share amounts are computed independently for each quarter while the full year is based on the annual weighted average shares outstanding. |
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| (2) | The fourth quarter for fiscal 2018 and fiscal 2017 are based on a 16-week period. All other quarters presented are based on a 12-week period. |
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| (3) | The second quarter of fiscal 2018 includes impairment charges of $193.2 million. See “Note M – Sale of Assets.” |
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| (4) | The fourth quarter of fiscal 2018 includes pension termination charges of $130.3 million. See “Note L - Pension and Savings Plans.” |
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| (5) | Net income of the second, third and fourth quarter of fiscal 2018 benefitted from changes due to Tax Reform. See “Note D – Income Taxes.” |
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