FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 14, 1998, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to ________. Commission file number 1-10714 AUTOZONE, INC. (Exact name of registrant as specified in its charter) Nevada 62-1482048 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 123 South Front Street Memphis, Tennessee 38103 (Address of principal executive offices) (Zip Code) (901) 495-6500 Registrant's telephone number, including area code (not applicable) Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value - 152,560,302 shares as of March 27, 1998.
AUTOZONE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS Feb. 14, Aug.30, 1998 1997 ----------- ----------- (Unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents $ 4,803 $ 4,668 Accounts receivable 19,703 18,713 Merchandise inventories 719,806 709,446 Prepaid expenses 17,609 20,987 Deferred income taxes 25,367 24,988 ----------- ----------- Total current assets 787,288 778,802 Property and equipment: Property and equipment 1,463,404 1,336,911 Less accumulated depreciation and amortization (296,475) (255,783) ----------- ----------- 1,166,929 1,081,128 Other assets: Cost in excess of net assets acquired 16,286 16,570 Deferred income taxes 6,559 4,339 Other assets 3,738 3,178 ----------- ----------- 26,583 24,087 ----------- ----------- $ 1,980,800 $ 1,884,017 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 399,179 $ 449,793 Accrued expenses 114,486 122,580 Income taxes payable 19,653 20,079 ----------- ----------- Total current liabilities 533,318 592,452 Long-term debt 263,800 198,400 Other liabilities 15,103 17,957 Stockholders' equity 1,168,579 1,075,208 ----------- ----------- $ 1,980,800 $ 1,884,017 =========== =========== SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Twelve Weeks Ended Twenty-four Weeks Ended -------------------- ------------------------ Feb. 14, Feb. 15, Feb. 14, Feb. 15, 1998 1997 1998 1997 --------- --------- ----------- ----------- (in thousands, except per share amounts) Net Sales $ 607,097 $ 538,012 $ 1,282,371 $ 1,107,157 Cost of sales, including warehouse and delivery expenses 353,416 311,056 748,249 639,903 Operating, selling, general and administrative expenses 195,599 177,739 397,392 356,139 --------- --------- ----------- ----------- Operating profit 58,082 49,217 136,730 111,115 Interest expense 3,028 2,110 5,530 3,283 --------- --------- ----------- ----------- Income before income taxes 55,054 47,107 131,200 107,832 Income taxes 20,700 17,700 49,300 40,450 --------- --------- ----------- ----------- Net income $ 34,354 $ 29,407 $ 81,900 $ 67,382 Weighted average shares for basic earnings per share 152,061 150,509 151,879 150,385 Effect of dilutive stock options 1,640 1,742 1,883 1,879 --------- --------- ----------- ----------- Adjusted weighted average shares for diluted earnings per share 153,701 152,251 153,762 152,264 ========= ========= =========== =========== Basic earnings per share $ 0.23 $ 0.20 $ 0.54 $ 0.45 ========= ========= =========== =========== Diluted earnings per share $ 0.22 $ 0.19 $ 0.53 $ 0.44 ========= ========= =========== =========== SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Twenty-four Weeks Ended --------------------------- Feb. 14, Feb.15, 1998 1997 ----------- ----------- (in thousands) Cash flows from operating activities: Net income $ 81,900 $ 67,382 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 40,092 35,482 Net increase in merchandise inventories (10,360) (108,326) Net decrease in current liabilities (59,134) (9,330) Other - net (3,639) (9,966) ----------- ---------- Net cash provided by (used in) operating activities 48,859 (24,758) Cash flows from investing activities: Cash outflows for property and equipment, net (125,595) (103,344) Cash flows from financing activities: Net proceeds from debt 65,400 121,500 Proceeds from sale of Common Stock, including related tax benefit 11,471 7,334 ----------- ---------- Net cash provided by financing activities 76,871 128,834 ----------- ---------- Net increase in cash and cash equivalents 135 732 Cash and cash equivalents at beginning of period 4,668 3,904 ----------- ---------- Cash and cash equivalents at end of period $ 4,803 $ 4,636 =========== ========== NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twenty-four weeks ended February 14, 1998, are not necessarily indicative of the results that may be expected for the fiscal year ending August 29, 1998. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended August 30, 1997. NOTE B--INVENTORIES Inventories are stated at the lower of cost or market using the last- in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. NOTE C--DEBT On February 10, 1998, the Company increased its five-year unsecured revolving credit facility by $75 million for a total of $350 million which extends until December 2001. The rate of interest payable under the agreement is a function of the London Interbank Offered Rate (LIBOR), or the lending bank's base rate (as defined in the agreement), or a competitive bid rate, at the option of the Company. At February 14, 1998, the Company's borrowings under this agreement were $263.8 million and the weighted average interest rate was 5.9%. The unsecured revolving credit agreement contains a covenant limiting the amount of debt the Company may incur relative to its total capitalization. The Company also has a negotiated rate unsecured revolving credit agreement totaling $25 million which extends until March 26, 1998. There were no amounts outstanding under the agreement as of February 14, 1998. On March 26, 1998 the Company amended this facility to extend the maturity date to March 26, 1999. NOTE D--SHAREHOLDERS EQUITY In January 1998, the Company announced Board approval to purchase up to $100 million of its common stock in the open market. NOTE E--SUBSEQUENT EVENTS On February 17, 1998, the Company acquired 100% of the voting stock of ADAP, Inc. (Auto Palace) for $55 million in a transaction accounted for as a purchase. Financial information of Auto Palace will be included in the results of operations from the date of the acquisition. The Auto Palace balance sheet and results of operations are not material to the consolidated results of the Company. On February 23, 1998, the Company acquired a 364-day credit facility with a group of banks for $150 million. The rate of interest payable under the agreement is a function of the London Interbank Offered Rate (LIBOR), or the lending bank's base rate (as defined in the agreement), or a competitive bid rate, at the option of the Company. The unsecured revolving credit agreement contains a covenant limiting the amount of debt the Company may incur relative to its total capitalization. On March 2, 1998, the Company announced it had reached a definitive agreement to acquire assets and liabilities of TruckPro, L.P. (TruckPro). If consummated, the transaction would not have a material impact on the fiscal 1998 financial position or consolidated operating results. The transaction is subject to the satisfactory completion of certain conditions and regulatory approvals. Financial information of TruckPro will be included in the results of operations, if consummated, from the date of acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TWELVE WEEKS ENDED FEBRUARY 14, 1998, COMPARED TO TWELVE WEEKS ENDED FEBRUARY 15, 1997 Net sales for the twelve weeks ended February 14, 1998 increased by $69.1 million, or 12.8%, over net sales for the comparable period of fiscal 1997. This increase was due to a comparable store sales increase of 2%, (which was primarily due to the sales growth of the Company's newer stores and the added sales of the Company's commercial program), and increases in net sales for stores opened since the beginning of fiscal 1997. At February 14, 1998 the Company had 1,824 stores in operation compared with 1,516 stores at February 15, 1997. Gross profit for the twelve weeks ended February 14, 1998, was $253.7 million, or 41.8% of net sales, compared with $227.0 million, or 42.2% of net sales, during the comparable period for fiscal 1997. The decrease in the gross profit percentage was due primarily to lower antifreeze gross margins. Operating, selling, general and administrative expenses for the twelve weeks ended February 14, 1998 increased by $17.9 million over such expenses for the comparable period for fiscal 1997, and decreased as a percentage of net sales from 33.0% to 32.2%. The decrease in the expense ratio was due primarily to a sales increase in the Company's commercial program, which resulted in favorable commercial payroll leverage, and to efficiencies gained with the closings of two call centers in fiscal 1997. The number of stores participating in the commercial program was 1,275 at February 14, 1998. The Company's effective income tax rate was 37.6% of pre-tax income for the twelve weeks ended February 14, 1998 and February 15, 1997. TWENTY-FOUR WEEKS ENDED FEBRUARY 14, 1998, COMPARED TO TWENTY-FOUR WEEKS ENDED FEBRUARY 15, 1997 Net sales for the twenty-four weeks ended February 14, 1998 increased by $175.2 million, or 15.8%, over net sales for the comparable period of fiscal 1997. This increase was due to a comparable store sales increase of 5%, (which was primarily due to the sales growth of the Company's newer stores and the added sales of the Company's commercial program), and increases in net sales for stores opened since the beginning of fiscal 1997. Gross profit for the twenty-four weeks ended February 14, 1998, was $534.1 million, or 41.7% of net sales, compared with $467.3 million, or 42.2% of net sales, during the comparable period for fiscal 1997. The decrease in the gross profit percentage was due primarily to lower commodities gross margins. Operating, selling, general and administrative expenses for the twenty-four weeks ended February 14, 1998 increased by $41.3 million over such expenses for the comparable period for fiscal 1997, and decreased as a percentage of net sales from 32.2% to 31.0%. The decrease in the expense ratio was due primarily to a sales increase in the Company's commercial program, which resulted in favorable commercial payroll leverage, and to efficiencies gained with the closing of two call centers in fiscal 1997. The Company's effective income tax rate was 37.6% of pre-tax income for the twenty-four weeks ended February 14, 1998 and 37.5% for the twenty- four weeks ended February 15, 1997. LIQUIDITY AND CAPITAL RESOURCES For the twenty-four weeks ended February 14, 1998, net cash of $48.9 million was provided by the Company's operations versus $24.8 million used by operations for the comparable period of fiscal year 1997. The comparative increase in cash provided by operations is due primarily to improving inventory turnover. Capital expenditures for the twenty-four weeks ended February 14, 1998 were $125.6 million. The Company anticipates that capital expenditures for fiscal 1998 will be approximately $400 million. Year-to-date, the Company opened 96 net new stores. The Company expects to add approximately 450 new stores including stores acquired through the Auto Palace and TruckPro acquisitions and approximately 17 to 20 replacement stores during fiscal 1998. The Company anticipates that it will rely on internally generated funds to support a majority of its capital expenditures and working capital requirements; the balance of such requirements, as well as the stock repuchase and acquisitions, will be funded through borrowings. The Company has a five-year revolving credit agreement with a group of banks for $350 million. At February 14, 1998 the Company had borrowings outstanding under this credit agreement of $263.8 million. Additionally, on February 23, 1998 the Company acquired a 364-day credit facility with a group of banks for $150 million. In January 1998, the Company announced Board approval to purchase up to $100 million of its common stock in the open market. YEAR 2000 CONVERSION The Company established a team to coordinate the identification, evaluation, and implementation of changes to computer systems and applications necessary to achieve a year 2000 date conversion with no effect on customers or disruption to business operations. These actions are necessary to ensure that the systems and applications will recognize and process the year 2000 and beyond. Major areas of potential business impact have been identified and conversion efforts are underway. The Company also is communicating with suppliers, dealers, financial institutions and others with which it does business to assess the impact of their year 2000 conversion plans on the Company. The total cost of compliance and its effect on the Company's future results of operations have been estimated as part of the detailed conversion planning. The Company believes the costs of conversion will not be material. The Company could be materially affected by the failure of a number of its vendors to achieve year 2000 date conversion. FORWARD-LOOKING STATEMENTS Certain statements contained in this quarterly report on Form 10-Q are forward-looking statements. These statements discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. The forward-looking statements are subject to risks, uncertainties and assumptions including, but not limited to competitive pressures, demand for the Company's products, the market for auto parts, the economy in general, inflation, consumer debt levels and the weather. Actual results may materially differ from anticipated results described in these forward-looking statements.
PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of the Shareholders of the Company was held on December 18, 1997. (b) Not applicable. (c) 1. Election of Directors. All nominees for director were elected pursuant to the following vote: VOTES FOR VOTES WITHHELD ------------ ---------------- Johnston C. Adams, Jr. 139,093,584 1,041,128 Andrew M. Clarkson 139,104,265 1,030,447 N. Gerry House 123,114,966 17,019,746 Robert J. Hunt 139,103,108 1,031,604 J. R. Hyde, III 139,108,136 1,026,576 James F. Keegan 139,096,153 1,038,559 Michael W. Michelson 138,961,176 1,173,536 John E. Moll 139,051,369 1,083,343 George R. Roberts 138,957,553 1,177,159 Ronald A. Terry 139,093,249 1,041,463 Timothy D. Vargo 139,108,190 1,026,522 2. Approval of Amended and Restated Employee Stock Purchase Plan: 134,665,744 votes in favor; 2,200,515 votes against; and 268,453 shares abstained from voting. 3. Ratification of Ernst & Young LLP, as the Company's independent auditors: 139,868,092 votes in favor; 90,046 votes against; and 176,574 shares abstained from voting. (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as part of this report: 3.1 Articles of Incorporation of AutoZone, Inc. incorporated by reference to Exhibit 3.1 to the Form 10-K for the fiscal year ended August 27, 1994. 3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated December 16, 1993, to increase its authorized shares of common stock to 200,000,000. Incorporated by reference to Exhibit 3.2 to the Form 10-K for the fiscal year ended August 27, 1994. 3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit 3.2 to the Registration Statement filed by the Company under the Securities Act of 1933 (No. 33-45649) (the February 1992 Form S-1). 4.1 Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992 Form S-1. 10.1 Credit Agreement among AutoZone, Inc., as Borrower, the several lenders from time to time party thereto, NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent, dated December 20, 1996. Incorporated herein by reference to the Form 10-Q for the quarter ended February 15, 1997. 10.2 Amendment No. 1 to Credit Agreement dated as of February 10, 1998 among AutoZone, Inc., as Borrower, the several lenders from time to time party thereto, NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent. 27.1 Financial Data Schedule. (SEC Use Only)
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOZONE, INC. By: /s/ Robert J. Hunt --------------------- Robert J. Hunt Executive Vice President and Chief Financial Officer-Customer Satisfaction (Principal Financial Officer) By: /s/ Michael E. Butterick ------------------------- Michael E. Butterick Vice President, Controller-Customer Satisfaction (Principal Accounting Officer) Dated: March 31, 1998
EXHIBIT INDEX 3.1 Articles of Incorporation of AutoZone, Inc. incorporated by reference to Exhibit 3.1 to the Form 10-K for the fiscal year ended August 27, 1994. 3.2 Amendment to Articles of Incorporation of AutoZone, Inc., dated December 16, 1993, to increase its authorized shares of common stock to 200,000,000. Incorporated by reference to Exhibit 3.2 to the Form 10-K for the fiscal year ended August 27, 1994. 3.3 By-laws of AutoZone, Inc. Incorporated by reference to Exhibit 3.2 to the Registration Statement filed by the Company under the Securities Act of 1933 (No. 33-45649) (the February 1992 Form S-1). 4.1 Form of Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 2 to the February 1992 Form S-1. 10.1 Credit Agreement among AutoZone, Inc., as Borrower, the several lenders from time to time party thereto, NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent, dated December 20, 1996. Incorporated herein by reference to the Form 10-Q for the quarter ended February 15, 1997. 10.2 Amendment No. 1 to Credit Agreement dated as of February 10, 1998 among AutoZone, Inc., as Borrower, the several lenders from time to time party thereto, NationsBank, N.A., as Agent, and SunTrust Bank, Nashville, N.A. as Co-Agent. 27.1 Financial Data Schedule. (SEC Use Only)