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 May 9, 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 - 152,734,031 shares as of June 19, 1998.
AUTOZONE, INC. CONDENDSED CONSOLIDATED BALANCE SHEETS MAY 9, AUG. 30, 1998 1997 ----------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Current Assets Cash and cash equivalents $ 5,869 $ 4,668 Accounts receivable 19,304 18,713 Merchandise inventories 768,540 709,446 Prepaid expenses 28,715 20,987 Deferred income taxes 30,851 24,988 ----------- ----------- Total current assets 853,279 778,802 Property and equipment: Property and equipment 1,569,967 1,336,911 Less accumulated depreciation and amortization (326,379) (255,783) ----------- ----------- 1,243,588 1,081,128 Other assets: Cost in excess of net assets acquired 55,733 16,570 Deferred income taxes 15,771 4,339 Other assets 42,317 3,178 ----------- ----------- 113,821 24,087 ----------- ----------- $ 2,210,688 $ 1,884,017 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 466,119 $ 449,793 Accrued expenses 143,182 122,580 Income taxes payable 25,338 20,079 ----------- ----------- Total current liabilities 634,639 592,452 Long-term debt 338,000 198,400 Other liabilities 13,325 17,957 Stockholders' equity 1,224,724 1,075,208 ------------ ------------ $ 2,210,688 $ 1,884,017 ============ ============ SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED ----------------------- ------------------------- MAY 9, MAY 10, MAY 9, MAY 10, 1998 1997 1998 1997 ----------- ---------- ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales $ 743,661 $ 637,895 $ 2,026,032 $ 1,745,052 Cost of sales, including warehouse and delivery expenses 432,581 368,920 1,180,830 1,008,823 Operating, selling, general and administrative expenses 220,623 192,200 618,015 548,339 ----------- ----------- ------------ ----------- Operating profit 90,457 76,775 227,187 187,890 Interest expense 4,217 2,672 9,747 5,955 ----------- ----------- ------------ ----------- Income before income taxes 86,240 74,103 217,440 181,935 Income taxes 32,300 28,000 81,600 68,450 ----------- ----------- ------------ ----------- Net income $ 53,940 $ 46,103 $ 135,840 $ 113,485 =========== =========== ============ =========== Weighted average shares for basic earnings per share 152,366 150,879 152,042 150,548 Effect of dilutive stock options 1,958 1,723 1,907 1,841 ----------- ----------- ------------ ----------- Adjusted weighted average shares for diluted earnings per share 154,324 152,602 153,949 152,389 =========== =========== ============ =========== Basic earnings per share $ 0.35 $ 0.31 $ 0.89 $ 0.75 =========== =========== ============ =========== Diluted earnings per share $ 0.35 $ 0.30 $ 0.88 $ 0.74 =========== =========== ============ =========== SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTOZONE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THIRTY-SIX WEEKS ENDED -------------------------- MAY 9, MAY 10, 1998 1997 ----------- ----------- (IN THOUSANDS) Cash flows from operating activities: Net income $ 135,840 $ 113,485 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 62,483 53,598 Net increase in merchandise inventories (35,211) (194,675) Net increase in current liabilities 5,585 90,576 Other - net (21,430) (18,424) ----------- ----------- Net cash provided by operating activities 147,267 44,560 Cash flows from investing activities: Cash outflows for property and equipment, net (212,023) (170,387) Acquisitions of businesses, net of cash (87,319) - ----------- ----------- Net cash used in investing activities (299,342) (170,387) Cash flows from financing activities: Net proceeds from debt 139,600 115,300 Purchase of Company stock (5,311) - Net proceeds from sale of Common Stock 18,987 11,461 ----------- ----------- Net cash provided by financing activities 153,276 126,761 Net increase in cash and cash equivalents 1,201 934 Cash and cash equivalents at beginning of period 4,668 3,904 ----------- ----------- Cash and cash equivalents at end of period $ 5,869 $ 4,838 =========== =========== SEE 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 thirty-six weeks ended May 9, 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 May 9, 1998, the Company's borrowings under this agreement were $338 million and the weighted average interest rate was 5.8%. 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, 1999. Additionally, 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 these agreements is a function of the London Interbank Offered Rate (LIBOR), or the lending bank's base rate (as defined in the agreement) at the option of the Company. There were no amounts outstanding under this agreement. NOTE D-ACQUISITIONS 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. On May 1, 1998, the Company acquired the assets and liabilities of TruckPro, L.P. (TruckPro) in a transaction accounted for as a purchase. TruckPro, which specializes in the sale of heavy duty trucks parts, operates 43 stores in 14 states. The purchase price for Auto Palace and TruckPro has been preliminarily allocated in the condensed consolidated financial statements and the final adjustment may differ from the preliminary allocation. NOTE E--STOCKHOLDERS' EQUITY In January 1998, the Company announced Board approval to purchase up to $100 million of its common stock in the open market. The Company presents basic and dilutive earnings per share (EPS) according to guidance established in Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128 requires dual presentation of basic EPS on the face of all statements of earnings for periods ending after December 15, 1997. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options. NOTE F--CONTINGENCIES The Company was a defendant in a purported class action entitled "Joe C. Proffitt, Jr., on behalf of himself and all others similarly situated, vs. AutoZone, Inc., and AutoZone Stores, Inc.," filed in the Circuit Court for Jefferson County, Tennessee, on or about October 17, 1997. AutoZone Stores, Inc., is a wholly-owned subsidiary of the Company. In the complaint, which was similar to other class action complaints filed against several other retailers of aftermarket automotive batteries, the plaintiff alleges that the Company sold "old," "used," or "out of warranty" automotive batteries to customers as if the batteries were new, and purported to state causes of action for unfair or deceptive acts or practices, breach of contract, breach of the duty of good faith and fair dealing, intentional misrepresentation, fraudulent concealment, civil conspiracy, and unjust enrichment. The plaintiffs were seeking an accounting of all moneys wrongfully received by the Company, compensatory and punitive damages, as well as plaintiffs' costs. On May 21, 1998, on the plaintiff's motion, the court dismissed the case without prejudice. The Company is also a party to various claims and lawsuits arising in the ordinary course of business. The Company does not believe that these claims and lawsuits, individually or in the aggregate, will have a material adverse effect on its results of operations or financial condition. NOTE G-SUBSEQUENT EVENTS On May 11, 1998, the Company announced it had reached a definitive agreement to purchase the outstanding common shares of Chief Auto Parts Inc. (Chief) for approximately $75 million. Additionally, the Company will assume approximately $205 million in debt. Chief operates over 500 auto parts stores primarily in California and Texas. Subject to the satisfactory completion of certain conditions, the Company anticipates closing in the fiscal fourth quarter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TWELVE WEEKS ENDED MAY 9, 1998, COMPARED TO TWELVE WEEKS ENDED MAY 10, 1997 Net sales for the twelve weeks ended May 9, 1998 increased by $105.8 million, or 16.6%, 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 sales growth in 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 May 9, 1998 the Company had 2,001 stores in operation compared with 1,578 stores at May 10, 1997. Gross profit for the twelve weeks ended May 9, 1998, was $311.1 million, or 41.8% of net sales, compared with $269.0 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 a decrease in battery gross margin and to lower gross margins for commodities such as Freon and antifreeze. Operating, selling, general and administrative expenses for the twelve weeks ended May 9, 1998 increased by $28.4 million over such expenses for the comparable period for fiscal 1997, and decreased as a percentage of net sales from 30.1% to 29.7%. The decrease in the expense ratio was due primarily to a decrease in net advertising and to a sales increase in the Company's commercial program, which resulted in favorable commercial payroll leverage. The Company's effective income tax rate was 37.5% of pre-tax income for the twelve weeks ended May 9, 1998 and 37.8% for the twelve weeks ended May 10, 1997. THIRTY-SIX WEEKS ENDED MAY 9, 1998, COMPARED TO THIRTY-SIX WEEKS ENDED MAY 10, 1997 Net sales for the thirty-six weeks ended May 9, 1998 increased by $281.0 million, or 16.1%, over net sales for the comparable period of fiscal 1997. This increase was due to a comparable store sales increase of 4%, (which was primarily due to sales growth in 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 thirty-six weeks ended May 9, 1998, was $845.2 million, or 41.7% of net sales, compared with $736.2 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 commodity gross margins. Operating, selling, general and administrative expenses for the thirty-six weeks ended May 9, 1998 increased by $69.7 million over such expenses for the comparable period for fiscal 1997, and decreased as a percentage of net sales from 31.4% to 30.5%. The decrease in the expense ratio was due primarily to sales increases 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 1,323 at May 9, 1998. The Company's effective income tax rate was 37.5% of pre-tax income for the thirty-six weeks ended May 9, 1998 and 37.6% for the thirty-six weeks ended May 10, 1997. LIQUIDITY AND CAPITAL RESOURCES For the thirty-six weeks ended May 9, 1998, net cash of $147.3 million was provided by the Company's operations versus $44.6 million 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 thirty-six weeks ended May 9, 1998 were $212 million. The Company anticipates that capital expenditures for fiscal 1998 will be approximately $400 million. The Company completed its acquisition of 112 Auto Palace stores and 43 TruckPro stores. In addition to these acquisitions, year-to-date the Company opened 161 net new stores and 9 replacement stores. Excluding the pending acquisition of Chief, 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 significant portion of its capital expenditures, acquisitions and working capital requirements; the balance of such requirements will be funded through borrowings. The Company has an unsecured revolving credit agreement with a group of banks providing for borrowings in an aggregate maximum amount of $350 million. At May 9, 1998, the Company had borrowings outstanding under the credit agreement of $338 million. The Company also has a negotiated rate unsecured revolving credit agreement totaling $25 million which extends until March 26, 1999. On February 23, 1998, the Company acquired a 364 day credit facility with a group of banks for $150 million. There were no amounts outstanding under this agreement as of May 9, 1998. YEAR 2000 CONVERSION The Company has dedicated personnel to implement a detailed plan to assure that the Company's computer systems are able to properly process dates for January 1, 2000 and beyond. The inventory and assessment phases of the implementation plan have been substantially completed and the conversion and testing phases are currently underway. The Company intends to have all of its systems Year 2000 compliant by December 31, 1998; however, certain software vendors may not have issued Year 2000 compliant releases prior to that time. These software releases will be installed and tested as they become available. A failure by the Company's vendors or service providers to address all of their Year 2000 issues may have a material impact upon the Company's operations. Therefore, the Company has begun contacting its material vendors and service providers to assess the preparedness of their computer systems for the Year 2000, and to assess the impact that any lack of preparedness would have upon the Company. The costs of conversion of the Company's systems and the assessment of the Company's vendor's systems are not material. 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 1. Legal Proceeding The Company was a defendant in a purported class action entitled "Joe C. Proffitt, Jr., on behalf of himself and all others similarly situated, vs. AutoZone, Inc., and AutoZone Stores, Inc.," filed in the Circuit Court for Jefferson County, Tennessee, on or about October 17, 1997. AutoZone Stores, Inc., is a wholly-owned subsidiary of the Company. In the complaint, which was similar to other class action complaints filed against several other retailers of aftermarket automotive batteries, the plaintiff alleges that the Company sold "old," "used," or "out of warranty" automotive batteries to customers as if the batteries were new, and purported to state causes of action for unfair or deceptive acts or practices, breach of contract, breach of the duty of good faith and fair dealing, intentional misrepresentation, fraudulent concealment, civil conspiracy, and unjust enrichment. The plaintiffs were seeking an accounting of all moneys wrongfully received by the Company, compensatory and punitive damages, as well as plaintiffs' costs. On May 21, 1998, on the plaintiff's motion, the court dismissed the case without prejudice. The Company is also a party to various claims and lawsuits arising in the ordinary course of business. The Company does not believe that these claims and lawsuits, individually or in the aggregate, will have a material adverse effect on its results of operations or financial condition. Item 5. Other Information John E. Moll resigned as a director of the Company effective June 23, 1998. 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. 4.2 Registration Rights Agreement, by and among AutoZone, Inc. and J. Dale Dawson and Judith S. Dawson dated May 1, 1998. 10.1 Credit Agreement dated as of February 23, 1998 among AutoZone, Inc. the several lenders from time to time party thereto, and NationsBank, N.A. as Agent and Suntrust Bank, Nashville, N.A. as Documentation Agent. 27.1 Financial Data Schedule (SEC Use Only) (b) Reports in Form 8-K None
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: June 23, 1998
EXHIBIT INDEX 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. 4.2 Registration Rights Agreement, by and among AutoZone, Inc. and J. Dale Dawson and Judith S. Dawson dated May 1, 1998. 10.1 Credit Agreement dated as of February 23, 1998 among AutoZone, Inc. the several lenders from time to time party thereto, and NationsBank, N.A. as Agent and Suntrust Bank, Nashville, N.A. as Documentation Agent. 27.1 Financial Data Schedule (SEC Use Only) (b) Reports in Form 8-K None