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This excerpt taken from the AZO 10-Q filed Jun 6, 2005. Liquidity and Capital Resources The primary source of our liquidity is our cash flows realized through the sale of automotive parts and accessories. For the thirty-six weeks ended May 7, 2005, our net cash flows from operating activities provided $403.5 million as compared with $334.4 million during the comparable prior year period. The year-over-year improvement in cash flows from operating activities is primarily due to changes in accounts payable and accrued expenses. The increase in merchandise inventories, required to support new-store development and sales growth, has largely been financed by our vendors, as evidenced by an 87% accounts payable to inventory ratio. Contributing to the favorable year-over-year change in accounts payable and accrued expenses is the use of pay-on-scan (“POS”) arrangements with certain vendors, whereby we will not purchase merchandise supplied by a vendor until just before that merchandise is ultimately sold to our customers. Title and certain risks of ownership remain with the vendor until the merchandise is sold to our customers. Since we do not own merchandise under POS arrangements until just before it is sold to a customer, such merchandise is not recorded on our balance sheet. Upon the sale of the merchandise to our customer, we recognize the liability for the goods and pay the vendor in accordance with the agreed upon terms. Although we do not hold title to the goods, we control pricing and have credit collection risk and therefore, revenues under POS arrangements are included gross in net sales in the income statement. We have financed the repurchase of existing merchandise inventory by certain vendors in order to convert such vendors to POS arrangements. These receivables have durations up to 25 months and approximated $57.3 million at May 7, 2005. The $38.0 million current portion of these receivables is reflected in accounts receivable and the $19.3 million long-term portion is reflected as a component of other long-term assets at May 7, 2005. Merchandise under POS arrangements was $140.7 million at May 7, 2005, and we continue to actively negotiate with our vendors to increase the use of POS arrangements. Our net cash flows from investing activities for the thirty-six weeks ended May 7, 2005, used $186.4 million as compared with $121.9 million used in the comparable prior year period. Included in the current year amount was $3.1 million related to our acquisition of certain assets from a regional auto parts retailer. Four stores related to this transaction have been
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converted to AutoZone stores and are reflected in our store counts. Capital expenditures for the thirty-six weeks ended May 7, 2005, were $186.9 million compared to $112.2 million for the comparable prior year period. The increase in capital expenditures was driven by the investment in our new distribution facility in Texas, an increase in stores under development and other current year initiatives. During this thirty-six week period, we opened 85 net new domestic stores and 10 new stores in Mexico. In the comparable prior year period, we opened 118 net new domestic stores and 11 new stores in Mexico. Capital expenditures for this fiscal year are estimated at $250 million, primarily related to the planned opening of approximately 200 new stores during this year, our new distribution facility and other initiatives. Our net cash flows from financing activities for the thirty-six weeks ended May 7, 2005, used $216.6 million compared to $217.8 million used for the comparable prior year period. The current period reflects $300.0 million in proceeds from the issuance of a bank term loan, and $252.7 million in net repayments of commercial paper borrowings. The comparable prior year period reflects $500.0 million in proceeds from the issuance of senior notes, $183.4 million in net proceeds from commercial paper and debt repayments of $431.3 million. Stock repurchases were $308.6 million in the current period as compared with $530.3 million in stock repurchases in the comparable prior year period. The settlement of interest rate hedge instruments provided $32.2 million in the comparable prior year period. For the thirty-six weeks ended May 7, 2005, exercises of stock options provided $68.6 million, including $23.4 million in related tax benefits that are reflected in cash flows from operating activities. In the comparable prior year period, exercises of stock options provided $44.9 million, including $20.6 million in related tax benefits. At May 7, 2005, options to purchase 1.8 million shares were exercisable at a weighted average exercise price of $48. Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance may be funded through new borrowings. We anticipate that we will be able to obtain such financing in view of our credit rating and favorable experiences in the debt market in the past. At May 7, 2005, AutoZone had a senior unsecured debt credit rating from Standard & Poor’s of BBB+ and a commercial paper rating of A-2. Moody’s Investors Service had assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. As of May 7, 2005, Moody’s and Standard & Poor’s had AutoZone listed as having a “negative” and “stable” outlook, respectively. If our credit ratings drop, our interest expense may increase; similarly, we anticipate that our interest expense may decrease if our investment ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited. We maintain $1.0 billion of revolving credit facilities with a group of banks. On May 3, 2005, the expiration dates of the facilities were extended by one year as permitted under the original agreement. Of the $1.0 billion, $300 million now expires in May 2006 and $700 million now expires in May 2010. The credit facilities exist primarily to support commercial paper borrowings, letters of credit and other short-term unsecured bank loans. As the available balance is reduced by commercial paper borrowings and certain outstanding letters of credit, we had $598.6 million in available capacity under these facilities at May 7, 2005. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the facility agreements) or a competitive bid rate at our option. On August 17, 2004, we filed a shelf registration with the Securities and Exchange Commission that allows us to sell up to $300 million in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt, and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. Based on changing market conditions, we chose to delay the issuance of debt securities and settled an outstanding forward-starting interest rate swap during November 2004. On December 23, 2004, we entered into a Credit Agreement for a $300 million, 5-year term loan with a group of banks. The term loan consists of, at our election, base rate loans, Eurodollar loans or a combination thereof. Interest accrues on base rate loans at a base rate per annum equal to the higher of prime rate or the Federal Funds Rate plus 1/2 of 1%. Interest accrues on Eurodollar loans at a defined Eurodollar rate plus the applicable percentage, which can range from 40 basis points to 112.5 basis points, depending upon our senior unsecured (non-credit enhanced) long term debt rating, as published by Standard & Poor’s Ratings Services and/or Moody’s Investors Service, Inc. At our current ratings, the applicable percentage on Eurodollar loans is 50 basis points. On December 30, 2004, the full principal amount of $300 million was funded as a Eurodollar loan. We may select interest periods of one, two, three or six months for Eurodollar loans, subject to availability. Interest is payable at the end of the selected interest period, but no less frequently than quarterly. We entered into an interest rate swap agreement on December 29, 2004, to effectively fix, based on current debt ratings, the interest rate of the term loan at 4.55%. We have the option to extend loans into subsequent interest period(s) or convert them into loans of another interest rate type. The entire unpaid principal amount of the term loan will be due and payable in full on December 23, 2009, when the facility terminates. We may
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prepay the term loan in whole or in part at any time without penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar borrowings. We have agreed to observe certain covenants under the terms of our borrowing agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage. All of the repayment obligations under our borrowing agreements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs. Additionally, the repayment obligations may be accelerated if we experience a change in control (as defined in the agreements) of AutoZone or its Board of Directors. As of May 7, 2005, we were in compliance with all covenants and expect to remain in compliance with all covenants. As of May 7, 2005, the Board of Directors had authorized the Company to repurchase up to $4.4 billion of common stock in the open market. This includes the additional $500 million that was approved by the Board of Directors on March 16, 2005. From January 1, 1998 to May 7, 2005, the Company has repurchased a total of 85.8 million shares at an aggregate cost of $4.0 billion; including 3.6 million shares of its common stock at an aggregate cost of $308.6 million during the thirty-six week period ended May 7, 2005. This excerpt taken from the AZO 10-Q filed Mar 11, 2005. Liquidity and Capital Resources The primary source of our liquidity is generated from our cash flows realized through the sale of automotive parts and accessories. For the twenty-four weeks ended February 12, 2005, our net cash flows from operating activities provided $101.2 million as compared with $157.5 million during the comparable prior year period. The year-over-year decline in cash flows from operating activities is primarily due to changes in the timing and amounts of income tax payments and changes in inventory levels. Prior to May 8, 2004, we had entered into arrangements with certain vendors and banks that, through our issuance of negotiable instruments to our vendors, the vendors could negotiate the instruments at attractive discount rates due to our credit rating. At May 8, 2004, we ceased the issuance of negotiable instruments under these arrangements. As of February 12, 2005, approximately $12.3 million was payable by us under these arrangements and is included in accounts payable in the accompanying consolidated balance sheets. The increase in merchandise inventories, required to support new-store development and sales growth, has largely been financed by our vendors, as evidenced by an 81% accounts payable to inventory ratio. Contributing to the favorable year-over-year change in accounts payable and accrued expenses is the use of pay-on-scan (“POS”) arrangements with certain vendors, whereby we will not purchase merchandise supplied by a vendor until just before that merchandise is ultimately sold to our customers. Title and certain risks of ownership remain with the vendor until the merchandise is sold to our customers. Since we do not own merchandise under POS arrangements until just before it is sold to a customer, such merchandise is not recorded on our balance sheet. Upon the sale of the merchandise to our customer, we recognize the liability for the goods and pay the vendor in accordance with the agreed upon terms. Although we do not hold title to the goods, we control pricing and have credit collection risk and therefore, revenues under POS arrangements are included gross in net sales in the income statement. We have financed the repurchase of existing merchandise inventory by certain vendors in order to convert such vendors to POS arrangements. These receivables have durations up to 24 months and approximated $54.5 million at February 12, 2005. The $34.9 million current portion of these receivables is reflected in accounts receivable and the $19.6 million long-term portion is reflected as a component of other long-term assets at February 12, 2005. |
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Merchandise under POS arrangements was $121.1 million at February 12, 2005, and we continue to actively negotiate with our vendors to increase the use of POS arrangements. Our net cash flows from investing activities for the twenty-four weeks ended February 12, 2005, used $120.0 million as compared with $68.5 million used in the comparable prior year period. Included in the current year amount was $3.2 million related to our acquisition of certain assets from a regional auto parts retailer. Four stores related to this transaction have been converted to AutoZone stores and are reflected in our store counts. Capital expenditures for the twenty-four weeks ended February 12, 2005, were $118.8 million compared to $69.5 million for the comparable prior year period. The increase in capital expenditures was driven by the investment in our new distribution facility in Texas, an increase in stores under development and other current year initiatives. During this twenty-four week period, we opened 54 net new domestic stores and four new stores in Mexico. In the comparable prior year period, we opened 80 net new domestic stores and six new stores in Mexico. Capital expenditures for this fiscal year are estimated at $250 million, primarily related to the planned opening of approximately 200 new stores during this year, our new distribution facility and other initiatives. Our net cash flows from financing activities for the twenty-four weeks ended February 12, 2005, provided $22.0 million compared to $101.6 million used for the comparable prior year period. The current period reflects $300.0 million in proceeds from the issuance of a bank term loan, and $266.4 million in net repayments of commercial paper borrowings. The comparable prior year period reflects $500.0 million in proceeds from the issuance of senior notes, $170.7 million in net proceeds from commercial paper and debt repayments of $430.6 million. Stock repurchases were $30.0 million in the current period as compared with $397.7 million in stock repurchases in the comparable prior year period. The settlement of interest rate hedge instruments provided $32.2 million in the comparable prior year period. For the twenty-four weeks ended February 12, 2005, exercises of stock options provided $28.1 million, including $9.7 million in related tax benefits that are reflected in cash flows from operating activities. In the comparable prior year period, exercises of stock options provided $39.8 million, including $17.3 million in related tax benefits. At February 12, 2005, options to purchase 2.3 million shares were exercisable at a weighted average exercise price of $47. Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance may be funded through new borrowings. We anticipate that we will be able to obtain such financing in view of our credit rating and favorable experiences in the debt market in the past. At February 12, 2005, AutoZone had a senior unsecured debt credit rating from Standard & Poor’s of BBB+ and a commercial paper rating of A-2. Moody’s Investors Service had assigned us a senior unsecured debt credit rating of Baa2 and a commercial paper rating of P-2. As of February 12, 2005, Moody’s and Standard & Poor’s had AutoZone listed as having a “negative” and “stable” outlook, respectively. If our credit ratings drop, our interest expense may increase; similarly, we anticipate that our interest expense may decrease if our investment ratings are raised. If our commercial paper ratings drop below current levels, we may have difficulty continuing to utilize the commercial paper market and our interest expense will increase, as we will then be required to access more expensive bank lines of credit. If our senior unsecured debt ratings drop below investment grade, our access to financing may become more limited. We maintain $1.0 billion of revolving credit facilities with a group of banks. Of the $1.0 billion, $300 million expires in May 2005 and $700 million expires in May 2009. We expect that the portion expiring in May 2005 will be renewed, replaced, or the option to extend the maturity date of the then-outstanding debt by one year will be exercised. The credit facilities exist primarily to support commercial paper borrowings, letters of credit and other short-term unsecured bank loans. As the available balance is reduced by commercial paper borrowings and certain outstanding letters of credit, we had $614.1 million in available capacity under these facilities at February 12, 2005. The rate of interest payable under the credit facilities is a function of the London Interbank Offered Rate (LIBOR), the lending bank’s base rate (as defined in the facility agreements) or a competitive bid rate at our option. On August 17, 2004, we filed a shelf registration with the Securities and Exchange Commission that allows us to sell up to $300 million in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt, and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. Based on changing market conditions, we chose to delay the issuance of debt securities and settled an outstanding forward-starting interest rate swap during November 2004. On December 23, 2004, we entered into a Credit Agreement for a $300 million, 5-year term loan with a group of banks. The term loan may consist of, at our election, base rate loans, Eurodollar loans or a combination thereof. Interest accrues on base rate loans at a base rate per annum equal to the higher of prime rate or the Federal Funds Rate plus 1/2 of 1%. Interest accrues on Eurodollar loans at a defined Eurodollar rate plus the applicable percentage, which can range from 40 basis points to 112.5 basis points, depending upon our senior unsecured (non-credit enhanced) long term debt rating, as published by Standard & Poor’s Ratings Services and/or Moody’s Investors Service, Inc. At our current ratings, the applicable percentage on Eurodollar loans is |
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50 basis points. On December 30, 2004, the full principal amount of $300 million was funded as a Eurodollar loan. We may select interest periods of one, two, three or six months for Eurodollar loans, subject to availability. Interest is payable at the end of the selected interest period, but no less frequently than quarterly. We entered into an interest rate swap agreement on December 29, 2004, to effectively fix the interest rate of the term loan at 4.55%. We have the option to extend loans into subsequent interest period(s) or convert them into loans of another interest rate type. The entire unpaid principal amount of the term loan will be due and payable in full on December 23, 2009, when the facility terminates. We may prepay the term loan in whole or in part at any time without penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in the case of prepayment of Eurodollar borrowings. We have agreed to observe certain covenants under the terms of our borrowing agreements, including limitations on total indebtedness, restrictions on liens and minimum fixed charge coverage. All of the repayment obligations under our borrowing agreements may be accelerated and come due prior to the scheduled payment date if covenants are breached or an event of default occurs. Additionally, the repayment obligations may be accelerated if we experience a change in control (as defined in the agreements) of AutoZone or its Board of Directors. As of February 12, 2005, we were in compliance with all covenants and expect to remain in compliance with all covenants. As of February 12, 2005, the Board of Directors had authorized the Company to repurchase up to $3.9 billion of common stock in the open market. This includes the additional $600 million that was approved by the Board of Directors on March 17, 2004. From January 1, 1998 to February 12, 2005, the Company has repurchased a total of 82.6 million shares at an aggregate cost of $3.7 billion, including 356,138 shares of its common stock at an aggregate cost of $30.0 million during the twenty-four week period ended February 12, 2005. | EXCERPTS ON THIS PAGE:
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