NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A General
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information and are presented in accordance with the requirements of Form
10-Q
and Article 10 of Regulation
S-X
of
the Securities and Exchange Commissions (the SEC) rules and regulations. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all
adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and related notes included in the AutoZone, Inc.
(AutoZone or the Company) Annual Report on Form
10-K
for the year ended August 26, 2017.
Operating results for the twelve and
thirty-six
weeks ended May 5, 2018 are not necessarily indicative of the
results that may be expected for the full fiscal year ending August 25, 2018. Each of the first three quarters of AutoZones fiscal year consists of 12 weeks, and the fourth quarter consists of 16 or 17 weeks. The fourth quarters for
fiscal 2018 and 2017 each have 16 weeks. Additionally, the Companys business is somewhat seasonal in nature, with the highest sales generally occurring during the months of February through September and the lowest sales generally occurring in
the months of December and January.
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 Companys 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 O Income Taxes in the Condensed
Consolidated Financial Statements for more information.
Recently Issued Accounting Pronouncements:
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers.
This ASU,
along with subsequent ASUs 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. This update will be effective for the
Company at the beginning of its fiscal 2019 year. The Company established a cross-functional implementation team to evaluate and identify the impact of the new standard on the Companys financial position, results of operations and
cash flows. Based on the preliminary work completed, the Company is considering the potential implications of the new standard on the Companys recognition of customer-related accounts receivable, warranty costs, the Companys loyalty
program, gift cards, subscriptions and other related topics in addition to all applicable financial statement disclosures required by the new guidance. The Company is currently in the process of identifying changes to its business processes, systems
and controls to support adoption of the new standard.
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. This update will be effective for the Company at the beginning of its fiscal 2020 year. The Company established a cross-functional
implementation team to evaluate and identify the impact of ASU
2016-02
on the Companys 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 Companys consolidated balance sheets. The impact on the Companys 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 Companys consolidated
statement of cash flows.
6
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.
In February 2018, the FASB
issued ASU
2018-02,
Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. ASU
2018-02
allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Reform. The guidance states that because the adjustment of
deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other
comprehensive income (stranded tax effects) do not reflect the appropriate tax rate. As stated within the guidance, the amendments in this update should be applied retrospectively to each period in which the effect of the change in the
U.S. federal corporate income tax rate in Tax Reform is recognized. At this time, the Company is in the process of evaluating the impact of the provisions of ASU
2018-02
on its consolidated financial
statements.
Note B Share-Based Payments
AutoZone recognizes compensation expense for share-based payments based on the fair value of the awards at the grant date. Share-based payments include stock
option grants, restricted stock grants, restricted stock unit grants and the discount on shares sold to employees under share purchase plans. Additionally, directors fees are paid in restricted stock units with value equivalent to the value of
shares of common stock as of the grant date. The change in fair value of liability-based stock awards is also recognized in share-based compensation expense.
Total share-based compensation expense (a component of Operating, selling, general and administrative expenses) was $5.8 million for the twelve week
period ended May 5, 2018, and $8.6 million for the comparable prior year period. Share-based compensation expense was $29.6 million for the
thirty-six
week period ended May 5, 2018, and
$29.3 million for the comparable prior year period.
During the
thirty-six
week period ended May 5, 2018,
243,370 stock options were exercised at a weighted average exercise price of $281.72. In the comparable prior year period, 164,457 stock options were exercised at a weighted average exercise price of $263.95.
The Company made stock option grants of 284,335 shares during the
thirty-six
week period ended May 5, 2018, and
granted options to purchase 290,805 shares during the comparable prior year period. The weighted average fair value of the stock option awards granted during the
thirty-six
week periods ended May 5, 2018,
and May 6, 2017, using the Black-Scholes-Merton multiple-option pricing valuation model, was $129.12 and $139.80 per share, respectively, using the following weighted average key assumptions:
|
|
|
|
|
|
|
|
|
|
|
Thirty-Six Weeks Ended
|
|
|
|
May 5,
2018
|
|
|
May 6,
2017
|
|
|
|
|
Expected price volatility
|
|
|
20%
|
|
|
|
18%
|
|
Risk-free interest rate
|
|
|
1.9%
|
|
|
|
1.2%
|
|
Weighted average expected lives (in years)
|
|
|
5.1
|
|
|
|
5.1
|
|
Forfeiture rate
|
|
|
10%
|
|
|
|
10%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
See AutoZones Annual Report on Form
10-K
for the year ended August 26, 2017,
for a discussion regarding the methodology used in developing AutoZones assumptions to determine the fair value of the option awards and a description of AutoZones Amended and Restated 2011 Equity Incentive Award Plan, the 2011 Director
Compensation Program and the 2014 Director Compensation Plan.
For the twelve week period ended May 5, 2018, 861,595 stock options were excluded from
the diluted earnings per share computation because they would have been anti-dilutive. For the comparable prior year period, 638,051 anti-dilutive shares were excluded from the dilutive earnings per share computation. There were 850,421
anti-dilutive shares excluded from the diluted earnings per share computation for the
thirty-six
week period ended May 5, 2018, and 615,764 anti-dilutive shares excluded for the comparable prior year
period.
7
Note C 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 Companys own
assumptions as there is little, if any, observable activity in identical assets or liabilities.
Financial Assets & Liabilities Measured at
Fair Value on a Recurring Basis
The Companys assets and liabilities measured at fair value on a recurring basis were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
|
|
|
|
Other current assets
|
|
|
$
|
25,294
|
|
|
|
$
|
1,601
|
|
|
|
$
|
|
|
|
|
$
|
26,895
|
|
Other long-term assets
|
|
|
|
61,476
|
|
|
|
|
21,837
|
|
|
|
|
|
|
|
|
|
83,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86,770
|
|
|
|
$
|
23,438
|
|
|
|
$
|
|
|
|
|
$
|
110,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 May 5, 2018, the fair value measurement amounts for assets and liabilities recorded in the accompanying Condensed
Consolidated Balance Sheets consisted of short-term marketable securities of $26.9 million, which are included within Other current assets, and long-term marketable securities of $83.3 million, which are included in Other long-term assets.
The Companys 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. The fair values of the marketable securities, by asset class, are described in Note D Marketable Securities.
Non-Financial
Assets and Liabilities 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 in 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. As of May 5, 2018 and August 26, 2017, 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.
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 Companys debt is included in Note H Financing.
8
Note D Marketable Securities
The Companys 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 Companys
available-for-sale
marketable securities consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
(in thousands)
|
|
Amortized
Cost
Basis
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
|
|
|
|
Corporate securities
|
|
|
$
|
60,405
|
|
|
|
$
|
|
|
|
|
$
|
(849
|
)
|
|
|
$
|
59,556
|
|
Government bonds
|
|
|
|
27,165
|
|
|
|
|
1
|
|
|
|
|
(195
|
)
|
|
|
|
26,971
|
|
Mortgage-backed securities
|
|
|
|
3,689
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
|
3,586
|
|
Asset-backed securities and other
|
|
|
|
20,304
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
20,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,563
|
|
|
|
$
|
1
|
|
|
|
$
|
(1,356
|
)
|
|
|
$
|
110,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 May 5, 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 the
thirty-six
week period ended May 5, 2018.
The Company holds 122 securities that are in an unrealized loss position of approximately $1.4 million at May 5, 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 the intent and ability to hold the investments until maturity or until recovery of fair
value.
Included above in total marketable securities are $84.9 million of marketable securities transferred by the Companys insurance captive
to a trust account to secure its obligations to an insurance company related to future workers compensation and casualty losses.
Note E
Derivative Financial Instruments
At May 5, 2018, the Company had $8.5 million recorded in Accumulated other comprehensive loss related to
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
twelve week period ended May 5, 2018 and the comparable prior year period, the Company reclassified $509 thousand of net losses from Accumulated other comprehensive loss to Interest expense. During the
thirty-six
week period ended May 5, 2018 and the comparable prior year period, the Company reclassified $1.5 million of net losses from Accumulated other comprehensive loss to Interest expense. The
Company expects to reclassify $2.2 million of net losses from Accumulated other comprehensive loss to Interest expense over the next 12 months.
Note F Merchandise Inventories
Merchandise
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 Companys merchandise purchases, the Company
has exhausted its LIFO reserve balance. The Companys policy is not to write up inventory in excess of replacement cost, which is based on average cost. The difference between LIFO cost and replacement cost, which will be reduced upon
experiencing price inflation on the Companys merchandise purchases, was $444.4 million at May 5, 2018 and $414.9 million at August 26, 2017.
9
Note G Pension and Savings Plans
The components of net periodic pension expense related to the Companys pension plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
Thirty-Six Weeks Ended
|
(in thousands)
|
|
May 5,
2018
|
|
May 6,
2017
|
|
May 5,
2018
|
|
May 6,
2017
|
|
|
|
|
|
Interest cost
|
|
|
$
|
2,390
|
|
|
|
$
|
2,385
|
|
|
|
$
|
7,170
|
|
|
|
$
|
7,155
|
|
Expected return on plan assets
|
|
|
|
(4,384
|
)
|
|
|
|
(4,628
|
)
|
|
|
|
(13,152
|
)
|
|
|
|
(13,885
|
)
|
Amortization of net loss
|
|
|
|
2,478
|
|
|
|
|
3,201
|
|
|
|
|
7,433
|
|
|
|
|
9,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
|
$
|
484
|
|
|
|
$
|
958
|
|
|
|
$
|
1,451
|
|
|
|
$
|
2,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company makes contributions in amounts at least equal to the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as amended by the Pension Protection Act of 2006. During the
thirty-six
week period ended May 5, 2018, the Company did not make contributions to its funded plans.
On December 19, 2017, the Board of Directors approved a resolution to terminate the Companys pension plans, effective March 15, 2018. Benefit
accruals were frozen, and the plans closed to new participants on January 1, 2003. The Company has commenced the plans termination process and expects to distribute a portion of the pension plans assets as lump sum payments to
participants with the remaining balance transferred to an insurance company in the form of an annuity. The total payments distributed as lump sums will depend on the participation rate of eligible participants. The Company expects to record a
one-time
pre-tax
charge of approximately $130 - $140 million in the fourth quarter of fiscal 2018, triggered by the termination of the plans. This charge includes the
estimated $20 - $30 million in cash funding that will be required to fund the termination and the remainder will be
non-cash
in nature.
Note H Financing
The Companys long-term debt
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
May 5,
2018
|
|
August 26,
2017
|
|
|
|
7.125% Senior Notes due August 2018, effective interest rate of 7.28%
|
|
|
$
|
250,000
|
|
|
|
$
|
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 May 5, 2018 and
August 26, 2017, respectively
|
|
|
|
1,025,500
|
|
|
|
|
1,155,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt before discounts and debt issuance costs
|
|
|
|
4,975,500
|
|
|
|
|
5,105,100
|
|
Less: Discounts and debt issuance costs
|
|
|
|
20,803
|
|
|
|
|
23,862
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
$
|
4,954,697
|
|
|
|
$
|
5,081,238
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 5, 2018, the commercial paper borrowings, the $250 million 7.125% Senior Notes due August 2018, and the
$250 million 1.625% Senior Notes due April 2019 were classified as long-term in the accompanying Consolidated Balance Sheets as the Company had the ability and intent to refinance on a long-term basis through available capacity in its revolving
credit facility. As of May 5, 2018, the Company had $1.997 billion of availability under its $2.0 billion revolving credit facility, 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 Companys borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billion to $2.0 billion; (ii) the Companys 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 Companys 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.
10
Under the revolving credit facility, 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 facility, depending upon the Companys senior, unsecured,
(non-credit
enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the revolving credit facility. As of May 5, 2018, the Company had $3.3 million of outstanding letters of
credit under the Revolving Credit Agreement.
On November 18, 2016, the Company amended and restated its existing
364-Day
revolving credit facility (the New
364-Day
Credit Agreement) by decreasing the committed credit amount from $500 million to $400 million,
extending the expiration date by one year and renegotiating other terms and conditions. The credit facility was available to primarily support commercial paper borrowings and other short-term unsecured bank loans. Under the credit facility, the
Company could borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrued on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable margin, as defined in the revolving credit
facility, depending upon the Companys senior, unsecured,
(non-credit
enhanced) long-term debt ratings. Interest accrued on base rate loans as defined in the credit facility. The New
364-Day
Credit Agreement expired on November 17, 2017, and the Company did not renew this revolving credit facility.
The fair value of the Companys debt was estimated at $4.893 billion as of May 5, 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 the carrying value of debt by $61.5 million at May 5,
2018, which reflects their 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.
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 we experience a change in control (as defined in the agreements). Our borrowings under our senior notes contain minimal covenants, primarily
restrictions on liens. Under our 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 our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default
occurs. As of May 5, 2018, we were in compliance with all covenants and expect to remain in compliance with all covenants under our borrowing arrangements.
Note I Stock Repurchase Program
From
January 1, 1998 to May 5, 2018, the Company has repurchased a total of 143.7 million shares of its common stock at an aggregate cost of $18.753 billion, including 1,424,160 shares of its common stock at an aggregate cost of
$927.2 million during the
thirty-six
week period ended May 5, 2018. On March 20, 2018, the Board voted to increase the authorization by $1.0 billion. This raised the total value of shares
authorized to be repurchased to $19.65 billion. Considering the cumulative repurchases as of May 5, 2018, the Company had $896.5 million remaining under the Boards authorization to repurchase its common stock.
During the
thirty-six
week period ended May 5, 2018, the Company retired 1.5 million shares of treasury stock
which had previously been repurchased under the Companys 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.
Subsequent to May 5, 2018, the Company has repurchased 258,761 shares
of its common stock at an aggregate cost of $167.5 million.
Note J 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 for the twelve week periods ended May 5, 2018 and May 6, 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Liability
|
|
Foreign
Currency
(3)
|
|
Net
Unrealized
Gain on
Securities
|
|
Derivatives
|
|
Total
|
|
|
|
|
|
|
Balance at February 10, 2018
|
|
|
$
|
(68,699
|
)
|
|
|
$
|
(211,524
|
)
|
|
|
$
|
(585
|
)
|
|
|
$
|
(5,576
|
)
|
|
|
$
|
(286,384
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
|
|
|
|
|
|
|
|
(10,674
|
)
|
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
(10,975
|
)
|
Amounts reclassified from Accumulated other comprehensive loss
(
1
)
|
|
|
|
1,847
|
(2)
|
|
|
|
|
|
|
|
|
(17
|
)
(4)
|
|
|
|
390
|
(5)
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 5, 2018
|
|
|
$
|
(66,852
|
)
|
|
|
$
|
(222,198
|
)
|
|
|
$
|
(903
|
)
|
|
|
$
|
(5,186
|
)
|
|
|
$
|
(295,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Liability
|
|
Foreign
Currency
(3)
|
|
Net
Unrealized
Gain on
Securities
|
|
Derivatives
|
|
Total
|
|
|
|
|
|
|
Balance at February 11, 2017
|
|
|
$
|
(85,121
|
)
|
|
|
$
|
(253,945
|
)
|
|
|
$
|
(155
|
)
|
|
|
$
|
(7,096
|
)
|
|
|
$
|
(346,317
|
)
|
Other comprehensive income before reclassifications
(1)
|
|
|
|
|
|
|
|
|
33,539
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
33,572
|
|
Amounts reclassified from Accumulated other comprehensive loss
(
1
)
|
|
|
|
1,953
|
(2)
|
|
|
|
|
|
|
|
|
(11
|
)
(4)
|
|
|
|
321
|
(5)
|
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 6, 2017
|
|
|
$
|
(83,168
|
)
|
|
|
$
|
(220,406
|
)
|
|
|
$
|
(133
|
)
|
|
|
$
|
(6,775
|
)
|
|
|
$
|
(310,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts in parentheses indicate debits to Accumulated other comprehensive loss.
|
(2)
|
Represents amortization of pension liability adjustments, net of taxes of $631 for the twelve weeks ended May 5, 2018 and $1,248 for the twelve weeks ended May 6, 2017, which is recorded in Operating,
selling, general and administrative expenses on the Condensed Consolidated Statements of Income. See Note G Pension and Savings Plans for further discussion.
|
(3)
|
Foreign currency is not shown net of additional U.S. tax as earnings of certain
non-U.S.
subsidiaries are intended to be permanently reinvested.
|
(4)
|
Represents realized losses on marketable securities, net of taxes of $3 for the twelve weeks ended May 5, 2018 and $6 for the twelve weeks ended May 6, 2017, which is recorded in Operating, selling, general
and administrative expenses on the Condensed Consolidated Statements of Income. See Note D Marketable Securities for further discussion.
|
(5)
|
Represents losses on derivatives, net of taxes of $119 for the twelve weeks ended May 5, 2018 and $188 for the twelve weeks ended May 6, 2017, which is recorded in Interest expense, net, on the Condensed
Consolidated Statements of Income. See Note E Derivative Financial Instruments for further discussion.
|
Changes in
Accumulated other comprehensive loss for the
thirty-six
week periods ended May 5, 2018 and May 6, 2017, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Liability
|
|
Foreign
Currency
(3)
|
|
Net
Unrealized
Gain on
Securities
|
|
Derivatives
|
|
Total
|
|
|
|
|
|
|
Balance at August 26, 2017
|
|
|
$
|
(72,376
|
)
|
|
|
$
|
(175,814
|
)
|
|
|
$
|
(11
|
)
|
|
|
$
|
(6,356
|
)
|
|
|
$
|
(254,557
|
)
|
Other comprehensive (loss) before
reclassifications
(1)
|
|
|
|
|
|
|
|
|
(46,384
|
)
|
|
|
|
(839
|
)
|
|
|
|
|
|
|
|
|
(47,223
|
)
|
Amounts reclassified from Accumulated other comprehensive loss
(
1
)
|
|
|
|
5,524
|
(2)
|
|
|
|
|
|
|
|
|
(53
|
)
(4)
|
|
|
|
1,170
|
(5)
|
|
|
|
6,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 5, 2018
|
|
|
$
|
(66,852
|
)
|
|
|
$
|
(222,198
|
)
|
|
|
$
|
(903
|
)
|
|
|
$
|
(5,186
|
)
|
|
|
$
|
(295,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pension
Liability
|
|
Foreign
Currency
(3)
|
|
Net
Unrealized
Gain on
Securities
|
|
Derivatives
|
|
Total
|
|
|
|
|
|
|
Balance at August 27, 2016
|
|
|
$
|
(88,890
|
)
|
|
|
$
|
(211,012
|
)
|
|
|
$
|
120
|
|
|
|
$
|
(7,747
|
)
|
|
|
$
|
(307,529
|
)
|
Other comprehensive (loss) before
reclassifications
(1)
|
|
|
|
|
|
|
|
|
(9,394
|
)
|
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
(9,609
|
)
|
Amounts reclassified from Accumulated other comprehensive loss
(
1
)
|
|
|
|
5,722
|
(2)
|
|
|
|
|
|
|
|
|
(38
|
)
(4)
|
|
|
|
972
|
(5)
|
|
|
|
6,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 6, 2017
|
|
|
$
|
(83,168
|
)
|
|
|
$
|
(220,406
|
)
|
|
|
$
|
(133
|
)
|
|
|
$
|
(6,775
|
)
|
|
|
$
|
(310,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts in parentheses indicate debits to Accumulated other comprehensive loss.
|
(2)
|
Represents amortization of pension liability adjustments, net of taxes of $1,909 in fiscal 2018 and $3,883 in fiscal 2017, which is recorded in Operating, selling, general and administrative expenses on the Condensed
Consolidated Statements of Income. See Note G Pension and Savings Plans for further discussion.
|
(3)
|
Foreign currency is not shown net of additional U.S. tax as earnings of certain
non-U.S.
subsidiaries are intended to be permanently reinvested.
|
(4)
|
Represents realized losses on marketable securities, net of taxes of $20 in fiscal 2018 and $20 in fiscal 2017, which is recorded in Operating, selling, general and administrative expenses on the Condensed
Consolidated Statements of Income. See Note D Marketable Securities for further discussion.
|
12
(5)
|
Represents gains and losses on derivatives, net of taxes of $356 in fiscal 2018 and $555 in fiscal 2017, which is recorded in Interest expense, net, on the Condensed Consolidated Statements of Income. See Note
E Derivative Financial Instruments for further discussion.
|
Note K Goodwill and
Intangibles
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Auto Parts
Stores
|
|
Other
|
|
Total
|
|
|
|
|
Net balance as of August 26, 2017
|
|
|
$
|
326,703
|
|
|
|
$
|
65,184
|
|
|
|
$
|
391,887
|
|
Goodwill adjustments
(1)
|
|
|
|
(24,058
|
)
|
|
|
|
(65,184
|
)
|
|
|
|
(89,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as of May 5, 2018
|
|
|
$
|
302,645
|
|
|
|
$
|
|
|
|
|
$
|
302,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts of intangible assets are included in Other long-term assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Estimated
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
|
Impairment
(1)
|
|
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
|
|
|
|
|
(28,546
|
)
|
|
|
|
|
|
(10,057
|
)
|
|
|
|
11,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,546
|
|
|
|
$
|
(39,763
|
)
|
|
|
|
|
$
|
(10,710
|
)
|
|
|
|
11,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizing
intangible asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(26,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note L Sale of Assets for further discussion
|
Amortization expense of intangible
assets for the twelve and
thirty-six
week periods ended May 5, 2018 was $1.0 million and $3.8 million, respectively. Amortization expense of intangible assets for the twelve and
thirty-six
week periods ended May 6, 2017 was $1.9 million and $5.9 million, respectively.
Note L
Sale of Assets
As previously announced, the Company entered into asset purchase agreements to sell substantially all of the assets, net of
assumed liabilities related to its IMC and AutoAnything businesses.
During the second quarter of fiscal 2018, the Company determined that the approximate
fair value less costs to sell these businesses was significantly lower than the carrying value of the net assets based on recent offers received and, therefore, 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 our segment reporting. Impairment charges for AutoAnything, which is reflected as a component of the Other category in our segment reporting, totaled
$99.6 million.
During the third quarter of fiscal 2018, the Company completed the IMC and AutoAnything sales for total consideration that
approximated the remaining net book value at the closing date.
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.
On April 4, 2018, the Company completed its transaction to sell
substantially all of the assets, net of assumed liabilities related to IMC.
13
Note M Litigation
Arising out of an April 2016 letter from the California Air Resources Board (CARB), one of the Companys 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 its consolidated financial condition,
results of operations or cash flows.
Note N Segment Reporting
The Companys 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 Companys 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 Companys reportable segment are the same as those described in Note A in its Annual Report on
Form
10-K
for the year ended August 26, 2017.
The Auto Parts Locations segment is a retailer and distributor
of automotive parts and accessories through the Companys 6,092 locations in the U.S., 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 two 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; and
E-commerce,
which includes direct sales to customers through www.autozone.com; and AutoAnything results through February 26, 2018, which
included direct sales to customers through www.autoanything.com, prior to the Companys sale of substantially all of its assets.
The Company
evaluates its reportable segment primarily on the basis of net sales and segment profit, which is defined as gross profit. Segment results for the periods presented were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Weeks Ended
|
|
Thirty-Six
Weeks Ended
|
(in thousands)
|
|
May 5,
2018
|
|
May 6,
2017
|
|
May 5,
2018
|
|
May 6,
2017
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations
|
|
|
$
|
2,610,485
|
|
|
|
$
|
2,530,689
|
|
|
|
$
|
7,452,186
|
|
|
|
$
|
7,125,812
|
|
Other
|
|
|
|
49,667
|
|
|
|
|
88,318
|
|
|
|
|
210,123
|
|
|
|
|
250,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
2,660,152
|
|
|
|
$
|
2,619,007
|
|
|
|
$
|
7,662,309
|
|
|
|
$
|
7,376,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Parts Locations
|
|
|
$
|
1,387,497
|
|
|
|
$
|
1,332,086
|
|
|
|
$
|
3,942,949
|
|
|
|
$
|
3,750,776
|
|
Other
|
|
|
|
35,477
|
|
|
|
|
46,332
|
|
|
|
|
122,918
|
|
|
|
|
134,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
1,422,974
|
|
|
|
|
1,378,418
|
|
|
|
|
4,065,867
|
|
|
|
|
3,885,496
|
|
Operating, selling, general and administrative expenses
(1)
|
|
|
|
(877,209
|
)
|
|
|
|
(848,848
|
)
|
|
|
|
(2,846,250
|
)
|
|
|
|
(2,513,054
|
)
|
Interest expense, net
|
|
|
|
(41,958
|
)
|
|
|
|
(35,675
|
)
|
|
|
|
(120,186
|
)
|
|
|
|
(103,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
$
|
503,807
|
|
|
|
$
|
493,895
|
|
|
|
$
|
1,099,431
|
|
|
|
$
|
1,269,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes impairment charges of $193.2 million for the
thirty-six
weeks ended May 5, 2018. See Note L Sale of Assets for further discussion.
|
14
Note O Income Taxes
The Companys effective income tax rate was 27.2% of pretax income for the twelve weeks ended May 5, 2018. The effective tax rate was higher than the
U.S. statutory federal rate primarily due to domestic state income taxes.
The Companys effective income tax rate was 14.8% of pretax income for the
thirty-six
weeks ended May 5, 2018. As described in further detail below, the effective tax rate was lower than the U.S. statutory federal rate primarily due to the enactment of Tax Reform and its tax benefit
of $103 million due to the reduction of the U.S. statutory rate from 35% to approximately 25.9%, and the $34.7 million tax benefit associated with stock option accounting.
At the end of each interim period, the Company estimates its effective tax rate and applies that rate to its ordinary quarterly earnings. The tax expense or
benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the
effects of changes in enacted tax laws or rates or tax statutes are recognized in the interim period in which the change occurs.
On December 22,
2017, Tax Reform was enacted by the U.S. government. Tax Reform contains several key provisions that affected the Company. The enacted provisions include a mandatory
one-time
transition tax on certain earnings
of foreign subsidiaries and a permanent reduction of the U.S. corporate income tax rate from 35 to 21 percent, effective January 1, 2018. The impact of the lower rate will be phased in, resulting in a U.S. statutory federal
tax rate of approximately 25.9% for the fiscal year ending August 25, 2018 and a 21% U.S. statutory federal rate for fiscal years thereafter and as long as the provisions of Tax Reform remain in effect. Other enacted provisions which may impact
the Company beginning in fiscal 2019 include: limitations on the deductibility of executive compensation, eliminating U.S. federal taxation of future remitted foreign earnings and other new provisions requiring current inclusion of certain
earnings of controlled foreign corporations.
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 companys 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 is
expected to be completed within one year from the enactment date of Tax Reform.
The Company recorded a provisional income tax benefit of
$136.7 million in its consolidated financial statements for its second quarter ended February 10, 2018 for the
re-measurement
of the Companys net U.S. federal deferred tax liability at the
lower rate. 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.
In addition, during the second quarter ended February 10, 2018, upon enactment of Tax Reform, the Company was able to determine a reasonable estimate for
the mandatory
one-time
transition tax and included a provisional increase to tax expense of $24.8 million. Due to the new guidance issued during the quarter ended May 5, 2018, the Company has revised
its provisional estimate for the mandatory
one-time
transition tax to $25.4 million, an increase to tax expense of $0.6 million versus previous provisional estimates. Our analysis of these items is
incomplete at this time as the Company continues to finalize the calculation of post-1986 foreign earnings and profits previously deferred from U.S. federal taxation 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 Internal Revenue Service. We will complete the accounting for these items during the measurement period.
Per GAAP, foreign withholding taxes are not included when foreign earnings are indefinitely reinvested. The Company regularly reviews and assesses whether
there are any changes to its indefinite reinvestment assertion. Through the second quarter ended February 10, 2018, the Company had determined that the undistributed earnings for all of its foreign subsidiaries were indefinitely reinvested.
During the current quarter ended May 5, 2018, the Company made the determination that the undistributed earnings of certain foreign subsidiaries were no longer indefinitely reinvested while also maintaining its indefinite reinvestment assertion
for other foreign subsidiaries. As a result, the Company has analyzed and included foreign withholding taxes on undistributed earnings where applicable, which has no significant impact on the Companys consolidated results.
15
As of May 5, 2018, the Company has estimated the following obligations with respect to the mandatory deemed
repatriation of the Companys foreign subsidiaries. The estimate may change, possibly materially, due to among other things, further refinement of the Companys calculations, changes in interpretations and assumptions the Company has made,
guidance that may be issued and actions the Company may take as a result of Tax Reform.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Scheduled
Payments
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
$
|
3,372
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
1,918
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
1,918
|
|
|
|
|
|
2021
|
|
|
|
|
|
|
|
|
1,918
|
|
|
|
|
|
2022
|
|
|
|
|
|
|
|
|
1,918
|
|
|
|
|
|
2023
|
|
|
|
|
|
|
|
|
3,597
|
|
|
|
|
|
2024
|
|
|
|
|
|
|
|
|
4,795
|
|
|
|
|
|
2025
|
|
|
|
|
|
|
|
|
5,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
One-Time
Transition Tax Forecasted Obligation
Payments
|
|
|
|
|
|
|
|
$
|
25,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16