AutoZone 2003 Annual Report Download - page 28

25 AutoZone, Inc. 2003 Annual Report
Financial Commitments: The following table shows AutoZone’s obligations and commitments to make future payments under contractual
obligations:
Total Payment Due by Period
Contractual Less than Between Between Over
(in thousands) Obligations 1 year 1–3 years 4–5 years 5 years
Long-term debt(1) $1,546,845 $420,700 $435,445 $190,700 $500,000
Operating leases(2) 671,103 118,269 197,311 129,446 226,077
Construction obligations 16,765 16,765 — — —
$2,234,713 $555,734 $632,756 $320,146 $726,077
(1) Long-term debt balances represent principal maturities, excluding interest. At August 30, 2003, debt balances due in less than one year of $420.7 million are classified as long
term, in our Consolidated Financial Statements, as we have the ability and intention to refinance them on a long-term basis.
(2) Operating lease obligations include related interest.
The following table shows AutoZone’s other commitments which all have expiration periods of less than one year:
Total Other
(in thousands) Commitments
Standby letters of credit $52,778
Surety bonds 8,123
$60,901
Off-Balance Sheet Arrangements: The above table reflects the outstanding letters of credit and surety bonds as of August 30, 2003. A substan-
tial portion of the outstanding standby letters of credit (which are primarily renewed on an annual basis) and surety bonds are used to
cover reimbursement obligations to our workers’ compensation carriers. There are no additional contingent liabilities associated with them
as the underlying liabilities are already reflected in our balance sheet . The letters of credit and surety bonds arrangements have automatic
renewal clauses.
In conjunction with our commercial sales program, we offer credit to some of our commercial customers. The receivables related to the
credit program are sold to a third party at a discount for cash with limited recourse. AutoZone has recorded a reserve for this recourse. At
August 30, 2003, the receivables facility had an outstanding balance of $42.1 million and the balance of the recourse reserve was $2.6 million.
Guarantee and Indemnification Arrangements: During fiscal 2003, AutoZone adopted the provisions of Financial Accounting Standards Board
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others” (FIN 45). Effective for interim and annual periods ending after December 15, 2002, FIN 45 elaborates on the disclosures that must
be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and indemnities. It also
clarifies that a guarantor is required to recognize the fair value of guarantee and indemnification arrangements issued or modified by
AutoZone after December 31, 2002, if these arrangements are within the scope of FIN 45. The adoption of FIN 45 did not have a significant
impact on AutoZone’s Consolidated Financial Statements.
Critical Accounting Policies
Product Warranties: Limited warranties on certain products that range from 30 days to lifetime warranties are provided to our customers by
AutoZone or the vendors supplying its products. Warranty costs relating to merchandise sold under warranty not covered by vendors are
estimated and recorded as warranty obligations at the time of sale based on each product’s historical return rate. We periodically assess the
adequacy of our recorded warranty liability and adjust the amount as necessary.
Litigation and Other Contingent Liabilities: We have received claims related to and been notified that we are a defendant in a number of legal
proceedings resulting from our business, such as employment matters, product liability, general liability related to our store premises and
alleged violation of the Robinson-Patman Act (as specifically described in Note M in the Notes to Consolidated Financial Statements).
Generally, we calculate contingent loss accruals using our best estimate of our probable and reasonably estimable contingent liabilities, such
as lawsuits and our retained liability for insured claims.
Vendor Allowances: AutoZone receives various payments and allowances from its vendors based on the volume of purchases or for services
that AutoZone provides to the vendors. Monies received from vendors include rebates, allowances and promotional funds. Typically these
funds are dependent on purchase volumes and advertising plans. The amounts to be received are subject to changes in market conditions,
vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for AutoZone.