AutoZone 2004 Annual Report Download - page 25
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Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations
(continued)
$300millionandaforward-startinginterestrateswapwithanotionalamountof$200million.Theseagreementshedgedtheexposureto
variabilityinfuturecashflowsresultingfromchangesininterestratespriortotheNovember2003issuanceof$300million5.5%Senior
Notes due November 2015 and $200 million 4.75% Senior Notes due November 2010. The related gains on these transactions are
deferredinstockholders’equityasacomponentofothercomprehensiveincomeorloss.Thesedeferredgainsarerecognizedinincomeas
adecreasetointerestexpenseintheperiodinwhichtherelatedinterestratesbeinghedgedarerecognizedinexpense.However,tothe
extentthatthechangeinvalueofaninterestratehedgeinstrumentdoesnotperfectlyoffsetthechangeinthevalueoftheinterestrate
beinghedged,thatineffectiveportionisimmediatelyrecognizedinincome.DuringNovember2003,werecognized$2.7millioningains
relatedtotheineffectiveportionoftheseagreements.TheremaininggainsrealizedupontheNovember2003settlementweredeferredin
othercomprehensiveincomeandarebeingreclassifiedtointerestexpenseoverthelifeoftheunderlyingSeniorNotes,resultingineffective
interestratesof4.86%onthe$300millionissuanceand4.17%onthe$200millionissuance.
Duringfiscal2003,wealsoenteredintoandsettledaforward-startinginterestrateswapwithanotionalamountof$200million,usedto
hedgethevariabilityinfuturecashflowsresultingfromchangesininterestratespriortotheissuanceof$200million4.375%SeniorNotes.
Thelossrealizeduponsettlementwasdeferredinothercomprehensiveincomeandisbeingreclassifiedtointerestexpenseoverthelifeof
theunderlyingSeniorNotes,resultinginaneffectiveinterestrateof5.65%.Duringfiscal2003,allofourhedgeinstrumentsweredeter-
minedtobehighlyeffective,andnoineffectiveportionwasrecognizedinincome.
AutoZonereflectsthecurrentfairvalueofallinterestratehedgeinstrumentsonourconsolidatedbalancesheetsasacomponentof
otherassets.Thefairvaluesoftheinterestratehedgeinstrumentswere$4.6millionatAugust28,2004andwere$41.6millionat
August30,2003.OuroutstandinghedgeinstrumentwasdeterminedtobehighlyeffectiveatAugust28,2004.
Thefairvalueofourdebtwasestimatedat$1.88billionasofAugust28,2004,and$1.57billionasofAugust30,2003,basedonthe
quoted market prices for the same or similar debt issues or on the current rates available to AutoZone for debt of the same remaining
maturities.SuchfairvalueisgreaterthanthecarryingvalueofdebtatAugust28,2004,by$11.1million,andatAugust30,2003,by
$27.3million.Wehad$529.3millionofvariableratedebtoutstandingatAugust28,2004,and$556.8millionoutstandingatAugust30,
2003,bothofwhichexcludetheeffectofanyinterestrateswapsdesignatedandeffectiveascashflowhedgesofsuchvariableratedebt.
Attheseborrowinglevelsforvariableratedebt,aonepercentagepointincreaseininterestrateswouldhavehadanunfavorableimpacton
ourpre-taxearningsandcashflowsof$5.3millionin2004and$5.6millioninfiscal2003,whichexcludestheeffectsofinterestrate
swaps.TheprimaryinterestrateexposureonvariableratedebtisbasedonLIBOR.Wehadoutstandingfixedratedebtof$1.34billionat
August28,2004,and$990.0millionatAugust30,2003.Aonepercentagepointincreaseininterestrateswouldreducethefairvalue
ofourfixedratedebtby$81.1millionatAugust28,2004andby$47.0millionatAugust30,2003.
FuelPriceRisk: FuelswapcontractsutilizedbyushavenotpreviouslybeendesignatedashedginginstrumentsundertheprovisionsofSFAS
133anddonotqualifyforhedgeaccountingtreatment,althoughtheinstrumentswereexecutedtoeconomicallyhedgetheconsumptionof
dieselfuelusedtodistributeourproducts.Accordingly,mark-to-marketgainsandlossesrelatedtosuchfuelswapcontractsarerecorded
incostofsalesasacomponentofdistributioncosts.AsofAugust28,2004,thecurrentmonth’sfuelswapcontractwasoutstandingwith
asettlementdateofAugust31,2004.Duringfiscal2004and2003,weenteredintofuelswapstoeconomicallyhedgeaportionofour
dieselfuelexposure.Theseswapsweresettledwithinafewdaysofeachfiscalyearendandhadnosignificantimpactoncostofsalesfor
the2004or2003fiscalyears.
ReconciliationofNon-GAAPFinancialMeasures
“SelectedFinancialData”and“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”includecertain
financialmeasuresnotderivedinaccordancewithgenerallyacceptedaccountingprinciples(“GAAP”).Thesenon-GAAPfinancialmeasures
provideadditionalinformationfordeterminingouroptimumcapitalstructureandareusedtoassistmanagementinevaluatingperformance
andinmakingappropriatebusinessdecisionstomaximizestockholders’value.
Non-GAAPfinancialmeasuresshouldnotbeusedasasubstituteforGAAPfinancialmeasures,orconsideredinisolation,forthepurpose
ofanalyzingouroperatingperformance,financialpositionorcashflows.However,wehavepresentedthenon-GAAPfinancialmeasures,as
we believe they provide additional information to analyze or compare our operations. Furthermore, our management and Compensation
CommitteeoftheBoardofDirectorsusetheabovementionednon-GAAPfinancialmeasurestoanalyzeandcompareourunderlyingoperat-
ingresultsandtodeterminepaymentsofperformance-basedcompensation.Wehaveincludedareconciliationofthisinformationtothe
mostcomparableGAAPmeasuresinthefollowingreconciliationtables.