AutoZone 2004 Annual Report Download - page 34
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NoteB—DerivativeInstrumentsandHedgingActivities
AutoZonehasutilizedinterestrateswapstoconvertvariableratedebttofixedratedebtandtolockinfixedratesonfuturedebtissuances.
AtAugust28,2004,theCompanyheldafive-yearforward-startinginterestrateswapwithanotionalamountof$300million.Thisswap
hasanOctober2004effectivedatetocoincidewithananticipateddebttransaction.Duringfiscal2004,therelatedgainsonthisderivative
arerecorded inaccumulated other comprehensiveloss, netofincome taxes andit isexpected that uponsettlement of theagreement,
therealizedgainorlosswillbedeferredinaccumulatedothercomprehensivelossandreclassifiedtointerestexpenseoverthelifeofthe
underlyingdebt.
AtAugust30,2003,theCompanyheldaninterestrateswapcontract,whichwassettledinSeptember2003,tohedge$25millionof
variableratedebtassociatedwithcommercialpaperborrowings.AtAugust30,2003,italsoheldtreasurylockagreementswithnotional
amountsof$300millionandaforward-startinginterestrateswapwithanotionalamountof$200million.Theseagreementshedgedthe
exposuretovariabilityinfuturecashflowsresultingfromchangesininterestratespriortotheNovember2003issuanceof$300million
5.5%SeniorNotesdueNovember2015and$200million4.75%SeniorNotesdueNovember2010.Therelatedgainsonthesetrans-
actionsaredeferredinstockholders’equityasacomponentofaccumulatedothercomprehensiveloss.Thesedeferredgainsarerecognized
in income as a decrease to interest expense in the period in which the related interest rates being hedged are recognized in expense.
However,totheextentthatthechangeinvalueofaninterestratehedgeinstrumentdoesnotperfectlyoffsetthechangeinthevalueofthe
interestratebeinghedged,SFAS133requiresthattheineffectiveportionistobeimmediatelyrecognizedinincome.DuringNovember
2003,theCompanyrecognized$2.7millioningainsrelatedtotheineffectiveportionoftheseagreements.Theremaininggainsrealized
upontheNovember2003settlementweredeferredinaccumulatedothercomprehensivelossandarebeingreclassifiedtointerestexpense
overthelifeoftheunderlyingSeniorNotes,resultingineffectiveinterestratesof4.86%onthe$300millionissuanceand4.17%onthe
$200millionissuance.
Duringfiscal2003,theCompanyalsoenteredintoandsettledaforward-startinginterestrateswapwithanotionalamountof$200million,
usedtohedgethevariabilityinfuturecashflowsresultingfromchangesininterestratespriortotheissuanceof$200million4.375%
SeniorNotes.Thelossrealizeduponsettlementwasdeferredinaccumulatedothercomprehensivelossandisbeingreclassifiedtointerest
expenseoverthelifeoftheunderlyingSeniorNotes,resultinginaneffectiveinterestrateof5.65%.
AutoZonereflectsthecurrentfairvalueofalloutstandinginterestratehedgeinstrumentsinitsconsolidatedbalancesheetsasacomponent
ofotherassets.Thefairvaluesoftheinterestratehedgeinstrumentswere$4.6millionatAugust28,2004and$41.6millionatAugust
30,2003.TheCompany’soutstandinghedgeinstrumentwasdeterminedtobehighlyeffectiveatAugust28,2004.
Thefollowingtablesummarizesthefiscal2004and2003activityinaccumulatedothercomprehensivelossasitrelatestointerestrate
hedgeinstruments:
(inthousands)
Before-Tax
Amount
Income
Tax
After-Tax
Amount
AccumulatednetlossesasofAugust31,2002 $(10,445) $ — $(10,445)
Netgainsonoutstandingderivatives 41,566 (15,710) 25,856
Netlossesonterminated/maturedderivatives (20,014) — (20,014)
Reclassificationofnetlossesonderivativesintoearnings 6,479 — 6,479
AccumulatednetgainsasofAugust30,2003 17,586 (15,710) 1,876
Netgainsonoutstandingderivatives 4,640 (1,740) 2,900
Netgainsonterminated/maturedderivatives (9,484) 15,710 6,226
Reclassificationofderivativeineffectivenessintoearnings (2,701) — (2,701)
Reclassificationofnetlossesonderivativesintoearnings 1,523 — 1,523
AccumulatednetgainsasofAugust28,2004 $ 11,564 $ (1,740) $ 9,824
The Company primarily executes derivative transactions of relatively short duration with strong creditworthy counterparties. These
counterpartiesexposetheCompanytocreditriskintheeventofnon-performance.Theamountofsuchexposureislimitedtotheunpaid
portionofamountsduetotheCompanypursuanttothetermsofthederivativefinancialinstruments,ifany.Althoughtherearenocollateral
requirements,ifadowngradeinthecreditratingofthesecounterpartiesoccurs,managementbelievesthatthisexposureismitigatedby
provisionsinthederivativeagreementswhichallowforthelegalrightofoffsetofanyamountsduetotheCompanyfromthecounterparties
withamountspayable,ifany,tothecounterpartiesbytheCompany.Managementconsiderstheriskofcounterpartydefaulttobeminimal.