AutoZone 2005 Annual Report Download - page 42

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Notes to Consolidated Financial Statements
(continued)
The Company or the vendors supplying its products provide its customers limited warranties on certain products that range from 30 days to lifetime
warranties. In most cases, the Company’s vendors are primarily responsible for warranty claims. 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. These obligations, which are often funded by vendor allowances, are recorded as a component of accrued expenses. For vendor allowances
that are in excess of the related estimated warranty expense for the vendor’s products, the excess is reclassified to inventory and recognized as a
reduction to cost of sales as the related inventory is sold. The Company periodically assesses the adequacy of its recorded warranty liability and
adjusts the amount as necessary resulting in income or expense recognition. The Company has successfully negotiated with certain vendors to
transfer warranty obligations to such vendors in order to minimize the Company’s warranty exposure resulting in credits to earnings of $1.7 million
in fiscal 2005, $42.1 million in fiscal 2004, and $8.7 million in fiscal 2003, and ongoing reductions in claim settlements. Changes in the Company’s
accrued sales and warranty returns for the last three fiscal years consisted of the following:
Year Ended
(in thousands)
August฀27,฀
2005
August 28,
2004
August 30,
2003
Balance, beginning of fiscal year $฀ 11,493 $ 78,482 $ 82,035
Allowances received from vendors 53,997 49,444 116,808
Excess vendor allowances reclassified to inventory (7,129) (12,056) —
Income (1,736) (42,094) (25,522)
Claim settlements (49,446) (62,283) (94,839)
Balance, end of fiscal year $฀ ฀ 7,179 $ 11,493 $ 78,482
Note฀D—Income฀Taxes
The provision for income tax expense for each of the last three fiscal years consisted of the following:
Year Ended
(in thousands)
August฀27,฀฀
2005
August 28,
2004
August 30,
2003
Current:
Federal $296,849 $268,013 $219,699
State 21,981 27,189 30,003
318,830 295,202 249,702
Deferred:
Federal (11,271) 41,532 60,835
State (5,357) 2,966 4,866
(16,628) 44,498 65,701
$302,202 $339,700 $315,403
A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35% to income before income
taxes is as follows:
Year Ended
(in thousands)
August฀27,฀฀
2005
August 28,
2004
August 30,
2003
Expected tax at statutory rate $305,627 $317,066 $291,552
State income taxes, net 10,806 19,601 22,665
Tax benefit on repatriation of foreign earnings (16,351) — —
Other 2,120 3,033 1,186
$302,202 $339,700 $315,403
The American Jobs Creation Act (the “Act”), signed into law in October 2004, provides an opportunity to repatriate foreign earnings, reinvest them
in the United States, and claim an 85% dividend received deduction on the repatriated earnings provided certain criteria are met. The Company has
determined that it meets the criteria of the Act, and it plans to repatriate all of its foreign earnings, approximately $36.7 million, from its Mexico sub-
sidiaries. As the Company had previously recorded deferred income taxes on these amounts, the planned repatriation resulted in a $16.4 million
one-time reduction to income tax expense for fiscal 2005.