CSK AUTO CORP - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended May 1, 2005

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number 001-13927

CSK Auto Corporation

(Exact name of registrant as specified in its charter)


Delaware		86-0765798
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

645 E. Missouri Ave. Suite 400, Phoenix, Arizona (Address of principal executive offices)		85012 (Zip Code)

(602) 265-9200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

As of June 2, 2005, CSK Auto Corporation had 45,157,106 shares of common stock outstanding.

TABLE OF CONTENTS


		Page

PART I — Financial Information
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets		2
	Consolidated Statements of Operations		3
	Consolidated Statements of Cash Flows		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17

PART II — Other Information
Item 1.	Legal Proceedings		19
Item 2.	Unregistered Sales of Securities and Use of Proceeds and Issuer Repurchases of Equity Securities		20
Item 3.	Defaults Upon Senior Securities		21
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 5.	Other Information		21
Item 6.	Exhibits		21
Signature			23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

PART I

FINANCIAL INFORMATION


Item 1.	*Financial Statements*

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


			May 1,			January 30,
			2005			2005

			(Unaudited)
			(In thousands, except
			share data)
ASSETS
Cash and cash equivalents			$	97,704		$	56,548
Receivables, net of allowances of $1,395 and $670, respectively				75,292			73,106
Inventories				560,178			531,751
Deferred income taxes				41,956			46,263
Prepaid expenses and other current assets				22,987			27,260

		Total current assets		798,117			734,928

Property and equipment, net				137,645			139,357
Leasehold interests, net				10,075			10,393
Goodwill				118,966			118,966
Other assets, net				36,312			38,474

		Total assets	$	1,101,115		$	1,042,118


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable			$	224,183		$	178,444
Accrued payroll and related expenses				52,316			51,396
Accrued expenses and other current liabilities				53,891			47,982
Current maturities of long term debt				2,842			2,818
Current maturities of capital lease obligations				5,615			6,490

		Total current liabilities		338,847			287,130

Long term debt				477,893			477,568
Obligations under capital leases				9,302			10,437
Deferred income taxes				6,427			6,341
Other liabilities				45,817			46,358

		Total non-current liabilities		539,439			540,704

Commitments and contingencies
	Stockholders’ equity:
	Common stock, $0.01 par value, 58,000,000 shares authorized, 45,147,742 and 45,116,301 shares issued and outstanding at May 1, 2005 and January 30, 2005, respectively			452			451
	Additional paid-in capital			446,930			446,537
	Deferred compensation			(912	)		(1,018	)
	Stockholder receivable			(10	)		(10	)
	Accumulated deficit			(223,631	)		(231,676	)

		Total stockholders’ equity		222,829			214,284

		Total liabilities and stockholders’ equity	$	1,101,115		$	1,042,118

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


			Thirteen Weeks Ended

			May 1,		May 2,
			2005		2004

			(Unaudited)
			(In thousands, except per
			share data)
Net sales			$	397,201	$	397,054
Cost of sales				217,218		208,359

Gross profit				179,983		188,695
Other costs and expenses:
	Operating and administrative			157,883		158,712
	Store closing costs			315		326

Operating profit				21,785		29,657
Interest expense, net				8,570		8,614

Income before income taxes				13,215		21,043
Income tax expense				5,170		8,228

Net income			$	8,045	$	12,815

Basic earnings per share:
		Net income	$	0.18	$	0.28

Shares used in computing per share amounts				45,130		46,517

Diluted earnings per share:
		Net income	$	0.18	$	0.27

Shares used in computing per share amounts				45,494		46,885

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


				Thirteen Weeks Ended

				May 1,			May 2,
				2005			2004

				(Unaudited)
				(In thousands)
Cash flows from operating activities:
	Net income			$	8,045		$	12,815
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization of property and equipment			7,725			8,185
		Amortization and accretion of financing items			453			470
		Amortization of other items			1,005			1,032
		Losses on disposal of property, equipment and other assets			365			174
		Tax benefit relating to stock option exercises			86			106
		Deferred income taxes			4,393			7,564
		Change in operating assets and liabilities:
			Receivables		(2,186	)		(709	)
			Inventories		(28,427	)		(20,823	)
			Prepaid expenses and other current assets		4,273			(1,246	)
			Accounts payable		45,739			7,767
			Accrued payroll, accrued expenses and other current liabilities		6,829			392
			Other operating activities		501			(556	)

		Net cash provided by operating activities			48,801			15,171

Cash flows from investing activities:
	Capital expenditures				(6,384	)		(4,817	)
	Other investing activities				(320	)		(817	)

		Net cash used in investing activities			(6,704	)		(5,634	)

Cash flows from financing activities:
	Borrowings under senior credit facility				—			20,600
	Payments under senior credit facility				—			(20,600	)
	Payment of debt issuance costs				—			(854	)
	Payments on capital lease obligations				(2,010	)		(2,554	)
	Proceeds from repayment of stockholder receivable				—			8
	Proceeds from seller financing arrangements				905			—
	Payments on seller financing arrangements				(78	)		(45	)
	Proceeds from exercise of stock options				308			346
	Other financing activities				(66	)		(98	)

		Net cash used in financing activities			(941	)		(3,197	)

		Net increase in cash and cash equivalents			41,156			6,340
Cash and cash equivalents, beginning of period					56,548			37,221

Cash and cash equivalents, end of period				$	97,704		$	43,561

The accompanying notes are an integral part of these consolidated financial statements.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CSK Auto Corporation is a holding company. At May 1, 2005, CSK Auto Corporation had no business activity other than its investment in CSK Auto, Inc. (“Auto”), a wholly owned subsidiary. On a consolidated basis, CSK Auto Corporation and its subsidiaries are referred to herein as the “Company”, “we”, “us”, or “our”.

Auto is a specialty retailer of automotive aftermarket parts and accessories. At May 1, 2005, we operated 1,138 stores in 19 states as a fully integrated company and single business segment under three brand names: Checker Auto Parts, founded in 1969 and operating in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii; Schuck’s Auto Supply, founded in 1917 and operating in the Pacific Northwest and Alaska; and Kragen Auto Parts, founded in 1947 and operating primarily in California.


Note 1 —	Basis of Presentation

We prepared the unaudited consolidated financial statements included herein in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all information and footnotes required by generally accepted accounting principles for fiscal year end financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of our financial position and the results of our operations. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto for the fiscal year ended January 30, 2005 (fiscal 2004) as included in our Annual Report on Form 10-K filed with the SEC on May 2, 2005 (“2004 Annual Report”).

In the accompanying consolidated balance sheet, we have changed the classification of store operating supplies as of January 30, 2005 from inventory to prepaid expenses and other current assets to conform to the current year presentation. As these items do not represent merchandise held for sale, we believe this presentation is more appropriate. As of May 1, 2005 and January 30, 2005, store operating supplies were approximately $6.6 million. This classification has no impact on our previously reported total current assets, results of operations or cash flows.


Note 2 —	Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations”. FIN 47 clarifies that the term “conditional asset retirement obligation” as used in Statement of Financial Accounting Standards (“SFAS’) No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. In addition, FIN 47 clarifies when a company would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application of interim financial information is permitted but not required. Early adoption is encouraged. We are evaluating the impact of FIN 47 on our consolidated financial statements.

In December 2004, the FASB issued revised SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation. SFAS No. 123R is effective for fiscal years beginning after June 15, 2005. We will be required to adopt SFAS No. 123R in our first quarter of fiscal 2006. We currently disclose the proforma impact on net income (loss) and earnings (loss) per share under SFAS No. 123, “Accounting for Stock-Based Compensation” in Note 7 of these Consolidated Financial Statements. We are currently evaluating the impact of the adoption of SFAS No. 123R on our financial position and results of operations, including the valuation methods and support for the assumptions that will be included in the valuation of the awards.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4”, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). The standard requires that such costs be excluded from the cost of inventory and expensed when incurred. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We do not expect that the adoption of SFAS No. 151 will have a material effect on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB No. 29, Accounting for Nonmonetary Transactions”, which addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect that the adoption of SFAS No. 153 will have a material effect on our consolidated financial statements.


Note 3 —	Inventories

Inventories are valued at the lower of cost or market, cost being determined utilizing the First-in First-out (“FIFO”) method. In most instances, we retain the ability to return damaged, obsolete and excess merchandise inventory to our vendors. In situations where we do not have a right to return merchandise inventory (generally for certain import products), we may from time to time record an allowance representing an estimated loss for the difference between the cost of any damaged, obsolete or excess product and the estimated retail selling price. Inventory levels and margins earned on all products are monitored monthly. Quarterly, we assess whether we expect to sell any significant amount of inventory below cost and, if so, record an estimated allowance. We refer to this allowance as an obsolescence allowance.

At each balance sheet reporting date, we adjust our inventory carrying balances by the capitalization of certain operating and overhead administrative costs associated with purchasing and handling of inventory, an estimation of vendor allowances that remain in ending inventory at period end and an estimation of allowances for inventory shrinkage and obsolescence as follows.


	May 1,			January 30,			February 1,
	2005			2005(1)			2004(1)

	($ in millions)
FIFO cost	$	591.8		$	564.0		$	550.3
Administrative and overhead costs		43.8			39.8			39.6
Vendor allowances		(59.3	)		(57.4	)		(60.4	)
Shrinkage		(15.1	)		(13.1	)		(13.4	)
Obsolescence		(1.0	)		(1.5	)		—

Net inventory	$	560.2		$	531.8		$	516.1

(1)

Amounts are different from those disclosed in our 2004 Annual Report due to the reclassification of approximately $6.6 million of store operating supplies as of May 1, 2005 and January 30, 2005 and approximately $6.7 million of store operating supplies reclassified as of February 1, 2004 as discussed in Note 1 of the Notes to Consolidated Financial Statements in this Form 10-Q. In addition, FIFO cost, capitalized administrative and overhead costs and vendor allowance amounts have been revised from those previously reported in our 2004 Annual Report to reflect the correct balances for capitalized administrative and overhead costs and vendor allowances. The net effect of the correction was a $1.0 million reduction in FIFO cost which was recorded in cost of sales in the first quarter of fiscal 2005.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4 — Store Closing Costs

On an on-going basis, store locations are reviewed and analyzed based on several factors including market saturation, store profitability, and store size and format. In addition, we analyze sales trends and geographical and competitive factors to determine the viability and future profitability of our store locations. If a store location does not meet our required projections, it is considered for closure.

We account for the costs of closed stores in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS No. 146, costs of operating lease commitments for a closed store are recorded as expense at fair value at the date we cease operating the store. Fair value of the liability is determined as the present value of future cash flows discounted using a credit-adjusted risk free rate. Accretion expense represents interest on our recorded closed store liabilities at the same credit adjusted risk free rate used to discount the cash flows. In addition, SFAS No. 146 also requires that the amount of remaining lease payments owed be reduced by estimated sublease income (but not to an amount less than zero). Sublease income in excess of costs associated with the lease is recognized as it is earned and included as a reduction to operating and administrative expense in the accompanying financial statements.

The allowance for store closing costs is included in accrued expenses and other long term liabilities in the accompanying financial statements and primarily represents the discounted value of the following future net cash outflows related to closed stores: (1) future rents to be paid over the remaining terms of the lease agreements for the stores (net of estimated probable sublease income); (2) lease commissions associated with the anticipated store subleases; and (3) contractual expenses associated with the closed store vacancy periods. Certain operating expenses, such as utilities and repairs, are expensed as incurred and no provision is made for employee termination costs.

As of May 1, 2005, we had a total of 191 locations included in the allowance for store closing costs consisting of 137 store locations and 54 service centers. Of the store locations included in the allowance, 11 locations were vacant and 126 locations were subleased. Of the service centers included in the allowance, 2 were vacant and 52 were subleased. Future rent expense will be incurred through the expiration of the non-cancelable leases, the longest of which runs through March 2018.

Activity in the allowance for store closing costs and the related payments for the thirteen weeks ended May 1, 2005 is as follows ($ in thousands):


Balance, beginning of year				$	7,883
Store closing costs:
	Provision for store closing costs				62
	Revisions in estimates				8
	Accretion				105
	Operating expenses and other				140

			Store closing costs, net		315

Payments:
	Rent expense, net of sublease recoveries				(589	)
	Occupancy and other expenses				(199	)
	Sublease commissions and buyouts				—

		Total payments			(788	)

Balance as of May 1, 2005				$	7,410

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We expect net cash outflows for closed store locations of approximately $4.0 million during fiscal 2005 and the remainder of cash outflows to primarily occur during fiscal years 2006 through 2008. We plan to fund these outflows from normal operating cash flows. We anticipate that we will close or relocate approximately 18 stores during fiscal 2005. We anticipate that the majority of these closures will occur near the end of the lease terms, resulting in minimal closed store costs. We anticipate total cash outflows relating to these stores of $0.3 million, which includes estimated incremental costs to be measured at fair value when incurred.


Note 5 —	Long Term Debt

Outstanding debt, excluding capital leases, is comprised of the following ($ in thousands):


		May 1,		January 30,
		2005		2005

Senior credit facility — term loan		$	252,450	$	252,450
7% senior subordinated notes			220,041		220,519
Seller financing arrangements			8,244		7,417

Total debt		$	480,735	$	480,386
Less: Current maturities under senior credit facility			2,550		2,550
Current portion of seller financing arrangements			292		268

	Total long term debt	$	477,893	$	477,568

On April 5, 2004, we entered into an interest rate swap agreement to effectively convert $100.0 million of our 7% senior subordinated notes due 2014 to a floating rate, set semi-annually in arrears, equal to the six month LIBOR + 283 basis points. The agreement is for the term of the notes. The hedge is accounted for as a “fair value” hedge; accordingly, the fair value of the derivative and changes in the fair value of the underlying debt will be reported on our consolidated balance sheet and recognized in the results of operations. Based upon our assessment of effectiveness of the hedge, changes in the fair value of this derivative and the underlying debt will not have a significant effect on our consolidated results of operations. At May 1, 2005 and January 30, 2005, the fair value of the interest rate swap approximated $5.0 million and $4.5 million, respectively, which is included as an increase in other long-term liabilities with an identical amount reflected as a basis adjustment to the 7% senior subordinated notes on the accompanying Consolidated Balance Sheet.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 6 —	Earnings Per Share

Calculation of the numerator and denominator used in computing per share amounts is summarized as follows (in thousands):


			Thirteen Weeks
			Ended

			May 1,		May 2,
			2005		2004

Numerator for basic and diluted EPS:
	Net income		$	8,045	$	12,815

Denominator for basic EPS:
	Weighted average shares outstanding (basic)			45,130		46,517

Denominator for diluted EPS:
	Weighted average shares outstanding (basic)			45,130		46,517
	Effect of dilutive stock options			364		368

		Weighted average shares outstanding (diluted)		45,494		46,885

Shares excluded as a result of anti-dilution:
	Stock options			385		346


Note 7 —	Stock Based Compensation

We have stock-based employee compensation plans, which are described more fully in Note 12 of the Notes to Consolidated Financial Statements in our 2004 Annual Report on Form 10-K filed with the SEC on May 2, 2005. We continue to apply the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for those plans. No material stock-based employee compensation expense is reflected in net income (loss) for the quarters ended May 1, 2005 or May 2, 2004 as the intrinsic value of all options granted under those plans was zero. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” ($ in thousands, except per share amounts):


			Thirteen Weeks

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