We are the leading retailer, and a leading distributor, of automotive replacement parts and accessories in the
Americas. We began operations in 1979 and at August 28, 2021, operated 6,051 stores in the U.S., 664 stores in Mexicoand 52 stores in Brazil. Each store carries an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. At August 28, 2021, in 5,179 of our domestic stores, we also had a commercial sales program that provides commercial credit and prompt delivery of parts and other products to local, regional and national repair garages, dealers, service stations and public sector accounts. We also have commercial programs in all stores in Mexicoand Brazil. We also sell the ALLDATA brand automotive diagnostic, repair and shop management software through www.alldata.com. Additionally, we sell automotive hard parts, maintenance items, accessories and non-automotive products through www.autozone.com, and our commercial customers can make purchases through www.autozonepro.com. We also provide product information on our Duralast branded products through www.duralastparts.com. We do not derive revenue from automotive repair or installation services. COVID-19 Impact COVID-19 continues to impact numerous aspects of our business. Our sales remain at record levels as we have experienced unprecedented customer demand for our products during the COVID-19 pandemic, as we believe that many of our customers have benefitted from pandemic-related government stimulus and benefits. Our main priority continues to be the health, safety and well-being of our customers and AutoZoners. We continue to invest in supplies for the protection of our employees and customers and increased the frequency of cleaning and disinfecting our stores. For fiscal 2021, we incurred approximately $43.0 millionin pandemic related expenses, including Emergency Time-Off benefit enhancements for both full-time and part-time employees as compared to approximately $83.9 millionin the comparable prior year period. The long-term impact to our business remains unknown as we are unable to accurately predict the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, the likelihood of additional variants and resurgences of the outbreak, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, and unintended consequences of the foregoing. Furthermore, the continuing pandemic and related economic uncertainty may result in prolonged disruption and volatility to our business and magnify certain risks, including risks associated with sourcing quality merchandise domestically and outside the U.S.; our ability to promptly adjust inventory levels to meet fluctuations in customer demand; our ability to comply with complex and evolving laws and regulations related to customers' and AutoZoners' health and safety; our ability to open new store locations and expand or remodel existing stores; and our ability to hire and train qualified employees to address temporary or sustained labor shortages. Executive Summary For fiscal 2021, we achieved record net income of $2.170 billion, a 25.2% increase over the prior year, and sales growth of $1.998 billion, a 15.8% increase over the prior year. Domestic commercial sales increased 22.6%, which represents approximately 23% of our total sales. Both our retail sales and commercial sales grew this past year as we continue to experience unprecedented demand for our products during the COVID-19 pandemic and make progress on our initiatives aimed at improving our ability to say "Yes" to our customers more frequently, drive traffic to our stores and accelerate our commercial growth. Our business is impacted by various factors within the economy that affect both our consumer and our industry, including but not limited to fuel costs, wage rates, supply chain disruptions, hiring and other economic conditions, including for fiscal 2021 and 2020, the effects of, and responses to, COVID-19. Given the nature of these macroeconomic factors, we cannot predict whether or for how long certain trends will continue, nor can we predict to what degree these trends will impact us in the future. 26 Table of Contents One macroeconomic factor affecting our customers and our industry during fiscal 2021 was gas prices. During fiscal 2021, the average price per gallon of unleaded gasoline in the U.S.was $2.62, compared to $2.32during fiscal 2020. We believe fluctuations in gas prices impact our customers' level of disposable income. With approximately 10 billion gallons of unleaded gas consumption each month across the U.S., each $1decrease at the pump contributes approximately $10 billionof additional spending capacity to consumers each month. Given the unpredictability of gas prices, we cannot predict whether gas prices will increase or decrease, nor can we predict how any future changes in gas prices will impact our sales in future periods. We have also experienced continued accelerated pressure on wages in the U.S.during fiscal 2021. Some of this is attributed to regulatory changes in certain states and municipalities, while the larger portion is being driven by general market pressures and some specific actions taken recently by other retailers. The regulatory changes are expected to continue, as evidenced by the areas that have passed legislation to increase employees' wages substantially over the next few years, but we are still assessing to what degree these changes will impact our earnings growth in future periods. During fiscal 2021, failure and maintenance related categories represented the largest portion of our sales mix, at approximately 83% of total sales, with failure related categories continuing to comprise our largest set of categories. While we have not experienced any fundamental shifts in our category sales mix as compared to previous years, in our domestic stores we continue to see a slight increase in mix of sales of the discretionary category as compared to last year. We believe the improvement in this sales category resulted from the pandemic as many of our customers continue to have more time to work on discretionary projects. The two statistics we believe have the closest correlation to our market growth over the long-term are miles driven and the number of seven year old or older vehicles on the road. Miles Driven
We believe as the number of miles driven increases, consumers' vehicles are more likely to need service and maintenance, resulting in an increase in the need for automotive hard parts and maintenance items. While over the long-term we have seen a close correlation between our net sales and the number of miles driven, we have also seen certain time frames of minimal correlation in sales performance and miles driven. During the periods of minimal correlation between net sales and miles driven, we believe net sales have been positively impacted by other factors, including macroeconomic factors and the number of seven year old or older vehicles on the road. Since the beginning of the fiscal year and through
July 2021(latest publicly available information), miles driven in the U.S.decreased by 5.2% compared to the same period in the prior year. We believe this decrease is a result of the pandemic, but we are unable to predict if this decline will continue and are uncertain of the impact it will have to our business.
Vehicles seven years or older
According to the latest data provided by the
U.S. Bureau of Economic Analysis, new light vehicle sales for the year ended August 2021increased 11.5% as compared to the comparable prior year period. We estimate vehicles are driven an average of approximately 12,500 miles each year. In seven years, the average miles driven equates to approximately 87,500 miles. Our experience is that at this point in a vehicle's life, most vehicles are not covered by warranties and increased maintenance is needed to keep the vehicle operating.
According to the latest data provided by the
We expect the aging vehicle population to continue to increase as consumers keep their cars longer in an effort to save money. Additionally, there is increased demand for used vehicles as a result of new vehicle inventory shortages during the COVID-19 pandemic. As the number of seven year old or older vehicles on the road increases, we expect an increase in demand for the products we sell. 27 Table of Contents Results of Operations The following table highlights selected financial information over the last 5 years: Fiscal Year Ended August (in thousands, except per share data, same store sales and selected operating data) 2021(1) 2020(1) 2019(2) 2018(3) 2017 Income Statement Data Net sales
$ 14,629,585 $ 12,631,967 $ 11,863,743 $ 11,221,077 $ 10,888,676Cost of sales, including warehouse and delivery expenses 6,911,800 5,861,214 5,498,742 5,247,331 5,149,056 Gross profit 7,717,785 6,770,753 6,365,001 5,973,746 5,739,620 Operating, selling, general and administrative expenses 4,773,258 4,353,074 4,148,864 4,162,890 3,659,551 Operating profit 2,944,527 2,417,679 2,216,137 1,810,856 2,080,069 Interest expense, net 195,337 201,165 184,804 174,527 154,580 Income before income taxes 2,749,190 2,216,514 2,031,333 1,636,329 1,925,489 Income tax expense(4) 578,876 483,542 414,112 298,793 644,620 Net income(4) $ 2,170,314 $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869Diluted earnings per share(4) $ 95.19 $ 71.93 $ 63.43 $ 48.77 $ 44.07Weighted average shares for diluted earnings per share(4) 22,799 24,093 25,498 27,424 29,065 Same Store Sales Increase in domestic comparable store net sales(5) 13.6 % 7.4 % 3.0 % 1.8 % 0.5 % Balance Sheet Data Current assets $ 6,415,303 $ 6,811,872 $ 5,028,685 $ 4,635,869 $ 4,611,255Operating lease right-of-use assets(6) 2,718,712 2,581,677 - - - Working capital (deficit) (954,451) 528,781 (483,456) (392,812) (155,046) Total assets 14,516,199 14,423,872 9,895,913 9,346,980 9,259,781 Current liabilities 7,369,754 6,283,091 5,512,141 5,028,681 4,766,301 Debt 5,269,820 5,513,371 5,206,344 5,005,930 5,081,238 Finance lease liabilities, less current portion(6) 186,122 155,855 123,659 102,013 102,322 Operating lease liabilities, less current portion(6) 2,632,842 2,501,560 - - - Stockholders' deficit (1,797,536) (877,977) (1,713,851) (1,520,355) (1,428,377) Selected Operating Data Number of locations at beginning of year 6,549 6,411 6,202 6,029 5,814 Sold locations(7) - - - 26 - New locations 219 138 209 201 215 Closed locations 1 - - 2 - Net new locations 218 138 209 199 215 Relocated locations 12 5 2 7 5
Number of locations at end of year 6,767 6,549 6,411 6,202 6,029 AutoZone domestic commercial programs 5,179 5,007 4,893 4,741 4,592 Inventory per location (in thousands) $ 686
$ 683$ 674 $ 636 $ 644 Total AutoZone store square footage (in thousands) 45,057 43,502 42,526 41,066 39,684 Average square footage per AutoZone store 6,658 6,643 6,633 6,621 6,611 Increase in AutoZone store square footage 3.6 % 2.3 % 3.6 % 3.5 % 3.9 % Average net sales per AutoZone store (in thousands) $ 2,160 $ 1,914 $ 1,847 $ 1,778 $ 1,756Net sales per AutoZone store average square foot $ 325 $ 288$ 279 $ 269 $ 266 Total employees at end of year (in thousands) 105 100 96 89 87 Inventory turnover(8) 1.5x 1.3x 1.3x 1.3x 1.4x Accounts payable to inventory ratio 129.6 % 115.3 % 112.6 % 111.8 % 107.4 % After-tax return on invested capital(9) 41.0 % 35.7 % 35.7 % 32.1 % 29.9 % Adjusted debt to EBITDAR(10) 2.0 2.4 2.5 2.5 2.6 Net cash provided by operating activities (in thousands)(4) $ 3,518,543 $ 2,720,108 $ 2,128,513 $ 2,080,292 $ 1,570,612Cash flow before share repurchases and changes in debt (in thousands)(11) $ 3,048,841 $ 2,185,418 $ 1,758,672 $ 1,596,367 $ 1,017,585Share repurchases (in thousands)(12) $ 3,378,321 $ 930,903 $ 2,004,896 $ 1,592,013 $ 1,071,649Number of shares repurchased (in thousands)(12) 2,592 826 2,182 2,398 1,495 28 Table of Contents
(1) The 52 weeks ended
August 28, 2021and August 29, 2020were negatively impacted by pandemic related expenses, including Emergency Time-Off of approximately $43.0 million(pre-tax) and $83.9 million(pre-tax), respectively. (2) The fiscal year ended August 31, 2019consisted of 53 weeks. (3) Fiscal 2018 was negatively impacted by pension termination charges of $130.3 million(pre-tax) recognized in the fourth quarter and asset impairments of $193.2 million(pre-tax) recognized in the second quarter of fiscal 2018. Fiscal 2019 and 2018 also includes a benefit to net income related to the Tax Cuts and Jobs Act of $6.3 millionand $132.1 million, net of repatriation tax, respectively. (4) Fiscal 2021, 2020, 2019, 2018 and 2017 include excess tax benefits from stock option exercises of $56.4 million, $20.9 million, $46.0 million, $31.3 millionand $31.2 million, respectively. (5) The domestic comparable sales increases are based on sales for all AutoZone domestic stores open at least one year. Same store sales are computed on a 52-week basis. Relocated stores are included in the same store sales computation based on the year the original store was opened. Closed store sales are included in the same store sales computation up to the week it closes, and excluded from the computation for all periods subsequent to closing. All sales through our www.autozone.com website, including consumer direct ship-to-home sales, are also included in the computation. (6) The Company adopted ASU 2016-02, Leases (Topic 842), beginning with its first quarter ended November 23, 2019which resulted in the Company recognizing a right-of-use asset ("ROU asset") and a corresponding lease liability on the balance sheet. (7) 26 IMC branches were sold on April 4, 2018. (8) Inventory turnover is calculated as cost of sales divided by the average merchandise inventory balance over the trailing 5 quarters. (9) After-tax return on invested capital is defined as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize leases). For fiscal 2019, after-tax operating profit was adjusted for the impact of the average revaluation of deferred tax liabilities, net of repatriation tax. For fiscal 2018, after-tax operating profit was adjusted for impairment charges, pension termination charges and the impact of the revaluation of deferred tax liabilities, net of repatriation tax. See Reconciliation of Non-GAAP Financial Measures in Management's Discussion and Analysis of Financial Condition and Results of Operations. (10) Adjusted debt to EBITDAR is defined as the sum of total debt, finance lease obligations and annual rents times six; divided by net income plus interest, taxes, depreciation, amortization, rent and share-based compensation expense. For fiscal 2018, net income was adjusted for impairment charges and pension termination charges before tax impact. See Reconciliation of Non-GAAP Financial Measures in Management's Discussion and Analysis of Financial Condition and Results of Operations. (11) Cash flow before share repurchases and changes in debt is defined as the change in cash and cash equivalents less the change in debt plus treasury stock purchases. See Reconciliation of Non-GAAP Financial Measures in Management's Discussion and Analysis of Financial Condition and Results of Operations. (12) During the third quarter of fiscal 2020, the Company temporarily suspended share repurchases under the share repurchase program in response to COVID-19 which was restarted beginning in the first quarter of fiscal 2021. 29 Table of Contents
Fiscal year 2021 compared to fiscal year 2020
For the year ended
August 28, 2021, we operated 6,051 domestic stores, 664 in Mexicoand 52 in Brazil, compared with 5,885 domestic stores, 621 in Mexicoand 43 in Brazilat August 29, 2020. We reported a total auto parts segment (domestic, Mexicoand Brazil) sales increase of 15.9% for fiscal 2021. Gross profit for fiscal 2021 was $7.718 billion, or 52.8% of net sales, an 85 basis point decrease compared with $6.771 billion, or 53.6% of net sales for fiscal 2020. The decrease in gross margin was primarily driven by the initiatives to accelerate growth in our commercial business. Operating, selling, general and administrative expenses for fiscal 2021 increased to $4.773 billion, or 32.6% of net sales, from $4.353 billion, or 34.5% of net sales for fiscal 2020. The reduction in operating expenses as a percentage of sales was driven by strong sales growth and a decrease in pandemic related expenses.
Net interest expense for 2021 was
Our effective income tax rate was 21.1% of pre-tax income for fiscal 2021 compared to 21.8% for fiscal 2020. The decrease in the tax rate was primarily attributable to an increased benefit from stock options exercised during fiscal 2021 compared to fiscal 2020. The benefit of stock options exercised for fiscal 2021 was
$56.4 millioncompared to $20.9 millionfor fiscal 2020 (see "Note D - Income Taxes" in the Notes to Consolidated Financial Statements). Net income for fiscal 2021 increased by 25.2% to $2.170 billion, and diluted earnings per share increased 32.3% to $95.19from $71.93in fiscal 2020. The impact on the fiscal 2021 diluted earnings per share from stock repurchases was an increase of $5.13.
Fiscal year 2020 compared to fiscal year 2019
A discussion of changes in our results of operations from fiscal 2019 to fiscal 2020 has been omitted from this Annual Report on Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended
August 29, 2020, filed with the SECon October 26, 2020, which is available free of charge on the SECs website at www.sec.gov and at www.autozone.com, by clicking "Investor Relations" located at the bottom of the page.
Each of the first three quarters of our fiscal year consists of 12 weeks, and the fourth quarter consisted of 16 weeks in 2021 and 2020 and 17 weeks in 2019. Because the fourth quarter contains seasonally high sales volume and consists of 16 or 17 weeks, compared with 12 weeks for each of the first three quarters, our fourth quarter represents a disproportionate share of our annual net sales and net income. The fourth quarter of fiscal year 2021 represented 33.6% of annual sales and 36.2% of net income; the fourth quarter of fiscal year 2020 represented 36.0% of annual sales and 42.7% of net income; and the fourth quarter of fiscal year 2019 represented 33.6% of annual sales and 35.0% of
net income. 30 Table of Contents
Liquidity and capital resources
The primary source of our liquidity is our cash flows realized through the sale of automotive parts, products, and accessories. Unprecedented customer demand from the impact of the COVID-19 pandemic and continued progress on our initiatives improved our operating performance for the fiscal year, which drove a substantial increase in cash flows from operations. We believe that our cash generated from operating activities, available cash reserves and available credit, supplemented with our long-term borrowings will provide ample liquidity to fund our operations while allowing us to make strategic investments to support long-term growth initiatives and return excess cash to shareholders in the form of share repurchases. As of
August 28, 2021, we held $1.171 billionof cash and cash equivalents, as well as $1.998 billionin undrawn capacity on our revolving credit facility. We believe our sources of liquidity will continue to be adequate to fund our operations and investments to grow our business, repay our debt as it becomes due and fund our share repurchases over the short-term and long-term. In addition, we believe we have the ability to obtain alternative sources of financing, if necessary. Net cash provided by operating activities was $3.519 billionin 2021, $2.720 billionin 2020 and $2.129 billionin 2019. Cash flows from operations are favorable compared to last year primarily due to favorable changes in accounts payable, driven by higher sustained inventory purchase volume in fiscal 2021 as compared to fiscal 2020, and growth in net income due to accelerated sales growth as a result of the pandemic. Our net cash flows used in investing activities were $601.8 millionin fiscal 2021, $497.9 millionin fiscal 2020 and $491.8 millionin fiscal 2019. The increase in net cash used in investing activities in fiscal 2021, compared to fiscal 2020, was due to an increase in capital expenditures. We invested $621.8 millionin capital assets in fiscal 2021, $457.7 millionin fiscal 2020 and $496.1 millionin fiscal 2019. The increase in capital expenditures from fiscal 2020 to fiscal 2021 was primarily driven by increased store openings. We had 218 net new store openings for fiscal 2021, 138 for fiscal 2020 and 209 for fiscal 2019. We invest a portion of our assets held by our wholly owned insurance captive in marketable debt securities. We purchased $63.7 millionin marketable debt securities in fiscal 2021, $90.9 millionin fiscal 2020 and $55.5 millionin fiscal 2019. We had proceeds from the sale of marketable debt securities of $95.4 millionin fiscal 2021, $84.2 millionin fiscal 2020 and $53.1 millionin fiscal 2019. Net cash used in financing activities was $3.5 billionin fiscal 2021, $643.6 millionin fiscal 2020 and $1.674 billionin fiscal 2019. The net cash used in financing activities reflected purchases of treasury stock, which totaled $3.378 billionfor fiscal 2021, $930.9 millionfor fiscal 2020 and $2.005 billionfor fiscal 2019. The increase in purchases of treasury stock for fiscal 2021 in comparison to fiscal 2020 was due to resuming our share repurchase program which was temporarily suspended in fiscal 2020 due to the COVID-19 pandemic. The treasury stock purchases in fiscal 2021, 2020 and 2019 were primarily funded by cash flows from operations. During the year ended August 28, 2021, we repaid our $250 million2.500% Senior Notes due April 2021, which were callable at par in March 2021. We did not issue any new debt in fiscal 2021, and issued $1.850 billionand $750 millionin fiscal 2020 and 2019, respectively. In fiscal 2020, the proceeds from the issuance of debt were used for general corporate purposes, repayment of our outstanding commercial paper and repayment of our $500 millionSenior Notes due in November 2020which were callable at par in August 2020. In fiscal 2019, the proceeds from the issuance of debt were used to repay a portion of our outstanding commercial paper borrowings, our $250 millionSenior Notes due in April 2019and for general corporate purposes. We did not have any commercial paper or short term borrowing activity during fiscal 2021. Net repayments of commercial paper and short term borrowings were $1.030 billionand $295.3 millionfor 2020 and 2019, respectively. During fiscal 2022, we expect to increase the investment in our business as compared to fiscal 2021. Our investments are expected to be directed primarily to expansion of our store base and supply chain to fuel the growth of our domestic and Mexicobusinesses, which includes new stores, including mega hubs, as well as distribution center expansions and remodels. The amount of investments in our new stores is impacted by different factors, including whether the building and land are purchased (requiring higher investment) or leased (generally lower investment) and whether such buildings are located in the U.S., Mexicoor Brazil, or located in urban or rural areas. 31
In fiscal 2021, our capital expenditures increased by approximately 36%, compared to a decrease of 8% and 5%, for fiscal 2020 and 2019 respectively. Fiscal 2021 capital spending increased significantly due to delays in capital spending for the third and fourth quarters of fiscal 2020 related to COVID-19.
In addition to building and land costs, our new stores require working capital, predominantly for inventories. Historically, we have negotiated extended payment terms from suppliers, reducing the working capital required and resulting in a high accounts payable to inventory ratio. We plan to continue leveraging our inventory purchases; however, our ability to do so may be limited by our vendors' capacity to factor their receivables from us. Certain vendors participate in arrangements with financial institutions whereby they factor their AutoZone receivables, allowing them to receive early payment from the financial institution on our invoices at a discounted rate. The terms of these agreements are between the vendor and the financial institution. Upon request from the vendor, we confirm to the vendor's financial institution the balances owed to the vendor, the due date and agree to waive any right of offset to the confirmed balances. A downgrade in our credit or changes in the financial markets may limit the financial institutions' willingness to participate in these arrangements, which may result in the vendor wanting to renegotiate payment terms. A reduction in payment terms would increase the working capital required to fund future inventory investments. Extended payment terms from our vendors have allowed us to continue our high accounts payable to inventory ratio. We had an accounts payable to inventory ratio of 129.6% at
August 28, 2021and 115.3% at August 29, 2020. The increase from fiscal 2020 was primarily due to increased accounts payable purchases with favorable vendor terms and higher inventory turns. Depending on the timing and magnitude of our future investments (either in the form of leased or purchased properties or acquisitions), we anticipate that we will rely primarily on internally generated funds and available borrowing capacity to support a majority of our capital expenditures, working capital requirements and stock repurchases. The balance may be funded through new borrowings. We anticipate we will be able to obtain such financing in view of our credit ratings and favorable experiences in the debt markets in the past. Our cash balances are held in various locations around the world. As of August 28, 2021, and August 29, 2020, cash and cash equivalents of $80.4 millionand $62.4 million, respectively, were held outside of the U.S.and were generally utilized to support the liquidity needs in our foreign operations. For the fiscal year ended August 28, 2021, our adjusted after-tax return on invested capital ("ROIC"), which is a non-GAAP measure, was 41.0% as compared to 35.7% for the comparable prior year period. Adjusted ROIC is calculated as after-tax operating profit (excluding rent charges) divided by invested capital (which includes a factor to capitalize operating leases). We use adjusted ROIC to evaluate whether we are effectively using our capital resources and believe it is an important indicator of our overall operating performance. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for further details
of our calculation. Debt Facilities
We entered into a Master Extension, New Commitment and Amendment Agreement dated as of
November 18, 2017(the "Extension Amendment") to the Third Amended and Restated Credit Agreement dated as of November 18, 2016, as amended, modified, extended or restated from time to time (the "Revolving Credit Agreement"). Under the Extension Amendment: (i) our borrowing capacity under the Revolving Credit Agreement was increased from $1.6 billionto $2.0 billion; (ii) the maximum borrowing under the Revolving Credit Agreement may, at our option, subject to lenders approval, be increased from $2.0 billionto $2.4 billion; (iii) the termination date of the Revolving Credit Agreement was extended from November 18, 2021until November 18, 2022; and (iv) we have the option to make one additional written request of the lenders to extend the termination date then in effect for an additional year. Under the Revolving Credit Agreement, we may borrow funds consisting of Eurodollar loans, base rate loans or a combination of both. Interest accrues on Eurodollar loans at a defined Eurodollar rate, defined as LIBOR plus the applicable percentage, as defined in the Revolving Credit Agreement, depending upon our senior, unsecured, (non-credit enhanced) long-term debt ratings. Interest accrues on base rate loans as defined in the Revolving Credit Agreement. 32
Under our revolving credit agreement, restrictive covenants include restrictions on liens, a maximum debt-to-earnings ratio, a minimum fixed charge coverage ratio, and a change of control clause which may require the acceleration of debt obligations. refund under certain circumstances.
The Revolving Credit Agreement requires that our consolidated interest coverage ratio as of the last day of each quarter shall be no less than 2.5:1. This ratio is defined as the ratio of (i) consolidated earnings before interest, taxes and rents to (ii) consolidated interest expense plus consolidated rents. Our consolidated interest coverage ratio as of
August 28, 2021was 6.9:1. On April 3, 2020, we entered into a 364-Day Credit Agreement (the "364-Day Credit Agreement") to supplement our existing Revolving Credit Agreement. The 364-Day Credit Agreement provided for loans in the aggregate principal amount of up to $750 million. The 364-Day Credit Agreement had a termination date of, and any amounts borrowed under the 364-Day Credit Agreement were due and payable on April 2, 2021. Revolving loans under the 364-Day Credit Agreement could be base rate loans, Eurodollar loans, or a combination of both at our election. Effective February 2021, we terminated the 364-Day Credit Agreement. There were no borrowings outstanding under the 364-Day Credit Agreement. We entered into the 364-Day Agreement to augment our access to liquidity due to the macroeconomic conditions existing at the time, and we determined the additional access to liquidity was no longer necessary. As of August 28, 2021, the $500 million3.700% Senior Notes due April 2022were classified as long-term in the Consolidated Balance Sheets as we had the ability and intent to refinance them on a long-term basis through available capacity in our revolving credit facility. As of August 28, 2021, we had $1.998 billionof availability under our $2.0 billionRevolving Credit Agreement, which would allow us to replace these short-term obligations with a long-term financing facility.
which were redeemable at par in
August 14, 2020, we issued $600 millionin 1.650% Senior Notes due January 2031under our automatic shelf registration statement on Form S-3, filed with the SECon April 4, 2019(File No. 333-230719) (the "2019 Shelf Registration Statement"). The 2019 Shelf Registration Statement allows us to sell an indeterminate amount in debt securities to fund general corporate purposes, including repaying, redeeming or repurchasing outstanding debt and for working capital, capital expenditures, new store openings, stock repurchases and acquisitions. Proceeds from the debt issuance were used for general corporate purposes, including the repayment of the $500 millionin 4.000% Senior Notes due in November 2020that were callable at par in August 2020. On March 30, 2020, we issued $500 millionin 3.625% Senior Notes due April 2025and $750 millionin 4.000% Senior Notes due April 2030under the 2019 Shelf Registration Statement. Proceeds from the debt issuance were used to repay a portion of the outstanding commercial paper borrowings and for other general corporate purposes. On April 18, 2019, we issued $300 millionin 3.125% Senior Notes due April 2024and $450 millionin 3.750% Senior Notes due April 2029under the 2019 Shelf Registration Statement. Proceeds from the debt issuance were used to repay a portion of our outstanding commercial paper borrowings, the $250 millionin 1.625% Senior Notes due in April 2019and for other general corporate purposes. 33 Table of Contents All Senior Notes are subject to an interest rate adjustment if the debt ratings assigned are downgraded (as defined in the agreements). Further, the Senior Notes contain a provision that repayment may be accelerated if we experience a change in control (as defined in the agreements). Our borrowings under our Senior Notes contain minimal covenants, primarily restrictions on liens, sale and leaseback transactions and consolidations, mergers and the sale of assets. All of the repayment obligations under our borrowing arrangements may be accelerated and come due prior to the applicable scheduled payment date if covenants are breached or an event of default occurs. Interest is paid on a semi-annual basis.
We also maintain a letter of credit facility that allows us to request the participating bank to issue letters of credit on our behalf up to an aggregate amount of
$25 million. The letter of credit facility is in addition to the letters of credit that may be issued under the Revolving Credit Agreement. As of August 28, 2021, we had $23.9 millionin letters of credit outstanding under the letter of credit facility which expires in June 2022. In addition to the outstanding letters of credit issued under the committed facility discussed above, we had $136.8 millionin letters of credit outstanding as of August 28, 2021. These letters of credit have various maturity dates and were issued on an uncommitted basis. For the fiscal year ended August 28, 2021, our adjusted debt to earnings before interest, taxes, depreciation, amortization, rent and share-based compensation expense ("EBITDAR") ratio was 2.0:1 as compared to 2.4:1 as of the comparable prior year end. We calculate adjusted debt as the sum of total debt, finance lease liabilities and rent times six; and we calculate adjusted EBITDAR by adding interest, taxes, depreciation, amortization, rent and share-based compensation expense to net income. We target our debt levels to a specified ratio of adjusted debt to EBITDAR in order to maintain our investment grade credit ratings and believe this is important information for the management of our debt levels. Management expects the ratio of adjusted debt to EBITDAR to return to pre-pandemic levels in the future, increasing debt levels. Once the target ratio is achieved, to the extent adjusted EBITDAR increases, we expect our debt levels to increase; conversely, if adjusted EBITDAR decreases, we would expect our debt levels to decrease. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for further details of our calculation.
During 1998, we announced a program permitting us to repurchase a portion of our outstanding shares not to exceed a dollar maximum established by our Board of Directors (the "Board"). On
December 15, 2020, the Board voted to increase the authorization by $1.5 billion. On March 23, 2021, the Board voted to increase the repurchase authorization by an additional $1.5 billion, which raised the total value of shares authorized to be repurchased to $26.15 billion. From January 1998to August 28, 2021, we have repurchased a total of 150.3 million shares at an aggregate cost of $25.732 billion. We repurchased 2.6 million shares of common stock at an aggregate cost of $3.378 billionduring fiscal 2021, 826 thousand shares of common stock at an aggregate cost of $930.9 millionduring fiscal 2020 and 2.2 million shares of common stock at an aggregate cost of $2.005 billionduring fiscal 2019. The increase in purchases of treasury stock for fiscal 2021 compared to fiscal 2020 was due to the temporary suspension of the share repurchase program during fiscal 2020 in order to preserve cash as a result of the uncertainty related to the pandemic. Purchases under the program resumed beginning in the first quarter of fiscal 2021. Considering cumulative repurchases as of August 28, 2021, we had $417.6 millionremaining under the Board's authorization to repurchase our common stock. We will continue to evaluate current and expected business conditions and adjust the level of share repurchases under our share repurchase program as we deem appropriate. 34 Table of Contents For the fiscal year ended August 28, 2021, cash flow before share repurchases and changes in debt was $3.049 billionas compared to $2.185 billionduring the comparable prior year period. Cash flow before share repurchases and changes in debt is calculated as the net increase or decrease in cash and cash equivalents less net increases or decreases in debt (excluding deferred financing costs) plus share repurchases. We use cash flow before share repurchases and changes in debt to calculate the cash flows remaining and available. We believe this is important information regarding our allocation of available capital where we prioritize investments in the business and utilize the remaining funds to repurchase shares, while maintaining debt levels that support our investment grade credit ratings. Refer to the "Reconciliation of Non-GAAP Financial Measures" section for further details of our calculation. On October 5, 2021, the Board voted to authorize the repurchase of an additional $1.5 billionof our common stock in connection with our ongoing share repurchase program. Since the inception of the repurchase program in 1998, the Board has authorized $27.65 billionin share repurchases. Subsequent to August 28, 2021and through October 18, 2021, we have repurchased 220,022 shares of common stock at an aggregate cost of $362.8 million. Considering the cumulative repurchases and the increase in authorization subsequent to August 28, 2021and through October 18, 2021, we have $1.555 billionremaining under the Board's authorization to repurchase its common stock.
The following table shows our significant contractual obligations as of
August 28, 2021: Total Payment Due by Period Contractual Less than Between Between Over (in thousands) Obligations 1 year 1Â3
years 35 years 5 years
$ 5,300,000 $ 500,000 $ 1,100,000 $ 1,300,000 $ 2,400,000Interest payments(2) 911,863 175,025 284,488 214,675 237,675 Operating leases(3) 3,682,998 323,245 672,142 573,073 2,114,538 Finance leases(3) 304,499 91,228 106,969 57,922 48,380 Self-insurance reserves(4) 259,585 95,263 87,953 37,188 39,181 Construction commitments 48,217 48,217 - - - $ 10,507,162 $ 1,232,978 $ 2,251,552 $ 2,182,858 $ 4,839,774
(1) Debt balances represent the main maturities, excluding interest, discounts,
and debt issuance costs.
(2) Represents interest payment obligations on long-term debt.
(3) Operating lease and finance lease obligations include interest
in accordance with ASU 2016-02, Leases (subject 842).
Self-insurance reserves reflect estimates based on actuarial calculations and
are presented net of insurance receivables. Although these bonds do not have (4) scheduled maturities, the timing of future payments is predictable.
based on historical models. Accordingly, we reflect the net present value
of these obligations in our Consolidated Balance Sheets.
Our tax liability for uncertain tax positions, including interest and penalties, was
$31.8 millionat August 28, 2021. Approximately $3.0 millionis classified as current liabilities and $28.8 millionis classified as long-term liabilities. We did not reflect these obligations in the table above as we are unable to make an estimate of the timing of payments of the long-term liabilities due to uncertainties in the timing and amounts of the settlement of these tax positions. 35 Table of Contents
Off-balance sheet provisions
The following table reflects outstanding letters of credit and surety bonds as of
August 28, 2021: Total Other (in thousands) Commitments Standby letters of credit $ 162,393Surety bonds 35,362 $ 197,755
A significant portion of outstanding standby letters of credit (which are mainly renewed on an annual basis) and bonds are used to cover repayment obligations to our workers’ compensation insurers.
There are no additional contingent liabilities associated with these instruments as the underlying liabilities are already reflected in our Consolidated Balance Sheets. The standby letters of credit and surety bond arrangements expire within one year but have automatic renewal clauses.
Reconciliation of non-GAAP financial measures
"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes certain financial measures not derived in accordance with generally accepted accounting principles ("GAAP"). These non-GAAP financial measures provide additional information for determining our optimum capital structure and are used to assist management in evaluating performance and in making appropriate business decisions to maximize stockholders' value. Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows. However, we have presented the non-GAAP financial measures, as we believe they provide additional information that is useful to investors as it indicates more clearly our comparative year-to-year operating results. Furthermore, our management and Compensation Committee of the Board use the above-mentioned non-GAAP financial measures to analyze and compare our underlying operating results and use select measurements to determine payments of performance-based compensation. We have included a reconciliation of this information to the most comparable GAAP measures in the following reconciliation tables. 36
Reconciliation of non-GAAP financial measures: cash flow before share buybacks and changes in debt
The following table reconciles net increase (decrease) in cash and cash equivalents to cash flow before share repurchases and changes in debt, which is presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations": Fiscal Year Ended August (in thousands) 2021 2020 2019 2018 2017 Net cash provided by/(used in): Operating activities
$ 3,518,543 $ 2,720,108 $ 2,128,513 $ 2,080,292 $ 1,570,612Investing activities (601,778) (497,875) (491,846) (521,860) (553,599) Financing activities (3,500,417) (643,636) (1,674,088) (1,632,154) (914,329) Effect of exchange rate changes on cash 4,172 (4,082) (4,103) (1,724) 852 Net increase/(decrease) in cash and cash equivalents (579,480) 1,574,515 (41,524) (75,446) 103,536 Less: increase/(decrease) in debt, excluding deferred financing costs (250,000) 320,000 204,700 (79,800) 157,600 Plus: Share repurchases 3,378,321 930,903(1) 2,004,896 1,592,013 1,071,649 Cash flow before share repurchases and changes in debt $ 3,048,841 $ 2,185,418 $ 1,758,672 $ 1,596,367 $ 1,017,585
(1) During the third quarter of fiscal 2020, the Company temporarily suspended
share repurchases under the share repurchase program in response to COVID-19. 37 Table of Contents
Reconciliation of non-GAAP financial measure: Adjusted after-tax ROI
The following table calculates the percentage of ROIC. ROIC is calculated as after-tax operating profit (excluding rent) divided by invested capital (which includes a factor to capitalize operating leases). The ROIC percentages are presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations": Fiscal Year Ended August (in thousands, except percentage) 2021 2020 2019(1) 2018(2) 2017 Net income
$ 2,170,314 $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869Adjustments: Impairment before tax - - - 193,162 - Pension termination charges before tax - - - 130,263 - Interest expense 195,337 201,165 184,804 174,527 154,580 Rent expense(3) 345,380 329,783 332,726 315,580 302,928 Tax effect(4) (114,091) (115,747) (105,576) (211,806) (153,265) Deferred tax liabilities, net of repatriation tax(5) - - (6,340) (132,113) - Adjusted after-tax return $ 2,596,940 $ 2,148,173 $ 2,022,835 $ 1,807,149 $ 1,585,112Average debt(6) $ 5,416,471 $ 5,375,356 $ 5,126,286 $ 5,013,678 $ 5,061,502Average stockholders' deficit(6) (1,397,892) (1,542,355) (1,615,339) (1,433,196) (1,730,559) Add: Rent x 6(3)(7) 2,072,280 1,978,696 1,996,358 1,893,480 1,817,568 Average finance lease liabilities(6) 237,267 203,998 162,591 156,198 150,066 Invested capital $ 6,328,126 $ 6,015,695$
5 669 896
Adjusted after-tax ROIC 41.0 % 35.7 %
35.7 % 32.1 % 29.9 %
Reconciliation of non-GAAP financial measure: adjusted debt / EBITDAR
The following table calculates the ratio of adjusted debt to EBITDAR. Adjusted debt to EBITDAR is calculated as the sum of total debt, financing lease liabilities and annual rents times six; divided by net income plus interest, taxes, depreciation, amortization, rent and share-based compensation expense. The adjusted debt to EBITDAR ratios are presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations": Fiscal Year Ended August
(in thousands, except ratio) 2021 2020 2019(1)
2018 (2) 2017
$ 2,170,314 $ 1,732,972 $ 1,617,221 $ 1,337,536 $ 1,280,869Add: Impairment before tax - - - 193,162 - Pension termination charges before tax - - - 130,263 - Add: Interest expense 195,337 201,165 184,804 174,527 154,580 Income tax expense 578,876 483,542 414,112 298,793 644,620 Adjusted EBIT 2,944,527 2,417,679 2,216,137 2,134,281 2,080,069 Add: Depreciation and amortization expense 407,683 397,466 369,957 345,084 323,051 Rent expense(3) 345,380 329,783 332,726 315,580 302,928 Share-based expense 56,112 44,835 43,255 43,674 38,244 Adjusted EBITDAR $ 3,753,702 $ 3,189,763 $ 2,962,075 $ 2,838,619 $ 2,744,292Debt $ 5,269,820 $ 5,513,371 $ 5,206,344 $ 5,005,930 $ 5,081,238Financing lease liabilities 276,054 223,353 179,905 154,303 150,456 Add: Rent x 6(3)(7) 2,072,280 1,978,696 1,996,358 1,893,480 1,817,568 Adjusted debt $ 7,618,154 $ 7,715,420 $ 7,382,607 $ 7,053,713 $ 7,049,262Adjusted debt to EBITDAR 2.0 2.4 2.5 2.5 2.6 38 Table of Contents
(1) The financial year ended
(2) For the 2018 financial year, operating income after tax has been restated for impairment
pension settlement charges and fees.
842), the new standard for accounting for leases which required the Company to
recognize operating lease assets and liabilities on the balance sheet. Table (3) below shows the calculation of rental charges and reconciles the rents
charge at total rental cost, per ASC 842, the most directly comparable GAAP
financial measure, for the 52 weeks ended,
August 28, 2021and August 29, 2020. For the year ended (in thousands) August 28,2021 August 29,2020 Total lease cost, per ASC 842, for the trailing four quarters $ 427,443$
Less: Finance lease interest and amortization (56,334)
Less: Variable operating lease components, related to insurance and common area maintenance (25,729)
Rent charges for the last four quarters
For fiscal years 2021, 2020 and 2019, the effective tax rate was 21.1%, 21.8% and (4) 20.4%, respectively. The effective tax rate during the 2018 financial year was 24.2% for
depreciation, 28.1% for termination of pension and 26.2% for interest and rent
costs. For fiscal 2017, the effective tax rate was 33.5%.
For fiscal years 2019 and 2018, operating profit after tax was adjusted (5) for the impact of the revaluation of deferred tax liabilities, net of
(6) All averages are calculated on the basis of the last five quarters.
(7) The rent is multiplied by six to capitalize the operating leases in the
determination of pre-tax invested capital.
Recent accounting positions
See Note A of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Critical accounting conventions and estimates
Preparation of our Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent liabilities. In the Notes to our Consolidated Financial Statements, we describe our significant accounting policies used in preparing the Consolidated Financial Statements. Our policies are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under different assumptions or conditions. Our senior management has identified the critical accounting policies for the areas that are materially impacted by estimates and assumptions and have discussed such policies with the Audit Committee of our Board. The following items in our Consolidated Financial Statements represent our critical accounting policies that require significant estimation or judgment by management:
We retain a significant portion of the risks associated with workers' compensation, general, product liability, property and vehicle liability; and we obtain third party insurance to limit the exposure related to certain of these risks. Our self-insurance reserve estimates totaled
$284.0 millionat August 28, 2021, and $288.6 millionat August 29, 2020. Where estimates are possible, losses covered by insurance are recognized on a gross basis with a corresponding insurance receivable. 39 Table of Contents The assumptions made by management in estimating our self-insurance reserves include consideration of historical cost experience, judgments about the present and expected levels of cost per claim and retention levels. We utilize various methods, including analyses of historical trends and use of a specialist, to estimate the cost to settle reported claims and claims incurred but not yet reported. The actuarial methods develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet date. When estimating these liabilities, we consider factors, such as the severity, duration and frequency of claims, legal costs associated with claims, healthcare trends and projected inflation of related factors. In recent history, our methods for determining our exposure have remained consistent, and our historical trends have been appropriately factored into our reserve estimates. As we obtain additional information and refine our methods regarding the assumptions and estimates we use to recognize liabilities incurred, we will adjust our reserves accordingly. Management believes that the various assumptions developed and actuarial methods used to determine our self- insurance reserves are reasonable and provide meaningful data and information that management uses to make its best estimate of our exposure to these risks. Arriving at these estimates, however, requires a significant amount of subjective judgment by management, and as a result these estimates are uncertain and our actual exposure may be different from our estimates. For example, changes in our assumptions about healthcare costs, the severity of accidents and the incidence of illness, the average size of claims and other factors could cause actual claim costs to vary materially from our assumptions and estimates, causing our reserves to be overstated or understated. For instance, a 10% change in our self-insurance liability would have affected net income by approximately $19.1 millionfor fiscal 2021. Our liabilities for workers' compensation, general and product liability, property and vehicle claims do not have scheduled maturities; however, the timing of future payments is predictable based on historical patterns and is relied upon in determining the current portion of these liabilities. Accordingly, we reflect the net present value of the obligations we determine to be long-term using the risk-free interest rate as of the balance sheet date.
If the discount rate used to calculate the present value of these reserves varied by 25 basis points, net income would have been affected by approximately
Income Taxes Our income tax returns are audited by state, federal and foreign tax authorities, and we are typically engaged in various tax examinations at any given time. Tax contingencies often arise due to uncertainty or differing interpretations of the application of tax rules throughout the various jurisdictions in which we operate. The contingencies are influenced by items such as tax audits, changes in tax laws, litigation, appeals and prior experience with similar tax positions. We regularly review our tax reserves for these items and assess the adequacy of the amount we have recorded. As of
August 28, 2021, we had approximately $31.8 millionreserved for uncertain tax positions. We evaluate exposures associated with our various tax filings by estimating a liability for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We believe our estimates to be reasonable and have not experienced material adjustments to our reserves in the previous three years; however, actual results could differ from our estimates, and we may be exposed to gains or losses that could be material. Specifically, management has used judgment and made assumptions to estimate the likely outcome of uncertain tax positions. Additionally, to the extent we prevail in matters for which a liability has been established, or must pay in excess of recognized reserves, our effective tax rate in any particular period could be materially affected. 40 Table of Contents Vendor Allowances We receive various payments and allowances from our vendors through a variety of programs and arrangements, including allowances for warranties, advertising and general promotion of vendor products. Vendor allowances are treated as a reduction of the cost of inventory, unless they are provided as a reimbursement of specific, incremental, identifiable costs incurred by the Company in selling the vendor's products. Approximately 85% of the vendor funds received during fiscal 2021 were recorded as a reduction of the cost of inventories and recognized as a reduction to cost of sales as these inventories are sold. Based on our vendor agreements, a significant portion of vendor funding we receive is earned as we purchase inventory. Therefore, we record receivables for funding earned but not yet received as we purchase inventory. During the year, we regularly review the receivables from vendors to ensure vendors are able to meet their obligations. We generally have not recorded a reserve against these receivables as we have not experienced significant losses and typically have a legal right of offset with our vendors for payments owed them. Historically, we have had write-offs less than $1 millionin each of the last three years.
Article 7A. Quantitative and qualitative information on market risk
We are exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel prices. From time to time, we use various derivative instruments to reduce interest rate and fuel price risks. To date, based upon our current level of foreign operations, no derivative instruments have been utilized to reduce foreign exchange rate risk. All of our hedging activities are governed by guidelines that are authorized by the Board. Further, we do not buy or sell derivative instruments for trading purposes.
Interest rate risk
Our financial market risk results primarily from changes in interest rates. At times, we reduce our exposure to changes in interest rates by entering into various interest rate hedge instruments such as interest rate swap contracts, treasury lock agreements and forward-starting interest rate swaps. We have historically utilized interest rate swaps to convert variable rate debt to fixed rate debt and to lock in fixed rates on future debt issuances. We reflect the current fair value of all interest rate hedge instruments as a component of either other current assets or accrued expenses and other. Our interest rate hedge instruments are designated as cash flow hedges. As of
August 28, 2021and August 29, 2020no such interest rate swaps were outstanding. Unrealized gains and losses on interest rate hedges are deferred in stockholders' deficit as a component of Accumulated Other Comprehensive Loss. These deferred gains and losses are recognized in income as a decrease or increase to interest expense in the period in which the related cash flows being hedged are recognized in expense. However, to the extent that the change in value of an interest rate hedge instrument does not perfectly offset the change in the value of the cash flow being hedged, that ineffective portion is immediately recognized in earnings. The fair value of our debt was estimated at $5.683 billionas of August 28, 2021, and $6.081 billionas of August 29, 2020, based on the quoted market prices for the same or similar debt issues or on the current rates available to us for debt having the same remaining maturities. Such fair value is greater than the carrying value of debt by $413.1 millionand $567.5 millionat August 28, 2021and August 29, 2020, respectively, which reflects its face amount, adjusted for any unamortized debt issuance costs and discounts.
We had no variable rate debt outstanding at
We had outstanding fixed rate debt of
$5.270 billion, net of unamortized debt issuance costs of $30.2 million, at August 28, 2021, and $5.513 billion, net of unamortized debt issuance costs of $36.6 million, at August 29, 2020. A one percentage point increase in interest rates would have reduced the fair value of our fixed rate debt by approximately $258.3 millionat August 28,
2021. 41 Table of Contents Foreign Currency Risk Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than our entities' functional currencies. To minimize our risk, we generally enter into transactions denominated in the respective functional currencies. We are exposed to Brazilian reals, Canadian dollars, euros, Chinese yuan renminbi and British pounds, but our primary foreign currency exposure arises from Mexican peso-denominated revenues and profits and their translation into
U.S.dollars. Foreign currency exposures arising from transactions denominated in currencies other than the functional currency are not material. We view our investments in Mexican subsidiaries as long-term. As a result, we generally do not hedge these net investments. The net asset exposure in the Mexican subsidiaries translated into U.S.dollars using the year-end exchange rates was $310.1 millionat August 28, 2021and $293.1 millionat August 29, 2020. The year-end exchange rates with respect to the Mexican peso increased by approximately 10% with respect to the U.S.dollar during fiscal 2021 and decreased by approximately 10% with respect to the U.S.dollar during fiscal 2020. The potential loss in value of our net assets in the Mexican subsidiaries resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates at August 28, 2021and August 29, 2020, would have been approximately $28.2 millionand approximately $26.6 million, respectively. Any changes in our net assets in the Mexican subsidiaries relating to foreign currency exchange rates would be reflected in the foreign currency translation component of Accumulated Other Comprehensive Loss, unless the Mexican subsidiaries are sold or otherwise disposed. A hypothetical 10 percent adverse change in average exchange rates would not have a material impact on our results of operations. 42 Table of Contents
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