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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number 001-13927

CSK Auto Corporation

(602) 265-9200

N/A

     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 September 7, 2004, CSK Auto Corporation had 45,278,966 shares of common stock outstanding.

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PART I

FINANCIAL INFORMATION

CSK AUTO CORPORATION AND SUBSIDIARIES

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

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CSK AUTO CORPORATION AND SUBSIDIARIES

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

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CSK AUTO CORPORATION AND SUBSIDIARIES

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

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CSK AUTO CORPORATION AND SUBSIDIARIES

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

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CSK AUTO CORPORATION AND SUBSIDIARIES

      CSK Auto Corporation is a holding company. At August 1, 2004, 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 August 1, 2004, we operated 1,123 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 presentation 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 February 1, 2004 (fiscal 2003), as included in our Annual Report on Form 10-K filed with the SEC on April 15, 2004.

      Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation. This has no impact on our previously reported financial position, results of operations or cash flows.

Note 2 — Recent Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities”, which addressed accounting for special-purpose and variable interest entities. In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities”, which superseded FIN 46. The effective date of FIN 46R is the end of the first reporting period that ends after March 15, 2004, unless the entity is considered to be a special-purpose entity. Companies that have adopted FIN 46 prior to the effective date of FIN 46R will either continue to apply FIN 46 until the effective date of FIN 46R or apply the provision of FIN 46R at an earlier date. We have adopted the provisions of FIN 46R with no impact on our financial statements.

Note 3 — Inventories

      Inventories are valued at the lower of cost or market, our costs being determined utilizing the Last-in First-out (“LIFO”) method. Under the LIFO method, costs of sales reflect the costs of the most recently purchased inventories. Inventory carrying balances on the other hand, reflect the costs relating to prices paid in prior years under the LIFO method. Our costs of acquiring inventories through normal purchasing activities have been moderately decreasing, as our increased size, financial performance and cash flows have enabled us to take advantage of volume discounts and lower product acquisition costs. Accordingly, it costs us less money to replace inventory today than the LIFO balances carried for similar inventory in our financial statements.

      The replacement cost of inventories, including the capitalization of certain purchase related costs, was approximately $580.2 million and $552.0 million at August 1, 2004 and February 1, 2004, respectively, as compared to financial statement carrying values of $695.4 million and $666.3 million. While financial statement carrying balances are higher than replacement costs, such carrying balances are not higher than the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

net realizable value amount (“NRV”) we expect to earn by selling the inventory through our retail stores in the normal course of business. Under generally accepted accounting principles, NRV reflects the expected selling price of the inventories, less selling costs and a normal profit margin to compute our NRV floor.

      We evaluate the difference between carrying balances and NRV of our inventories at each balance sheet reporting date. At August 1, 2004, we estimated that the NRV of our inventories exceeded carrying balances by approximately $1.0 million. Though not anticipated at this time, if our evaluation in a future period indicated that carrying balances exceeded the NRV of the inventories, the carrying balances of the inventory would be reduced to NRV, with a corresponding charge to operations.

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 performance, it is considered for closure. As a result of past acquisitions, we have closed numerous locations due to store overlap with previously existing store locations.

      We account for the costs of closed stores in accordance with Statement of Financial Accounting Standard (“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 recognized as expense at fair value at the time 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 August 1, 2004, we had a total of 148 store locations included in the allowance for store closing costs. Of this total, 13 locations were vacant and 135 locations were subleased. In addition to these stores, we had 55 service centers of which 3 were vacant and 52 were subleased. Future rental payments will be made through the expiration of the non-cancelable leases, the longest of which runs through January 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Activity in the allowance for store closings and the related payments for the first half of fiscal 2004 are as follows ($ in thousands):

      We expect cash outflows for vacant stores (which includes certain operating expenses that are expensed as incurred), sublease losses and lease buyouts to be approximately $7.0 million during fiscal 2004. We expect the remainder of cash outflows relating to these stores to occur primarily during fiscal 2005 through fiscal 2007.

Note 5 — Debt

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

      On August 10, 2004, we amended our senior credit facility to provide for an immediate reduction of the interest rate on the term loan of 25 basis points and an opportunity for an additional 25 basis points reduction of the interest rate on such term loan upon the achievement of certain conditions, as more particularly set forth in the amendment. The amendment also provides for a one-year extension of the term loan maturity to August 2010.

      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 6 month

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 August 1, 2004, the fair value of the interest rate swap approximated $8.6 million, 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.

Note 6 — Earnings Per Share

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

Note 7 — Stock Based Compensation

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires expanded and more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results.

      We have stock-based employee compensation plans, which are described more fully in Note 11 of the Notes to Consolidated Financial Statements in our 2003 Annual Report on Form 10-K filed with the SEC on April 15, 2004. 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 for the thirteen or twenty-six weeks ended August 1, 2004 or August 3, 2003 as the intrinsic value of all options granted under those plans was zero. The following table illustrates the effect on net income and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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):

      During the second quarter of fiscal 2004, our stockholders approved a new Stock and Incentive Plan which allows for the issuance of a variety of equity-based awards, including stock options and restricted stock.

Note 8 — Stock Repurchase Program

      On June 8, 2004, our Board of Directors approved a share repurchase program that authorized our purchase of shares of our common stock with an aggregate purchase price not to exceed $25.0 million. The program provides that we may buy shares in the open market or in privately negotiated transactions and that we will base our decisions on whether to repurchase shares and the timing of any such repurchases on factors including the stock price, our cash and debt levels, and general economic and market conditions. Shares of stock repurchased under the program will be retired and returned to the status of authorized and unissued shares. This program will expire in December 2005. During the second quarter of fiscal 2004, we repurchased approximately 1.3 million shares of our common stock at a cost of approximately $19.8 million under this program.

Note 9 — Legal Matters

      During the third quarter of fiscal 2003, we received notification from the State of California Board of Equalization (the “Board”) of an assessment for approximately $1.2 million for sales tax and approximately $0.6 million for related interest based on the Board’s audit findings for the tax periods of October 1997 through September 2000. During this time period, we refunded the sales tax associated with battery cores to customers who returned a battery core to our stores. The Board believes that the sales tax associated with the battery cores should have been remitted to the taxing authority rather than refunded to the customers. Based on the Board’s position, we could be responsible for the sales tax and related interest associated with this matter for the audited periods of October 1997 through September 2000, plus the additional unaudited time period through December 2002, when we changed our business practices in this area to mitigate potential future tax related liability.

      We believe that we have a strong basis under California law for disputing the payment of this assessment, and in October 2003 we timely filed a Petition for Redetermination with the Board. In May 2004, we received a response from the Board indicating that the district office that conducted the audit upheld its position and requested confirmation of our desire to proceed with the scheduling of an appeals conference concerning this

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

matter. We responded affirmatively to the Board’s letter in May 2004 and are presently waiting for formal scheduling by the Board of an appeals conference before an appeals division attorney or auditor. Our practices through December 2002 relative to the handling of taxes on battery cores had been consistent for over a decade, and it is our position that our consistent treatment of battery core charges, together with prior tax audits and tax auditors’ written commentary concerning our handling of such charges, permits us to rely upon precedent set in prior audits. Reliance on prior audits is a position that is supportable under California law. We also have other defenses and intend to vigorously defend our position with regard to this matter. A liability for the potential sales tax and related interest payments has not been recorded in our consolidated financial statements.

      We currently and from time to time are involved in other litigation incidental to the conduct of our business, including asbestos and similar product liability claims, slip and fall and other general liability claims, discrimination and employment claims, vendor disputes, and miscellaneous environmental and real estate claims. The damages claimed in some of this litigation are substantial. Based on internal review, we accrue reserves using our best estimate of the probable and reasonably estimable contingent liabilities. We do not currently believe that any of the legal claims, individually or in the aggregate, will result in liabilities material to our consolidated financial position, results of operations or cash flows.

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     Overview

      CSK Auto Corporation is the largest specialty retailer of automotive parts and accessories in the Western United States and one of the largest retailers of these products in the United States based, in each case, on our number of stores. As of August 1, 2004, through our wholly owned subsidiary CSK Auto, Inc., we operated 1,123 stores in 19 states under one fully integrated operating format and three brand names:

	•	Checker Auto Parts, founded in 1969, with 419 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;
	•	Schucks Auto Supply, founded in 1917, with 225 stores in the Pacific Northwest and Alaska; and
	•	Kragen Auto Parts, founded in 1947, with 479 stores primarily in California.

      In the following discussion, we refer to the thirteen and twenty-six week periods ended on August 1, 2004 and August 3, 2003, respectively, as the “second quarter” and “first half” of those respective fiscal years.

      During the first half of fiscal 2004, we opened 16 stores, relocated 4 stores and closed 7 stores in addition to the 4 stores closed upon relocation. Our goal for fiscal 2004 is to open approximately 45 stores, consisting of approximately 35 new stores and 10 relocated stores. During fiscal 2004, we expect to close approximately 10 stores (in addition to approximately 10 stores closed due to relocation) for a net increase of approximately 25 stores.

      During the first half of fiscal 2004, we were faced with many challenges. We experienced 5.2% same store sales increases during the first quarter of fiscal 2004 and same store sales decreases of 2.5% during the second quarter of fiscal 2004. We believe our sales during the second quarter of fiscal 2004 were negatively impacted by higher gas prices and milder summer temperatures in many of our key markets. Despite the sales environment, our gross profit rate increased almost 50 basis points compared to the same period last year. Our inventory management process allowed us to effectively control our inventory with only a slight increase compared to the same period last year. We will continue to: (1) analyze our operating and administrative expenses to further reduce our cost structure; (2) review and refine our core product categories, such as batteries, brakes, shocks, starters and alternators, to ensure that we are meeting our customers’ expectations; (3) add new product offerings as we deem appropriate to give our customers additional reasons to shop our stores; and (4) review our marketing programs, sales promotions, event marketing and sports sponsorships to build customer awareness and help increase store traffic. Our primary objective is to remain focused on our long-term goals and initiatives of: (1) reducing our debt while maximizing our return on investment; (2) accelerating our store growth; (3) continuing to strengthen our vendor partnerships to reduce costs from the supply chain and reduce our merchandise inventory; and (4) reducing our operating and administrative expenses.

      Automotive Information Systems, Inc. (“AIS”) is a wholly owned subsidiary of CSK Auto, Inc. that provides diagnostic vehicle repair information to automotive technicians, automotive replacement parts manufacturers, automotive test equipment manufacturers, and to DIY consumers. We are continuing to examine alternatives that will allow us to maximize the potential value of AIS without significantly increasing our capital commitment. Possibilities include joint ventures or a sale in a manner that would allow us to retain certain of the attributes of AIS we deem most valuable to our business. We do not anticipate that any potential transaction will have a material effect on our fiscal 2004 consolidated results of operations or our financial condition.

      The following discussion and analysis presents factors that affected our consolidated results of operations for the thirteen and twenty-six weeks ended August 1, 2004 and our consolidated financial position at that date. The following information should be read in conjunction with the Consolidated Financial Statements and Notes included in this Form 10-Q as well as our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on April 15, 2004.

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      The following table expresses the statements of operations as a percentage of sales for the periods shown:

Thirteen Weeks Ended August 1, 2004 Compared to Thirteen Weeks Ended August 3, 2003

      Net sales for the second quarter of fiscal 2004 decreased 2.3% to $409.1 million from $418.5 million for the second quarter of fiscal 2003. Same store sales decreased 2.5% (negative 2.5% for retail and negative 2.7% for commercial). We believe our sales during the second quarter of fiscal 2004 were negatively impacted by higher gas prices and milder summer temperatures in many of our key markets. During the quarter we experienced weaker than anticipated demand for products in heat-related categories (for example, air conditioning, cooling accessories, batteries, starters, alternators and water pumps).

      Gross profit was $191.3 million, or 46.8% of net sales, for the second quarter of fiscal 2004 as compared to $193.7 million, or 46.3% of net sales, for the second quarter of fiscal 2003. Gross profit dollars were lower due to our decline in sales. Gross profit, as a percent to sales, increased during the quarter primarily due to lower acquisition costs on selected products, improvements in our balance of sales through our category management systems, and reduced store inventory shrinkage as a result of improved store procedures and enhanced inventory control systems.

      Operating and administrative expenses were $160.4 million or 39.2% of net sales in the second quarter of fiscal 2004, compared to $158.5 million or 37.9% of net sales in the second quarter of fiscal 2003. The increase is primarily attributable to higher payroll rates and benefit-related expenses.

      Interest expense for the second quarter of fiscal 2004 decreased to $7.6 million from $13.3 million in the second quarter of fiscal 2003 primarily as a result of the lower interest rate and corresponding reduced interest expense associated with our January 2004 refinancing.

      Income tax expense for the second quarter of fiscal 2004 was $8.9 million, compared to $6.8 million for the comparable period of fiscal 2003. Our effective tax rate increased slightly to 39.0% from 38.6% primarily as a result of the non-deductibility of certain employee benefits and a reduction in employment based state tax credits as a percentage of pretax income.

      Net income increased to $13.9 million, or $0.30 per diluted common share, for the second quarter of fiscal 2004, compared to net income of $10.8 million, or $0.24 per diluted common share, for the second quarter of fiscal 2003.

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Twenty-six Weeks Ended August 1, 2004 Compared to Twenty-six Weeks Ended August 3, 2003

      Net sales for the first half of fiscal 2004 increased 1.3% to $806.1 million from $796.0 million for the first half of fiscal 2003. Same store sales increased 1.1% (1.1% for retail and 1.5% for commercial). During the first quarter of fiscal 2004 same store sales increased 5.2% and were strong in core product categories such as batteries, brakes, shocks and rotating electric parts. We believe our sales during the second quarter of fiscal 2004 were negatively impacted by higher gas prices and milder summer temperatures in many of our key markets. Same store sales decreased primarily due to weak demand for products in heat-related categories.

      Gross profit was $379.9 million, or 47.1% of net sales, for the first half of fiscal 2004 as compared to $368.7 million, or 46.3% of net sales, for the first half of fiscal 2003. The increased gross profit margin dollars and percent are a result of our continuing efforts to lower the acquisition costs of our core products and our ability to source our promotional products at more favorable terms. In addition, we have reduced our store inventory shrinkage through improved store procedures and enhanced inventory control systems.

      Operating and administrative expenses were $319.2 million or 39.6% of net sales in the first half of fiscal 2004, compared to $307.2 million or 38.6% of net sales in the first half of fiscal 2003. The increase year over year is primarily attributable to increased store count and higher payroll rates and benefit-related costs.

      Interest expense for the first half of fiscal 2004 decreased to $15.8 million from $27.2 million in the first half of fiscal 2003 primarily as a result of the lower interest rate and corresponding reduced interest expense associated with our January 2004 refinancing.

      Income tax expense for the first half of fiscal 2004 was $17.2 million, compared to $11.6 million for the comparable period of fiscal 2003. Our effective tax rate increased slightly to 39.1% from 38.7% primarily as a result of the non-deductibility of certain employee benefits and a reduction in employment based state tax credits as a percentage of pretax income.

      Net income increased to $26.8 million, or $0.57 per diluted common share, for the first half of fiscal 2004, compared to net income of $18.3 million, or $0.41 per diluted common share, for the first half of fiscal 2003.

Liquidity and Capital Resources

      Our primary cash requirements include working capital (primarily inventory), interest on our debt and capital expenditures. We are required to make only minimal debt amortization payments prior to fiscal 2009 other than capital lease payments. We intend to fund our cash requirements with cash flows from operating activities, borrowings under our senior credit facility and short-term trade credit relating to extended payment terms for inventory purchases. The following table outlines our liquidity:

      Availability under our revolving line of credit decreased during the first half of fiscal 2004 relative to prior periods, primarily due to the issuance of letters of credit relating to our increased purchases of import products.

      On August 10, 2004, we amended our senior credit facility to provide for an immediate reduction of the interest rate on the term loan of 25 basis points and an opportunity for an additional 25 basis points reduction of the interest rate on such term loan upon the achievement of certain conditions, as more particularly set forth in the amendment. The amendment also provides for a one-year extension of the term loan maturity to

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      On June 8, 2004, our Board of Directors approved a share repurchase program that authorized the purchase of shares of our common stock with an aggregate purchase price not to exceed $25.0 million. The program provides that we may buy shares in the open market or in privately negotiated transactions and that we will base our decisions on whether to repurchase shares and the timing of any such repurchases on factors including the stock price, our cash and debt levels, and general economic and market conditions. Shares of stock repurchased under the program will be retired and returned to the status of authorized and unissued shares. This program will expire in December 2005. During the second quarter of fiscal 2004, we repurchased approximately 1.3 million shares of our common stock at a cost of approximately $19.8 million under this program.

      We lease our office and warehouse facilities, all but one of our retail stores, and much of our equipment. Substantially all of our store leases are operating leases with private landlords and provide for monthly rental payments based on a contractual amount. These leases generally require minimal initial cash outlay and we expect that substantially all of our new store locations will be leased pursuant to similar operating leases.

      In order to facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided ($ in thousands):

(1)	Represents the period from August 2, 2004 to January 30, 2005.
(2)	Change from fiscal year 2003 annual report due to the extension of our term loan to August 10, 2010.
(3)	Operating lease obligations are not reduced to reflect sublease income. Changes from fiscal year 2003 annual report due primarily to new stores and lease extensions.

      Other commercial commitments consist of standby letters of credit totaling $31.4 million, the latest of which expire in April 2005. Our inventory purchase commitments are cancelable and therefore not included in the above table.

Analysis of Cash Flows

      The following table summarizes our cash flows from operating activities: