Pension and Savings Plans

12 Months Ended

Aug. 25, 2012

Pension and Savings Plans

Note L – Pension and Savings Plans

Prior to January 1, 2003, substantially all full-time employees were covered by a defined benefit pension plan. The benefits under the plan were based on years of service and the employee’s highest consecutive five-year average compensation. On January 1, 2003, the plan was frozen. Accordingly, pension plan participants will earn no new benefits under the plan formula and no new participants will join the pension plan.

On January 1, 2003, the Company’s supplemental defined benefit pension plan for certain highly compensated employees was also frozen. Accordingly, plan participants will earn no new benefits under the plan formula and no new participants will join the pension plan.

The Company has recognized the unfunded status of the defined pension plans in its Consolidated Balance Sheets, which represents the difference between the fair value of pension plan assets and the projected benefit obligations of its defined benefit pension plans. The net unrecognized actuarial losses and unrecognized prior service costs are recorded in Accumulated other comprehensive loss. These amounts will be subsequently recognized as net periodic pension expense pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension expense in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension expense on the same basis as the amounts previously recognized in Accumulated other comprehensive loss.

The Company’s investment strategy for pension plan assets is to utilize a diversified mix of domestic and international equity and fixed income portfolios to earn a long-term investment return that meets the Company’s pension plan obligations. The pension plan assets are invested primarily in listed securities, and the pension plans hold only a minimal investment in AutoZone common stock that is entirely at the discretion of third-party pension fund investment managers. The Company’s largest holding classes, U.S. equities and fixed income bonds, are invested with a fund manager that holds diversified portfolios. Accordingly, the Company does not have any significant concentrations of risk in particular securities, issuers, sectors, industries or geographic regions. Alternative investment strategies are in the process of being liquidated and constitute less than 2% of the pension plan assets. The Company’s investment managers are prohibited from using derivatives for speculative purposes and are not permitted to use derivatives to leverage a portfolio.

The following is a description of the valuation methodologies used for the Company’s investments measured at fair value:

U.S., international, emerging, and high yield equities – These investments are commingled funds and are valued using the net asset values, which are determined by valuing investments at the closing price or last trade reported on the major market on which the individual securities are traded. These investments are subject to annual audits.

Alternative investments – This category represents a hedge fund of funds made up of 16 different hedge fund managers diversified over 9 different hedge strategies. The fair value of the hedge fund of funds is determined using valuations provided by the third party administrator for each of the underlying funds.

Real estate – The valuation of these investments requires significant judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. These investments are valued based upon recommendations of our investment manager incorporating factors such as contributions and distributions, market transactions, and market comparables.

Fixed income securities – The fair values of corporate, U.S. government securities and other fixed income securities are estimated by using bid evaluation pricing models or quoted prices of securities with similar characteristics.

Cash and cash equivalents – These investments include cash equivalents valued using exchange rates provided by an industry pricing vendor and commingled funds valued using the net asset value. These investments also include cash.

The fair values of investments by level and asset category and the weighted-average asset allocations of the Company’s pension plans at the measurement date are presented in the following table:

	August 25, 2012
	Fair Value		Asset Allocation						Fair Value Hierarchy
(in thousands)			Actual			Target			Level 1		Level 2		Level 3
U.S. equities	$	51,101		28.2	%		30.0	%	$	—	$	51,101	$	—
International equities		31,767		17.5			20.0			—		31,767		—
Emerging equities		16,471		9.1			10.0			—		16,471		—
High yield equities		17,378		9.6			10.0			—		17,378		—
Alternative investments		2,404		1.3			—			—		—		2,404
Fixed income securities		47,667		26.3			30.0			—		47,667		—
Cash and cash equivalents		14,621		8.0			—			—		14,621		—
	$	181,409		100.0	%		100.0	%	$	—	$	179,005	$	2,404

	August 27, 2011
	Fair Value		Asset Allocation						Fair Value Hierarchy
(in thousands)			Actual			Target			Level 1		Level 2		Level 3
U.S. equities	$	40,092		25.5	%		30.0	%	$	—	$	40,092	$	—
International equities		28,378		18.1			20.0			—		28,378		—
Emerging equities		12,086		7.7			10.0			—		12,086		—
High yield equities		12,547		8.0			10.0			—		12,547		—
Alternative investments		2,807		1.8			—			—		—		2,807
Real estate		2,474		1.6			—			—		—		2,474
Fixed income securities		27,321		17.4			30.0			—		27,321		—
Cash and cash equivalents		31,178		19.9			—			—		31,178		—
	$	156,883		100.0	%		100.0	%	$	—	$	151,602	$	5,281

The August 25, 2012 actual asset allocation in the chart above includes an $8.7 million cash contribution made prior to August 25, 2012. Subsequent to August 25, 2012, this cash contribution was allocated to the pension plan investments in accordance with the targeted asset allocation.

In August 2011, the Company’s Investment Committee approved a revised asset allocation target for the investments held by the pension plan. Based on the revised asset allocation target, the expected long-term rate of return on plan assets changed from 8.0% in fiscal 2011 to 7.5% for the year ending August 25, 2012. The August 27, 2011 actual asset allocation in the chart above includes a $28.3 million cash contribution made prior to August 27, 2011. Subsequent to August 27, 2011, this cash contribution was allocated to the pension plan investments to achieve the revised asset allocation target.

The change in fair value of Level 3 assets that use significant unobservable inputs is presented in the following table:

(in thousands)	Level 3 Assets
Beginning balance – August 27, 2011	$	5,281
Actual return on plan assets:
Assets held at August 25, 2012		55
Assets sold during the year		168
Sales and settlements		(3,100	)
Ending balance – August 25, 2012	$	2,404

The following table sets forth the plans’ funded status and amounts recognized in the Company’s Consolidated Balance Sheets:

(in thousands)	August 25, 2012			August 27, 2011
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	241,645		$	211,536
Interest cost		12,214			11,135
Actuarial losses		56,749			23,746
Benefits paid		(5,402	)		(4,772	)
Benefit obligations at end of year	$	305,206		$	241,645
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	156,883		$	117,243
Actual return on plan assets		14,505			10,336
Employer contributions		15,423			34,076
Benefits paid		(5,402	)		(4,772	)
Fair value of plan assets at end of year	$	181,409		$	156,883
Amount Recognized in the Statement of Financial Position:
Current liabilities	$	(30	)	$	(27	)
Long-term liabilities		(123,767	)		(84,736	)
Net amount recognized	$	(123,797	)	$	(84,763	)
Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic Benefit Cost:
Net actuarial loss	$	(154,678	)	$	(106,972	)
Accumulated other comprehensive loss	$	(154,678	)	$	(106,972	)
Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic Benefit Cost and expected to be amortized in next year’s Net Periodic Benefit Cost:
Net actuarial loss	$	(14,721	)	$	(9,795	)
Amount recognized	$	(14,721	)	$	(9,795	)

Net periodic benefit expense consisted of the following:

	Year Ended
(in thousands)	August 25, 2012			August 27, 2011			August 28, 2010
Interest cost	$	12,214		$	11,135		$	11,315
Expected return on plan assets		(11,718	)		(9,326	)		(9,045	)
Amortization of prior service cost		—			—			—
Recognized net actuarial losses		9,795			9,405			8,135
Net periodic benefit expense	$	10,291		$	11,214		$	10,405

The actuarial assumptions used in determining the projected benefit obligation include the following:

	Year Ended
	August 25, 2012			August 27, 2011			August 28, 2010
Weighted average discount rate		3.90	%		5.13	%		5.25	%
Expected long-term rate of return on plan assets		7.50	%		8.00	%		8.00	%

As the plan benefits are frozen, increases in future compensation levels no longer impact the calculation and there is no service cost. The discount rate is determined as of the measurement date and is based on the calculated yield of a portfolio of high-grade corporate bonds with cash flows that generally match the Company’s expected benefit payments in future years. The expected long-term rate of return on plan assets is based on the historical relationships between the investment classes and the capital markets, updated for current conditions.

The Company makes annual contributions in amounts at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The Company contributed $15.4 million to the plans in fiscal 2012, $34.1 million to the plans in fiscal 2011 and $12 thousand to the plans in fiscal 2010. The Company expects to contribute approximately $9 million to the plans in fiscal 2013; however, a change to the expected cash funding may be impacted by a change in interest rates or a change in the actual or expected return on plan assets.

Based on current assumptions about future events, benefit payments are expected to be paid as follows for each of the following fiscal years. Actual benefit payments may vary significantly from the following estimates:

(in thousands)	Benefit Payments
2013	$	7,438
2014		8,182
2015		8,867
2016		9,583
2017		10,164
2018 – 2022		60,567

The Company has a 401(k) plan that covers all domestic employees who meet the plan’s participation requirements. The plan features include Company matching contributions, immediate 100% vesting of Company contributions and a savings option up to 25% of qualified earnings. The Company makes matching contributions, per pay period, up to a specified percentage of employees’ contributions as approved by the Board. The Company made matching contributions to employee accounts in connection with the 401(k) plan of $14.4 million in fiscal 2012, $13.3 million in fiscal 2011 and $11.7 million in fiscal 2010.