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, fixed income bonds and U.S. equities, 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 1% 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 9 different hedge fund managers diversified over 4 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.

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 31, 2013
	Fair Value		Asset Allocation						Fair Value Hierarchy
(in thousands)	Fair Value		Actual			Target			Level 1		Level 2		Level 3

U.S. equities	$	57,931		27.9	%		30.0	%	$	—	$	57,931	$	—
International equities		38,145		18.3			20.0			—		38,145		—
Emerging equities		19,030		9.1			10.0			—		19,030		—
High yield equities		19,858		9.5			10.0			—		19,858		—
Alternative investments		1,226		0.6			—			—		—		1,226
Fixed income securities		59,500		28.6			30.0			—		59,500		—
Cash and cash equivalents		12,430		6.0			—			—		12,430		—

	$	208,120		100.0	%		100.0	%	$	—	$	206,894	$	1,226


August 25, 2012
	Fair Value		Asset Allocation						Fair Value Hierarchy
(in thousands)	Fair Value		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

The asset allocations in the charts above include $11.0 million and $8.7 million in cash contributions made prior to the balance sheet date of August 31, 2013, and August 25, 2012, respectively. Subsequent to August 31, 2013, and August 25, 2012, these cash contributions were 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 years ending August 25, 2012, and August 31, 2013.

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 25, 2012	$	2,404
Actual return on plan assets:
Assets held at August 31, 2013		60
Assets sold during the year		72
Sales and settlements		(1,310	)

Ending balance – August 31, 2013	$	1,226

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


(in thousands)	August 31, 2013			August 25, 2012

Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	305,206		$	241,645
Interest cost		11,746			12,214
Actuarial (gains) losses		(53,756	)		56,749
Benefits paid		(6,416	)		(5,402	)

Benefit obligations at end of year	$	256,780		$	305,206


Change in Plan Assets:
Fair value of plan assets at beginning of year	$	181,409		$	156,883
Actual return on plan assets		16,218			14,505
Employer contributions		16,909			15,423
Benefits paid		(6,416	)		(5,402	)

Fair value of plan assets at end of year	$	208,120		$	181,409


Amount Recognized in the Statement of Financial Position:
Current liabilities	$	(124	)	$	(30	)
Long-term liabilities		(48,536	)		(123,767	)

Net amount recognized	$	(48,660	)	$	(123,797	)


Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic Benefit Cost:
Net actuarial loss	$	(83,601	)	$	(154,678	)

Accumulated other comprehensive loss	$	(83,601	)	$	(154,678	)


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	$	(6,879	)	$	(14,721	)

Amount recognized	$	(6,879	)	$	(14,721	)

Net periodic benefit expense consisted of the following:


	Year Ended
(in thousands)	August 31, 2013			August 25, 2012			August 27, 2011

Interest cost	$	11,746		$	12,214		$	11,135
Expected return on plan assets		(13,617	)		(11,718	)		(9,326	)
Amortization of prior service cost		—			—			—
Recognized net actuarial losses		14,721			9,795			9,405

Net periodic benefit expense	$	12,850		$	10,291		$	11,214

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


	Year Ended
	August 31, 2013			August 25, 2012			August 27, 2011

Weighted average discount rate		5.19	%		3.90	%		5.13	%
Expected long-term rate of return on plan assets		7.50	%		7.50	%		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 $16.9 million to the plans in fiscal 2013, $15.4 million to the plans in fiscal 2012 and $34.1 million to the plans in fiscal 2011. The Company expects to contribute approximately $4 million to the plans in fiscal 2014; 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

2014	$	9,125
2015		9,205
2016		9,912
2017		10,604
2018		11,193
2019 – 2023		65,396

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 $14.1 million in fiscal 2013, $14.4 million in fiscal 2012 and $13.3 million in fiscal 2011.