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 various investments in limited partnerships, limited liability companies and corporations. The fair value of the hedge fund of funds is determined using valuations provided by third party administrators 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 29, 2015
	Fair Value		Asset Allocation						Fair Value Hierarchy
(in thousands)	Fair Value		Actual			Target			Level 1		Level 2		Level 3
U.S. equities	$	60,286		25.3	%		25.8	%	$	—	$	60,286	$	—
International equities		38,725		16.2			17.2			—		38,725		—
Emerging equities		16,393		6.9			8.5			—		16,393		—
High yield securities		19,310		8.1			8.5			—		19,310		—
Alternative investments		307		0.1			—			—		—		307
Fixed income securities		93,362		39.1			40.0			—		93,362		—
Cash and cash equivalents		10,372		4.3			—			—		10,372		—

	$	238,755		100.0	%		100.0	%	$	—	$	238,448	$	307


August 30, 2014
	Fair Value		Asset Allocation						Fair Value Hierarchy
(in thousands)	Fair Value		Actual			Target			Level 1		Level 2		Level 3
U.S. equities	$	70,021		28.8	%		25.8	%	$	—	$	70,021	$	—
International equities		45,521		18.7			17.2			—		45,521		—
Emerging equities		24,187		9.9			8.5			—		24,187		—
High yield securities		22,647		9.3			8.5			—		22,647		—
Alternative investments		803		0.3			—			—		—		803
Fixed income securities		67,652		27.8			40.0			—		67,652		—
Cash and cash equivalents		12,576		5.2			—			—		12,576		—

	$	243,407		100.0	%		100.0	%	$	—	$	242,604	$	803

The asset allocations in the charts above include $11.5 million and $12.6 million in cash contributions made prior to the balance sheet date of August 29, 2015, and August 30, 2014, respectively. Subsequent to August 29, 2015, and August 30, 2014, these cash contributions were allocated to the pension plan investments in accordance with the targeted asset allocation.

In August 2014, 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 7.5% for the year ended August 30, 2014, to 7.0% for the year ending August 29, 2015.

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 30, 2014	$	803
Actual return on plan assets:
Assets held at August 29, 2015		(134	)
Assets sold during the year		(74	)
Sales and settlements		(288	)

Ending balance – August 29, 2015	$	307

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


(in thousands)	August 29, 2015			August 30, 2014
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	300,966		$	256,780
Interest cost		12,338			13,070
Actuarial (gains) losses		(1,056	)		38,659
Benefits paid		(16,125	)		(7,543	)

Benefit obligations at end of year	$	296,123		$	300,966

Change in Plan Assets:
Fair value of plan assets at beginning of year	$	243,407		$	208,120
Actual return on plan assets		(5,604	)		25,920
Employer contributions		17,077			16,910
Benefits paid		(16,125	)		(7,543	)

Fair value of plan assets at end of year	$	238,755		$	243,407

Amount Recognized in the Statement of Financial Position:
Current liabilities	$	(253	)	$	(192	)
Long-term liabilities		(57,115	)		(57,367	)

Net amount recognized	$	(57,368	)	$	(57,559	)

Amount Recognized in Accumulated Other Comprehensive Loss and not yet reflected in Net Periodic Benefit Cost:
Net actuarial loss	$	(116,735	)	$	(104,847	)

Accumulated other comprehensive loss	$	(116,735	)	$	(104,847	)

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	$	(10,506	)	$	(8,941	)

Amount recognized	$	(10,506	)	$	(8,941	)

Net periodic benefit expense consisted of the following:


	Year Ended
(in thousands)	August 29, 2015			August 30, 2014			August 31, 2013
Interest cost	$	12,338		$	13,070		$	11,746
Expected return on plan assets		(16,281	)		(15,386	)		(13,617	)
Recognized net actuarial losses		8,941			6,879			14,721

Net periodic benefit expense	$	4,998		$	4,563		$	12,850

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


	Year Ended
	August 29, 2015			August 30, 2014			August 31, 2013
Weighted average discount rate		4.50	%		4.28	%		5.19	%
Expected long-term rate of return on plan assets		7.00	%		7.50	%		7.50	%

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 $17.1 million to the plans in fiscal 2015, $16.9 million to the plans in fiscal 2014 and $16.9 million to the plans in fiscal 2013. The Company expects to contribute approximately $6.3 million to the plans in fiscal 2016; 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
2016	$	11,118
2017		10,992
2018		11,717
2019		12,482
2020		13,107
2021 – 2025		73,726

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 $17.7 million in fiscal 2015, $15.6 million in fiscal 2014, and $14.1 million in fiscal 2013.