AutoZone 2010 Annual Report Download - page 120

funds received are 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 based on our inventory
purchases. 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 legal right of offset
with our vendors for payments owed them. Historically, we have had minimal write-offs (less than $100 thousand
in any of the last three years).
Self-Insurance
We retain a significant portion of the risks associated with workers’ compensation, employee health, general and
products liability, property and vehicle insurance losses; and we obtain third party insurance to limit the exposure
related to certain of these risks. Our self-insurance reserve estimates totaled $156 million, $158 million, and $145
million as of the end of fiscal years 2010, 2009, and 2008, respectively. These changes are primarily reflective of
our growing operations, including inflation, increases in vehicles and the number of hours worked, as well as our
historical claims experience and changes in our discount rate.
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 actuarial methods, 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, we have experienced
improvements in frequency and duration of claims; however, medical and wage inflation have partially offset
these trends. Throughout this time, our methods for determining our exposure have remained consistent, and
these trends have been appropriately factored into our reserve estimates.
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 health care 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 $10
million for fiscal 2010.
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. In recent years, we have experienced
favorable claims development, particularly related to workers’ compensation, and have adjusted our estimates as
necessary. We attribute this success to programs, such as return to work and projects aimed at accelerating claims
closure. The programs have matured and proven to be successful and are therefore considered in our current and
future assumptions regarding claims costs.
Our liabilities for workers’ compensation, certain 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 changed by 50 basis points, net income would
have changed approximately $2 million for fiscal 2010. Our liability for health benefits is classified as current, as
the historical average duration of claims is approximately six weeks.
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
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10-K