AutoZone 2010 Annual Report Download - page 121

contingencies are influenced by items such as tax audits, changes in tax laws, litigation, appeals and prior
experience with similar tax positions. We regularly review our tax reserves for these items and assess the
adequacy of the amount we have recorded. As of August 28, 2010, we had approximately $46.5 million reserved
for uncertain tax positions.
We evaluate potential exposures associated with our various tax filings in accordance with ASC Topic 740
(formerly Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes) by estimating a liability for uncertain tax positions based on a two-step process. The first step is to evaluate
the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation processes,
if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than
50% likely to be realized upon ultimate settlement.
We believe our estimates to be reasonable and have not experienced material adjustments to our reserves in the
previous three years; however, actual results could differ from our estimates and we may be exposed to gains or
losses that could be material. Specifically, management has used judgment and made assumptions to estimate the
likely outcome of uncertain tax positions. Additionally, to the extent we prevail in matters for which a liability
has been established, or must pay in excess of recognized reserves, our effective tax rate in any particular period
could be materially affected.
Pension Obligation
Prior to January 1, 2003, substantially all full-time employees were covered by a qualified 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,
our supplemental, unqualified 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. As the plan benefits are frozen, the annual pension expense and recorded liabilities are
not impacted by increases in future compensation levels, but are impacted by the use of two key assumptions in
the calculation of these balances:
Expected long-term rate of return on plan assets: We have assumed an 8% long-term rate of return on our
plan assets. This estimate is a judgmental matter in which management considers the composition of our
asset portfolio, our historical long-term investment performance and current market conditions. We review
the expected long-term rate of return on an annual basis, and revise it accordingly. Additionally, we monitor
the mix of investments in our portfolio to ensure alignment with our long-term strategy to manage pension
cost and reduce volatility in our assets. At August 28, 2010, our plan assets totaled $117 million in our
qualified plan. Our assets are generally 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. We have no assets in our nonqualified plan. A 50 basis point change in our expected long term
rate of return would impact annual pension expense/income by approximately $600 thousand for the qualified
plan.
Discount rate used to determine benefit obligations: This rate is highly sensitive and is adjusted annually
based on the interest rate for long-term, high-quality, corporate bonds as of the measurement date using yields
for maturities that are in line with the duration of our pension liabilities. This same discount rate is also used
to determine pension expense for the following plan year. For fiscal 2010, we assumed a discount rate of
5.25%. A decrease in the discount rate increases our projected benefit obligation and pension expense. A 50
basis point change in the discount rate at August 28, 2010 would impact annual pension expense/income by
approximately $2.2 million for the qualified plan and $40 thousand for the nonqualified plan.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from, among other things, changes in interest rates, foreign exchange rates and fuel
prices. From time to time, we use various financial instruments to reduce interest rate and fuel price risks. To date,
based upon our current level of foreign operations, no derivative instruments have been utilized to reduce foreign
exchange rate risk. All of our hedging activities are governed by guidelines that are authorized by our Board of
Directors. Further, we do not buy or sell financial instruments for trading purposes.
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10-K