AutoZone 2010 Annual Report Download - page 143

Changes in accumulated other comprehensive loss consisted of the following:
(in thousands)
Pension
Liability
Adjustments,
net of taxes
Foreign
Currency
Translation
Adjustments
Unrealized
Loss (Gain)
on
Marketable
Securities,
net of taxes
Net Loss
(Gain) on
Outstanding
Derivatives,
net of taxes
Reclassification
of Net Gains
on Derivatives
into Earnings,
net of taxes
Accumulated
Other
Comprehensive
Loss
Balance at August 30, 2008 .......................... $ 4,270 $ 1,798 $(186) $ 2,744 $(4,491) $ 4,135
Fiscal 2009 activity ....................................... 46,945 43,655 (568) (2,744) 612 87,900
Balance at August 29, 2009 .......................... 51,215 45,453 (754) — (3,879) 92,035
Fiscal 2010 activity ....................................... 8,144 (705) 104 6,278 612 14,433
Balance at August 28, 2010 .......................... $59,359 $44,748 $(650) $ 6,278 $(3,267) $106,468
The fiscal 2009 pension adjustment of $46.9 million reflects actuarial losses not yet reflected in the periodic
pension cost caused primarily by the significant losses on pension assets in fiscal 2009. The foreign currency
translation adjustment of $43.7 million during fiscal 2009 was attributable to the weakening of the Mexican
Peso against the US Dollar, which as of August 29, 2009, had decreased by approximately 30% when
compared to August 30, 2008.
Note H — Derivative Financial Instruments
Cash Flow Hedges
The Company periodically uses derivatives to hedge exposures to interest rates. The Company does not hold
or issue financial instruments for trading purposes. For transactions that meet the hedge accounting criteria,
the Company formally designates and documents the instrument as a hedge at inception and quarterly
thereafter assesses the hedges to ensure they are effective in offsetting changes in the cash flows of the
underlying exposures. Derivatives are recorded in the Company’s Consolidated Balance Sheet at fair value,
determined using available market information or other appropriate valuation methodologies. In accordance
with ASC Topic 815 (formerly FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities and FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities), the
effective portion of a financial instrument’s change in fair value is recorded in accumulated other comprehen-
sive loss for derivatives that quality as cash flow hedges and any ineffective portion of an instrument’s change
in fair value is recognized in earnings.
At August 28, 2010, the Company held two forward starting swaps, each with a notional amount of
$150 million. These agreements, which expire in November 2010, are cash flow hedges used to hedge the
exposure to variability in future cash flows resulting from changes in variable interest rates relating to
anticipated debt transactions. The fixed rates of the hedges are 3.15% and 3.13% and are benchmarked based
on the 3-month London InterBank Offered Rate (“LIBOR”). It is expected that upon settlement of the
agreements, the realized gain or loss will be deferred in accumulated other comprehensive loss and reclassified
to interest expense over the life of the underlying debt.
At August 28, 2010, the Company had $6.3 million, net of tax, recorded in accumulated other comprehensive
loss related to net unrealized losses associated with these derivatives. For the fiscal year ended August 28,
2010, the Company’s forward starting swaps were determined to be highly effective, and no ineffective portion
was recognized in earnings. The fair values of the interest rate hedge instruments at August 28, 2010 was a
liability of $10.0 million recorded within the accrued expenses and other caption in the accompanying
Consolidated Balance Sheet.
During 2009, the Company was party to an interest rate swap agreement related to its $300 million term
floating rate loan, which bore interest based on the three month LIBOR and matured in December 2009.
Under this agreement, which was accounted for as a cash flow hedge, the interest rate on the term loan was
effectively fixed for its entire term at 4.4% and effectiveness was measured each reporting period. During
August 2009, the Company elected to prepay, without penalty, the entire $300 million term loan. The
outstanding liability associated with the interest rate swap totaled $3.6 million, and was immediately expensed
in earnings upon termination. The Company recognized $5.9 million as increases to interest expense during
2009 related to payments associated with the interest rate swap agreement prior to its termination.
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10-K